Gross Domestic Product Explained

Gross Domestic Product (GDP) is a Figment of the State’s Imagination

In order for the state to exercise its power over people, it needs to know what you have and where it may be hidden. The phenomenon can be traced to the beginning of the civilised world.

There is no shortage of examples, from the Bible which tells us of the census which sent Mary and Joseph on their journey, the Domesday Book of the English Middle Ages. Kings, Emperors, politicians need to know where the wealth is. Often, historically, to fund wars. GDP is no exception, conceived in its current format in 1940, earlier attempts were made in 1695 in England to find ways of funding the Anglo-Dutch war. It has been fine tuned ever since to try and reflect economies as they grow and change at an ever increasing pace. Consequently, the numbers are backward looking and subjective. It matters not how many government statisticians toil over the numbers inventing different ways of cornering this ephemeral figure, they are doomed like the Flying Dutchman to sail the economic seas for eternity in vain.

They are steeped in outmoded economic theory, clutching their degrees in Keynesian or monetary theory they seek the holy grail, a true, accurate and fair value of a nation’s accounts.

How Do They Measure It?

Let us muse on the irregularities of GDP measurement, where others have analysed its shortcomings with charts, graphs and jargon but always conclude it is a necessary evil, I just outline here the nonsense of GDP.

If the state prints money, take the British government who electronically injected £350 billion into the economy in the last 6 years, it goes into the system via the banks and comes out the other side in inflation. Not CPI or RPI yet but asset price inflation, which is why your children can’t afford to live in big cities. This is real estate inflation. Yet the huge increase in property moves the GDP number up. Those energy subsidies which pour into windmills and solar panels, increase the price of electricity, and again pushes up GDP. The state pursues a suicidal drugs policy but the £billions squandered advances the GDP number. Crime rises so we need more prison places and more police, it also goes on the ticket.

Let’s develop it ad absurdum. There are numerous elements that effect GDP, including millions of small jobs which go to making an economic community and that go unregistered (gardening, handy man, babysitting) often referred to as the ‘informal economy ‘. Wild guesses estimate this at an average of 15% of GDP but difficult to call. But if you think about income tax, national insurance, pensions, maternity & paternity leave, maximum working hours, employer liability insurance, whatever the figure it must be growing. Italy recently increased their estimate to 30% and it meant their economy notionally overtook France and Great Britain, at the stroke of a pen! What about war? Increased spending on tanks, guns, planes & ammunition, more soldiers recruited, up goes GDP. Where is modern development in all this? Information technology such as Google, Wikipedia and social media have put at least $150 billion into the global economy but this does not find its way into the GDP machine. If St Paul’s cathedral collapsed and had to be rebuilt it would increase GDP. The list of these absurdities is endless. Yet the quarterly report on GDP is delivered as if it were holy writ. Usually inside their own margin of error 0.8% GDP growth per quarter is crazy with an error margin of 0.25%. The youngsters in the City and Wall Street then buy or sell stock or bonds on an assessment of what the economy might do, based on an extrapolation of these figures over the coming year. All GDP measures, and not very accurately at that, is activity. One last analogy. Imagine assessing your children’s educational progress on activity, they rush about, they fill their exercise books, they stay on in the playground after school, they even keep getting Saturday morning detention because they are naughty, yet this is all positive because the bench mark is energy expended not exams past.

The excuse for modern economists is that they must use some measurement, even if it’s wrong. Steeped in outdated concepts, even the term macro economics is an anachronism, they must have something to give their political masters. It would be more honest to try astrology as the numbers could not possibly be more irrelevant.