Yeah, the more canonical counterexample/paradox about GDP is different... and you hint at it at the end.
Imagine I stay at home watching my kids and you stay at home to watch your kids. Nothing is added to GDP.
However, what if I pay you $20 to watch my kids for the night, and you pay me $20 to watch your kids for the night? The same amount of work was done, we each up with the same amount of cash as before, but we've somehow added $40 to GDP. (There are no new performance arts events in this case, everything's literally the same as it was before.)
You might think at first this is a quirk of child care... but you can run the hypo with other industries.
Imagine two bakers on the same street in friendly competition. Each of their families goes through a loaf a week, one from their own production.
What if, one day, each baker wants to check out the competition, buys one of the other bakers' loafs? Each family eats the same amount of bread and each baker produces the same amount of loaves. GDP goes up by the full price of the loaves.
Right, so in the baker example, there is some value exchanged, checking out the competition.
The costs of transactions serve as a check on meaningless loops of transaction. And all transactions have a cost; even if it's not monetary it is a time based one.
With the case of parents watching the others' child for the night, now that work has been valued at some amount of money, and presumably the $20 is a better valuation than the $0 that you get for watching your own child. And in this case, the practicality is that since the transaction is under the table, it does not get added to GDP.
So yes, GDP can fail this way, but it's the same type of failure as activities that are not captured by GDP: individuals derive value that doesn't match the economic transfer.
I would posit that these looped transactions represent a tiny fraction of GDP in practice. Whereas the 0-dollar "transactions" where there is value represent a huge amount of potential potential GDP, if that value were put in dollar terms. There are so many examples of 0-dollar value transactions with value, such as the case of family-based childcare, or just good solid friendship, or getting physically assaulted (negative value, 0 dollar exchange). I don't pay others for friendship, but I do pay for opera. I don't pay people to not get physically assaulted. I think these are far stronger and real examples of how GDP is broken. Transaction loops may be a problem in simplified theory of economics, but in practice I can't see them as being anywhere as big of a problem as the non-dollar values that we have.
> Transaction loops may be a problem in simplified theory of economics
I think if you generalize it, it's not the loops per se as the failure to baseline against opportunity cost or counterfactuals, which could have a small impact on the value of almost all transactions.
I'm not sure though, will have to think more about it...
This is what’s missed in most of these criticisms. Arguably you could use movies, or video games, or TV shows or any entertainment instead of stupid examples like ‘eating poop’. The point is the money is (generally) taxed and the people receiving it spend the money to support their livelihood, it flows onwards into government spending, goods and services.
Even if I paid someone a salary as my personal poop eater they would pay income tax and rates, pay rent, buy food, pay bills, etc. That’s all valuable economic activity that wouldn’t occur if I kept the money in a mattress. Contrived examples where people just hand money back and forth aren’t a significant factor in reality and even if they were, they’d have to happen as a significant part of measured economic activity much more in some countries rather than others to be relevant.
Question is how strong the argument is that it isn't.
To pick up on the examples provided above, you could live in a friendly caring community where you occasionally babysit family B's babies and they occasionally babysit yours, for free.
Or you could live in a materialistic community where you won't babysit family B's babies unless they pay you, and they won't either.
1. GDP would still be useful to show growth in the same community over time.
2. It sounds like an edge-case, and when talking on national scales across most of the big economies very few countries actually operates like that to a significant degree. GDP is of not too precise but still pretty alright on a big picture level.
3. If there is a demand for it an adjuster can be made. Well I'm not an economist so there might already be one. I'm sure someone thought of this at some point.
4. GDP values are not cumulative, so even if there's an error in one year it does not stack and fixes itself in future years.
A recent trend here on HN is complaining about the loss of free-range childhood. Quality of life is dropping in this dimension, but it isn't seen in GDP.
Agreed, I don't think these thought experiments are coming from nihilistic economists who want to toss it out completely, but just trying to safeguard against ways it might be systematically biased, or identify ways we could improve its utility.
I think the theoretical critiques get refined down several layers and end up leading to to practical shifts, like the reweighting of intellectual property in 2013.
That must have been a hard trade off between consistency with earlier GDP measures and accuracy (read: more enduring consistency for coming decades, facing shifts in the economy).
Regarding your childcare example: while in theory interesting, it is not a good real world example, I definitely don’t think “the same amount of work is done”
- we need to transfer to our locations, this will cost money and time
- who takes care of the children in the meantime?
- watching someone else’s kids is quite a task, if they’re not yours chances are very high it won’t be smooth
So, chances are quite high that the amount of work will be quite different than watching your own kids
Imagine I stay at home watching my kids and you stay at home to watch your kids. Nothing is added to GDP.
However, what if I pay you $20 to watch my kids for the night, and you pay me $20 to watch your kids for the night? The same amount of work was done, we each up with the same amount of cash as before, but we've somehow added $40 to GDP. (There are no new performance arts events in this case, everything's literally the same as it was before.)
You might think at first this is a quirk of child care... but you can run the hypo with other industries.
Imagine two bakers on the same street in friendly competition. Each of their families goes through a loaf a week, one from their own production.
What if, one day, each baker wants to check out the competition, buys one of the other bakers' loafs? Each family eats the same amount of bread and each baker produces the same amount of loaves. GDP goes up by the full price of the loaves.