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David Hebert and Paul Mueller


NextImg:GDP Is Not the Problem, Government Regulations Are

Rather than scrapping a proven economic measure, conservatives should focus on dismantling the regulatory barriers that hinder prosperity.

I n a recent article in American Affairs, Philip Pilkington describes a seeming paradox: Despite rising living standards measured by increasing real GDP, many, especially young people, feel that “their quality of life [is declining] as time goes on.” To support this claim, Pilkington points to noneconomic measures, “such as the suicide rate and the rates of drug addiction and overdose,” and concludes, “It is time for economists to admit that their metrics are broken.” While some of his critiques are well-founded, they are not new. They indict practitioners rather than the tools themselves.

For example, Simon Kuznets, the “father” of GDP and the recipient of the 1971 Nobel Prize in Economics for his pioneering work in national income accounting, wrote, “The welfare of a nation can . . . scarcely be inferred from the measurement of [GDP].” He wrote this in 1934. Rather than bringing new insights, Pilkington offers an important reminder of the limits of GDP for assessing a nation’s overall well-being that economists have recognized for nearly 100 years.

Pilkington also correctly points out that labor, “such as mowing the lawn or doing the dishes,” does not count toward GDP if the parent does it, but would (at least in theory) be counted if the parents paid their children to do so. Having taught multiple principles of macroeconomics classes using nearly a dozen different textbooks, we can confidently report that this idea commonly appears under chapter subheadings such as “shortcomings of GDP.”

Were these points all he had to say on the matter, he would be correct, and we would be in agreement: Economists and policymakers alike should cease citing GDP figures alone as a measure of economic well-being. However, rather than stopping while he was ahead, Pilkington obviates an otherwise insightful point and provides a misadventure in the realm of economic jargon, disapprobations, and downright absurdities.

Broadly, he argues that we should eschew viewing economic transactions through the lens of exchange value and return to the lens of use value. The difference between the two flummoxed generations of economists. Indeed, even Adam Smith was puzzled about this.

Consider a simple example: A person on the verge of dehydration spots a vendor selling clean, cold drinking water for a dollar. The person eagerly agrees to purchase the water from the vendor. The use value of the water to the customer is clearly quite large: His life is saved! The exchange value — and thus GDP — however, would be merely one dollar.

But what about other use values of bottles of water, such as using it to remove a ketchup stain from a shirt or using it as a means of washing one’s face during a water shortage? Surely, these are both worth less than saving a person’s life. Pilkington implies that use value is objective, yet it clearly varies by person and by situation.

Beyond the “mere” impracticality, though, is the harder question: Who determines use value and can we assure its consistency across time? Suppose Congress got to determine use value by simple majority. As the majority party changes, different use values for different goods would be assigned, making it impossible to engage in any sort of analysis beyond “checking the vibes.” This might work for dinner parties but would be incomprehensible for understanding national economies.

It is precisely because of the subjective nature of value that we use exchange value based on prices rather than use value. Prices transform the subjective values of each and every item that each and every person has in each and every context into objective numbers. These prices may not be perfect representations of value, as Hayek, Stigler, and Stiglitz (all Nobel Prize–winning economists) pointed out, but they nonetheless capture something worth knowing. Replacing exchange value with arbitrarily determined use values will create greater confusion, not clarity.

Sick Markets, Not Sick Economics

To evidence his claim that GDP is a flawed measure, Pilkington points to two specific examples: the rise of sex “markets” and the astronomical increase in the price of housing and health care.

Pilkington suggests that all the billions of dollars in online or transactional sex-related spending should be seen not as improvements in productivity or output, but merely as a shift from informal transactions to formal transactions. You’ll find no objection from us on that point.

We would note two observations: First, the $1.3 billion spent on OnlyFans in 2023 and the $12-14 billion per year spent on the porn industry more broadly amounts to less than one-tenth of one percent of U. S. GDP. Second, while porn might not conform to Aristotle’s vision of the good, its existence does not depend on how GDP is measured, nor is its prevalence a sign we live under “late-stage” capitalism — there’s plenty of porn in communist China, too.

When it comes to rent extraction in housing, health care, and education, Pilkington has a kernel of truth. A strong case can be made that the costs of these particular goods have skyrocketed without a commensurate increase in quality. But Pilkington’s diagnosis fundamentally misses the mark, and his cure would only make matters worse.

Housing prices have risen rapidly in the past five years (and have been elevated for decades). Pilkington suggests this is a natural result of “late capitalism,” where the housing market is “financialized” by wealthy firms who buy up properties in order to “extract” rent, a common accusation made by those of the New Right.

However, Pilkington’s claim does not stand up to scrutiny. While he correctly points out that household size has fallen over time, he neglects to acknowledge that new houses today are almost twice the size of homes built in 1970 and are of much higher quality. Nor does he address how federal policy artificially encouraged more and larger mortgages for decades, which only pushed prices even higher.

Pilkington suggests that high amounts of spending on health-care middlemen and service providers somehow drive GDP growth and misrepresent people’s well-being. But he fails to ask the simple question of why the U.S. health-care system is so encumbered with middlemen and service providers. The middlemen Pilkington decries arose from government bureaucracy, not capitalism. Consider the American Academy of Professional Coders, whose purpose is to educate and certify how to administer the 73,428 unique ICD-10 diagnosis codes used in medical charting, coding, and billing.

This also ignores the further complication of health insurance regulations, the compliance costs associated with that industry, and the fact that health insurance has fundamentally decoupled the cost of health care from the cost the consumer pays, resulting in overqualified physicians providing testing above and beyond what is necessary and overcharging for simple medical supplies.

Rather than scrapping a proven economic measure, conservatives should focus on dismantling the regulatory barriers that hinder prosperity. Only then can we address the real challenges Pilkington identifies without undermining the market principles that drive progress.