For a long time, economists have used general principles and assumptions like utility maximization, self-interest, and GDP, among others. These assumptions and indicators help everyone from investor to politicians make important decisions that affect everyone around the world; but do they really reflect individuals underlying preferences and general economic performance?
Intuitively, we may question some of these measures and their accuracy, and there is emerging evidence that current measures do, in fact, leave out some important factors. A recent article in the economist discusses several of these issues, including the assumptions of an individual’s fixed preferences, which are taken as a given. Recent research in the field of cognitive science has shown people hold on to items well past the point at which it “makes sense” to sell. They have also found people dislike losing something more than they like gaining the same amount; a finding such as this may have implications for future tax policy.
Another article continues the discussion about GDP vs. a county’s wealth and wellbeing. GDP calculations only measure dollars spent but not what there spent on, i.e. things that either are beneficial or detrimental to growth and prosperity. Unpaid and open source goods and services are not calculated either; even though improving an open source code will not create a monetary exchange, it does improve the overall utility of those who use the product.
Amartya Sen, a Nobel laureate in economics at Harvard, had this to say about GDP:
“We may be in the early stages in the United States of recognizing that the gross domestic product is very misleading and something must be done to get better measures of well-being.”
While there are problems with our current measures, they do help us make decisions about policy and investment, and they are the best indicators we have. However, as domestic and international economies become more complex and less traditional, our current measure may become less and less effective, in which case new metrics must be created.
The Notorious B.I.G. was right, the more money we come across, the more problems we see!
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DeleteIt seems as though all of the measurements we have are purely surface measurements. As Michael said, they only measure how much money is gained or lost, not what it was gained or lost on. This concept is vital to the study of foreign aid as well. On the surface, an issue may be receiving millions of dollars, but only a small percentage of that is actually reaching the problem. To solve this issue, we must break down the economy into smaller pieces and study those to create policy. While this is more work, it will create stronger policies in the long run.
ReplyDeleteThis reminds me alot of the criticisms we seen within the Eurozone and their economic qualifications such as percent debt of GDP and inflation. If this really a good way to build cohesiveness? Additionally many Southern European countries get alot of flack for 'slacking' economically, however, in a recent conversation with a Spanish friend of mine he stated that they simply value different things than many northern europeans. It was what they wanted out of life, and sure they could have worked a little harder, yet it was not so much of an issue until they were held to a different countries standards. For example in Italy the slow food movement, and in Spain the use almost exclusively of local farmers market are good for their people and the planet, which as Romanow's article cited above states: "The notion of sustainability-ensuring that precious resources are preserved for future generations- doesnt enter the equation". Will we get to a point in our society that money cannot buy much of anything because not much of anything is left? Will GDP seem so important?
ReplyDeleteI agree with Paige that comparing certain qualities of countries is not always beneficial nor does accurately portray how developed those countries might actually be. If you are to start by looking at the list of counties in terms of GDP you will see that Luxembourg is first followed by Qatar, Macau, Singapore, Norway, Kuwait, and Switzerland. Then when you look at a list of the most developed countries according to the human development index you will see Norway, Australia, US, Netherlands, Germany, and Sweden. Then if you are to look at the Gender Development Index you will see Iceland, Australia, Norway, Canada, and Sweden. This difference shows that GDP is limited in its ability to be a useful tool towards making public policy.
ReplyDeletehttp://hdr.undp.org/en/media/HDR_20072008_GDI.pdf
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita