The dirty little secret about GDP

An interesting point made in The Times about GDP:

For even GDP — the greatest, most definitive statistic of all — is really just a survey too. Forms are posted out to a selection of companies where they are filled in and sent or faxed back (“Informed estimates are sufficient for our needs”, says the bumf). Those figures go into a model and soon enough they become GDP. The size of Britain’s economy, the question of whether we are in or out of recession, the fate of governments — ultimately it all hangs on a questionnaire.

Well, yes, obviously it's a survey for as Hayek pointed out we cannot possibly gain enough information to really measure something as complex as an economy. There is the idea that we should move more to tax data - but the problem with that is that we know very well that people lie about taxes.

But there's actually something much more important than this. GDP isn't what we're interested in. It's a proxy, an interesting and useful proxy but a proxy all the same.

What we want to know is "How well off are the people?" We want to know this so that we can consider whether what we're doing makes them better off again or not. And our problem with GDP is that we're measuring things at market prices. What people actually pay for things.

Yet we know very well that this is not the price at which people actually value something. If a producer were able to price discriminate so that we each paid exactly what something was worth to us then it would be of course. And they attempt this. VW sells much the same car under the Skoda, VW, Audi and so on brands, each at a different price, in an attempt to do such price discrimination. But it doesn't work entirely.

The usual rule of thumb is that this consumer surplus, this value that we gain but which we don't have to pay for, is about equal to recorded GDP. So our consumption value is really some 200% of recorded GDP.

Which is where our problem comes in. Because the digital world would appear to be changing that multiplier. WhatsApp appears in GDP as something like $30 million, $50 million. There's no sales of it, no revenue from it, just the cost of the engineers working on it. And yet this is something that a billion people use for their telecoms needs, or some of them. The value in actual human value as consumption is obviously more than $100 million a year.

We must therefore remember not only that GDP is a proxy for what we really want to know but also that it's becoming an ever less reliable one.