Economics used to be so much easier when things were about growing food and bending metal. When we were trading sheep for grain and grain for horseshoes, the more sheep, grain and horseshoes we made for each other, the better off we were. As we’ve worked our way up the Maslow Hierarchy of Needs, figuring out what’s valuable and what’s not gets wickedly complex.
Thought experiment:
If you have $10, there are all kinds of things you can do with your hard-earned, Federal Reserve-endorsed, green portrait of Alexander Hamilton. If you use it to buy a sandwich (sure, an expensive sandwich), you’ve engaged in a transaction that has benefitted both you and the gal selling you the sandwich. Everyone’s happy. Economic value has been created.
But if instead a gal steals your $10, we can all agree that no economic value was created. It’s simply a wealth transfer; no one has created anything and you’re certainly not happy. The act of stealing also has the negative externality of reducing your trust and thus future economic activity.
These are the extremes on either side of a value continuum; there are a whole lot of fuzzy stuff in-between. Consider gambling. Let’s say you play the slots in Vegas with your $10 for an hour and eventually lose your money. Was economic value created? Hard to say. Casino gambling combines two functions: entertainment and insidious wealth extraction. The casino can argue that they provided you an entertaining service, which included drinks and time in their ornate, oxygenated room protected from the sun’s harmful UV rays and any distracting indication of time. You can argue back that you thought you were going to make money — do a little wealth extracting of your own — and you did not intend to lose your $10.
How about spending $10 to see a movie? Remember, economics is the system of how we provide for each other the things that will enhance our well-being. If you find the movie highly enjoyable, it has enhanced your well-being as much as a sandwich, and the people who sold you the movie are happy you saw their film. Everyone’s happy. Economic value has been created.
But what if the movie was bad? How about if it was really, really bad? It’s hard for me to say if economic value was created, though GDP did go up as a result of that transaction. How about if you paid $10 for a movie, but when you went into the theater, it wasn’t a movie at all, just a blank screen for two hours? Isn’t that the same thing as a gal stealing your $10 bill? Or more interestingly, how’s the blank screen different from a bad movie? Or… how, in a very technical economic sense, is a blank screen purported to be a movie even different from a great movie that enhanced lives?
The difference is people’s well-being. I submit that economic value is created only if everyone involved in the transaction is satisfied with what they got out of it. Unfortunately, traditional economic metrics just measure the back-and-forth activity regardless of how much lives were enhanced. I.e., economics treats the blank screen and the good movie the same.
I’m not arguing for some type of goofy Bhutanesque gross national happiness index, and I’d rather see GDP go up instead of down. I’m arguing that as economies become less about feeding, clothing, and sheltering people, goods become more about improving people’s mental and emotional lives. For poor countries that are hustling to make more sheep, grain and horseshoes, GDP is a wonderful proxy for the well-being of a nation. But as rich countries’ economies become more about the exchange of ideas that make us feel better, the exact percentage of year-to-year changes in GDP aren’t nearly as important. We shouldn’t pretend it is.
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