The Old Numbers are Wrong
Gross domestic product is a universal numerical proxy for the economy (well, except in Bhutan, which uses “gross national happiness” instead). Politicians worldwide use GDP as a gauge of whether their countries are doing well or badly, and the number is deeply woven into our collective understanding of economic health.
Its weaknesses are well known yet bear repeating: It measures only output, and only output whose worth is recorded. So, it misses domestic work, volunteer work and black-market activities; none of those count toward GDP. Output is measured regardless of whether it improves quality of life, and contraction of output is counted as negative even if it improves quality of life. A factory that pollutes a river and whatever local or national government spends to clean it up add to GDP. Buying long-lasting light bulbs that use less energy detracts from it.
Perhaps more important, GDP also falls short as a measure of all sorts of “free goods” that manifestly improve daily life and make both work and play more efficient and less expensive. At MIT, Erik Brynjolfsson and his colleagues have been doing groundbreaking work studying such free goods, especially services readily available on the Web: Google, Wikipedia, LinkedIn and a host of others. (Although much of the time spent using these tools goes to entertainment, they clearly facilitate commerce as well.)
Because the effect of free goods is virtually invisible to the calculation of GDP, statistically, they add almost nothing. Yet by helping us find what we want and need, they clearly add something to our daily lives. How you calculate what they add is a matter both arcane and complex, and, therefore, scholars like Brynjolfsson work to find ways to account for what is currently uncounted.
Brynjolfsson’s conclusion is that we may be doing somewhat better than GDP numbers suggest, to the tune of tens or even hundreds of billions of dollars a year. That benefit, however, isn’t distributed evenly. Those with smartphones and computers who use their tools most effectively benefit disproportionately.
Our failure to measure the real economy accurately has significant policy consequences which disproportionately fall on countless millions of Americans who can’t find full-time work in part due to unnecessary austerity.