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What having a baby has taught me about GDP Traditional GDP measurement cannot capture the value of the sharing economy

The Analyst

Like many dads-to-be, I’ve been thinking about GDP a lot recently. The arrival of a new human means acquiring all sorts of stuff. I quietly grimaced on finding out we should expect to spend about £1,000 on new baby clobber, a figure presumably based on buying everything new.

Thankfully, the wonders of the digital economy mean that’s far from necessary. For instance, my wife and I got hold of a good-as-new sling from a woman down the road for a fiver, thanks to Facebook Marketplace. That for an item that you can spend as much as £150 (bear in mind that much of the infant accessory market is built on parents’ anxiety about not giving their little darling the very best in life).

This is where the GDP bit comes in. Having managed to get almost everything we needed for a small fraction of that £1,000 figure, my contribution to our gross domestic product is now several hundred pounds smaller than it would have been had I gone and bought everything shiny and new, even though we’ve got everything we wanted.  This is just one tiny example of the kind of free or low-cost transaction that technology is making much easier. And these transactions get lost in the leading measure of economic output.

It’s not a new problem. Speaking at the turn of the century, no less a figure than Alan Greenspanpointed out how GDP often offers a misleading picture of economic activity. For instance, people in hot places spend more on air conditioning – that spending comes up in the GDP figures, while people in cooler climes get the same effect without any economic transactions taking place.

By the same token, a huge range of domestic activities which clearly have huge economic value are not recorded. If I pay someone £200 to paint our front room, that’s added to GDP — were I to just buy the materials and do it myself the economy is not really any smaller, but GDP is lower.

Despite this, governments, economists and others fixate on the “growth numbers” as if they are a hard-and-fast diagnosis of the nation’s economic health, rather than a crude, incomplete estimate of most areas of economic activity.

One of the most widespread criticisms of this GDP fetishism is that it only measure economic output, and that is a poor proxy for human happiness.  As early as 1959 the economist Moses Abramowitz said we should be “highly sceptical” about treating GDP as a proxy for improved human welfare. That’s fine as far as it goes, but there is arguably a bigger problem with GDP: that it no longer does its intended job of measuring the size of the economy.

While it might have been a fairly handy approximate in the 1930s, when Nobel laureate Simon Kuznets was tasked with measuring the size of the US economy, GDP now looks like more of an anachronism with every passing year.

The problem with GDP is not just that commerce has gone online, but that so much of what is on offer – from news, to social networks, films, music – is either free to use or massively cheaper than before. As Tim Worstall recently observed on CapX, Facebook, Google or whatever email you use all contribute hugely to the economy without their true value showing up in GDP stats. Then there are the films one can watch for next to nothing on Netflix, or the fact most of us probably haven’t bought an album since about 2010.

And none of this is making the economy “bigger” in a GDP sense. In fact, streaming services like Spotify have led to a fall in GDP.

In his book The Zero Marginal Cost Society, Jeremy Rifkin posits a future where hyper-efficient machines have reduced the cost of producing a given good to zero, freeing up humanity to engage in more meaningful activities. We need not share his starry-eyed utopianism to see the enormous efficiency gains to be had in a more collaborative, sharing-based economy. For example, the idea of buying a car for oneself may very quickly be seen as a relic of the past, as people pop into a hired (probably driverless) vehicle for a few hours to run an errand.

Rifkin observes: “While producing and sharing virtual and physical goods at near zero marginal cost in the sharing economy on the Collaborative Commons vastly improves the economic quality life of millions of people, and decreases the amount of the earth’s resources needed to sustain a healthy society, it reduces the GDP at the same time.”

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