Is GDP really a good measure of our productive world?

At the Mont Pelerin Society meeting in Stockholm, we heard an enthralling paper on the productivity statistics—and what’s wrong with them—by Diane Coyle of the University of Manchester, with comments by Christian Bjornskov from Aarhus University in Denmark.

Their comments are not published yet, so I can’t go into detail. But the problem is technological improvement. The problem for the macro-measurers, that is. For the rest of us, technological improvement is just great. Nathan Rothschild might have made himself a multi-millionaire, but he died in 1836 from a tooth abcess that today’s antibiotics would suppress in no time flat. You might envy Rothschild his big house, his servants and his coach and six: but he would certainly have envied our modern dentists.

All sorts of stuff is simply getting better. Kitchen appliances do what all those servants slaved on, and have become cheaper and cheaper and cheaper. Our homes and workplaces are cleaner, healthier and more environmentally friendly than those of 1836—or even those of 1936—but none of that gain in value is measured by the GDP figures.

The poor in particular have gained from entrepreneurial breakthroughs, the growth of new inventions and technologies, mass manufacturing, and other parts of the capitalist system. The prices of what poorer groups buy have plummeted more than most, while the quality of what they can afford has skyrocketed. Wages may not be rising fast for the poorest groups, but there are more fringe benefits as standard, and money buys a lot more than it did twenty, thirty, forty or any number of other years ago. So people who talk about ‘rising inequality’ are up a gum tree. The income figures greatly overstate inequality, because the poorest groups are so much better off than they have ever been in history.

For the same reason, we are understating productivity growth. The official figures show productivity rising remorselessly, then becoming essentially flat from 2008 until today. What’s the reason? Underinvestment? Cheap imports of goods and labour from a more globalized world? The financial crash?

Well, maybe a bit of all of those. But a significant effect is the exponential impact of digital technology. It has allowed us to do a lot, lot more without having to produce a great deal more. We can work miracles, even by 1980s standards. I’m beaming this article from Stockholm to London in seconds, whereas in the 1980s I’d have had to type it out, put it in the mail, and have it re-keyboarded back at the office. It’s astonishing, when you think of it.

The GDP figures essentially measure production—so they don’t capture this huge productivity improvement. Which gives us all sorts of skewed ideas about equality and productivity. Can GDP be long for this world?