"Ditching" GDP Is Not A Good Idea

Since the Great Recession, monetary policy has become confused to a degree that arguments can echo those voiced in the years of the Great Depression. However, the argument to drop GDP in favor of various other measures, doesn't go back quite so far, for GDP as a concept was developed during the Great Depression. Dirk Philipsen adds to the GDP bashing in his book "The Little Big Number: How GDP Came to Rule the World and What to Do About It". From the book description:

In one lifetime, GDP, or Gross Domestic Product, has ballooned from a narrow economic tool into a global article of faith. It is our universal yardstick of progress. As "The Little Big Number" demonstrates, this spells trouble. While economies and cultures measure their performance by it, GDP ignores central facts such as quality, costs or purpose. It only measures output: More cars, more accidents, more lawyers more trials; more extraction, more pollution - all count as success. Sustainability and quality of life don't count. Losses don't count. GDP promotes a form of stupid growth and ignores real development. 

Philipsen's attack is a broad one, and I simply need to hone in on a few particulars in this post. The primary purpose of the Fed is to provide monetary policy, in spite of other responsibilities it has gradually assumed. GDP aggregates are the main means of measurement central bankers have, to provide monetary representation on behalf of citizens in a complex economy. Not only is the marketplace as a whole taken into account, but government activity as well.

Those who suggest doing away with this important measure, do not realize that it is the most useful means central bankers have to maintain monetary policy in a stable framework. Even though GDP measurement has become more difficult in recent decades, improvements for services capacity can be made in the years ahead, which should make it easier to determine monetary flows for services activity in real time.

While Philipsen's concerns shouldn't be discounted, he is mistaken in thinking that a discontinuation of GDP measurement would somehow "solve" the problems he is concerned with. GDP simply takes into account the economic activity that is currently taking place - i.e. what already is. It is up to citizens, to generate the kinds of economic activity they are ultimately more comfortable with. No change in measure can do that job for them. Change in measure can't provide practical assistance, if it doesn't record the activities individuals currently take part in - whatever goals they may seek. The value in exchange context concerns what happens in the present. Outcome is only measurable to the extent it is represented in a given recorded exchange.

Possibly the best means to improve GDP, would be to create a value in use marketplace, for local time use. This would allow more of the personal concerns individuals wish to measure, to be recorded in terms of time value alongside the monetary compensation that would support a time arbitrage base. Eventually, local marketplaces for time value could also make up for some of the missing elements of domestic activity and household production in GDP as well. There are doubtless other ways to measure national goals. But hopefully, none of them will detract from the central role that GDP still holds for monetary stability.