The Mismeasure of Our Economy

GDPIt is hard to believe that a book about the Gross Domestic Product could be interesting, important and occasionally amusing, but Diane Coyle has succeeded in all of this with GDP: A Brief but Affectionate History. It has two very salient takeaways for politics, one practical and one philosophical. First, GDP has become less and less good at capturing positive changes in human welfare. As a result, the lower growth in GDP in the last few decades is less troubling than it is often made out to be.  Second, GDP is a measurement of the government that has inherent biases that one might expect from a metric devised by the government.  Classical liberals should thus be careful to separate their respect for market freedom from any worship at the altar of GDP.

Coyle shows that GDP was designed for a  time when most of the economy consisted of the production of materials, not intellectual property or services. Indeed, because it was formulated at the time that government came to seen as responsible for the economy, its underlying image is that of a machine.  Put so much capital and labor into the economy and get out such much output of goods.

But of course today much of the economy does not lie in the production of material goods.

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Impoverished Pontifications, Part I


If there is one thing that religious leaders around the world seem to agree on today, it is the evils of income inequality stemming from a globalized economy.

Pope Francis said last year in his apostolic exhortation Evangelii Gaudium that “we … have to say ‘thou shalt not’ to an economy of exclusion and inequality. Such an economy kills.”

In a 2008 speech at George Mason University, the Dalai Lama asserted: “Economic inequality, especially that between developed and developing nations, remains the greatest source of suffering on this planet.”

Ecumenical Patriarch Bartholomew wrote in his 2012 Christmas encyclical that “the gloomy consequences of the overconcentration of wealth in the hands of the few and the financial desolation of the vast human masses are ignored. This disproportion, which is described worldwide as a financial crisis, is essentially the product of a moral crisis.”

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Uber Everywhere

This week brought more news of a globalized world—a simultaneous strike in Paris, London and Berlin against Uber—the service that allows people to summon cars through phone apps. Uber is itself a worldwide phenomenon.  It can succeed anywhere there are a substantial number of smartphones, and that is rapidly becoming everywhere.  In fact, the strikes backfired by giving publicity to Uber and encouraging more people to sign up.

While taxi drivers will continue to try to strangle the service, they will lose—quickly in some jurisdictions and slowly in others, like Virginia where regulators last week banned Uber. The advantages of Uber are ultimately too great to be denied and Uber-friendly jurisdictions will serve as demonstration projects.  On Thursday The New York Times described Uber’s many benefits for consumers and for society.  Most obviously, the service will bring more competition to an often highly regulated and sluggish market—the taxi industry.  In particular, it will help poorer and middle-class consumers who are unable to find cabs at crucial times and are not regular users of higher-priced car services.  It will shrink the carbon footprint, as fewer people will need to own cars and spend time looking for parking spaces.

Uber could also help decrease inequality of consumption, as I have previously argued that information technology generally does.  Only the .01 percent can afford chauffeurs at their beck and call.  But how different is the experience of having a car ready to pick you up at a moment’s notice? More and more people can ride like the millionaires of old.

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Promoting Innovation in the Twenty-First Century

In my last post, I discussed how the nature of innovation in our time raises questions for Thomas Piketty’s forecast of increasing inequality in his new book, Capital in the Twenty-First Century. In this post, I argue that his policy proposals also leave out consideration of innovation and thus risk great social harm.

Piketty does not recognize how crucial extraordinary individuals are to innovation and distribution. As Robert Solow notes in his review. Piketty seems skeptical that today’s highly paid “supermanagers” add much value for their very high salaries.  Solow endorses this skepticism, agreeing that agency costs are responsible for these high salaries. On this theory, boards of public companies are cozy with these managers who often appoint them to their positions and the result is sky high compensation. But if agency costs were the cause, we should observe closely held companies paying supermanagers less, but as Greg Mankiw points out, they do not.

A much better explanation is that innovations in the structure of corporations– faster telecommunications and the availability of data that represent the details of companies’ operations—have enabled managers at the very top to make a huge difference throughout their organization. A business today is the shadow of one or a few individuals who can take the key decisions.

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Innovation in the Twenty-First Century

Thomas Piketty’s book Capital in the Twenty-First Century has gotten a better reception from left-liberals than any book since  Limits to Growth. The books have important similarities. Both posit societies in the grip of a doomsday pincer. Limits foresaw a future of poverty and hunger, as inevitably declining resources outrun inevitably increasing population. Piketty sees a future of increasing inequality, as capitalists enjoy an ever-greater share of global income than workers. Both books are also used to justify government intervention. Limits to Growth was the basis of attempts to slow down population growth and require conservation of resources. Capital in the Twenty-First Century expressly calls for a global wealth tax.

Most importantly, both books share a similar, fundamental flaw, although Piketty’s book is far more interesting and sophisticated. They do not take sufficient account of innovation– of the manner in which human ingenuity again and again benefits us all. The mistake in Limits of Growth has already become clear, as Matt Ridley reminded us in the Wall Street Journal last week. We are not running out of energy, for instance. We have more usable oil than ever as we have learned to exploit shale. Innovators are creating wide variety of energy sources that were either not well understood or even imagined in 1972, when Limits to Growth was first published.

Piketty’s book has the same flaw. In his lucid and favorable review, Robert Solow shows that Piketty’s claim of increasing inequality is based partly on his belief that the rate of return on capital will stay constant, even as economic growth slows. In Piketty’s view, a sluggish economy means that people who own capital will gain a greater share of income than people who earn wages. This projection depends on a technological slowdown . But with the relentless increase in computational power, there are more reasons to believe in technological acceleration than stasis.

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The Idiocracy and Its Discontents

Economic inequality in the country is rapidly increasing. But our libertarians are right that inequality, by itself, hardly undermines the case for liberty.

A free country is a place where everyone is getting better off, although some, because of their hard work and natural gifts, more than others. Libertarians always point to the progress of technology as benefitting us all. Everyone is living longer, or at least everyone responsible enough to attend to what we can all know about avoiding the risk factors that imperil our health. In our march toward indefinite longevity and even the Singularity—the moment in time when machines are smarter than humans— it might be reasonable to hope that few will be left behind. And almost everyone benefits from the constant improvement and plummeting cost of the “screen”—from the smart phone to the tablet and laptop to the huge flat-screened TV.

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Eliminating Inequality?

So President Barack Obama and the Democratic Congressional leadership are going to end inequality? A half century after President Lyndon Johnson’s attempt to eliminate poverty, progressives aim higher. While cynics may think the real goal is changing the subject from Obamacare, most progressives actually have kept the faith. Eliminating inequality guarantees the moral high ground, especially with a supportive media who also desperately want to believe and who will faithfully transmit whatever theme their political allies send their way.

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Clarifying the State of Our Liberty

I am grateful for to Peter Lawler for his interesting comment on my post. I agree with much of it. My focus in The State of Our Liberty—an implicit response to the State of the Union– was on the effects our government is having on liberty, which I think are generally not happy. Lawler believes, and I do as well, that technological developments may nevertheless help foster liberty.

Indeed, I am even somewhat more optimistic than Lawler in this regard, because I do not believe technology poses as much risk to equality as he appears to think. As I have written on this blog, technological innovation helps equality in important respects, because innovations create a pool of cheap and free goods that everyone soon enjoys. Middle class people and the very rich have more equal lives today than did the middle class and very rich in previous times, because both spend an increasing amount of time on the internet and their experience there is not dissimilar. And innovations like smart phones go down the income scale much more rapidly than do previous innovations like refrigerators.

Moreover, the social media of today equips a much broader group of people to spend a large part of their lives writing and otherwise expressing themselves through blogs and even Facebook postings. As Clive Thompson has written in his excellent book, Smarter than You Think, the personal creativity enabled by social media dwarfs that of the letter writing of old. Thus, I do not agree that even a robotic future will relegate people to lives of passive entertainment, which appears to be the view Peter Lawler ascribes to Tyler Cowen. They will be able to follow their passions in ways that are inexpensive and largely free.

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The Mismeasure of Inequality

Growing economic inequality is now becoming a premise of our political debates. Unfortunately, however, conventional government measures of inequality provide a misleading picture of comparative living standards in the modern world.

Most importantly, income inequality is not a good proxy for gauging the rise or decline of economic equality. To be sure, if income equality is to be used as a proxy, incomes have to be calculated accurately. For instance, incomes have to be calculated after tax rather than before tax. Moreover, government transfers have to be included. Finally, for most people income changes significantly over their lives. The amount earned over a lifetime seems more relevant than that earned from year to year. All these adjustments temper the inequality of earned income.

Consumption, however, provides a better measure of economic equality than income. Consumption is the ultimate objective of earning, as Adam Smith himself recognized. And, as I have discussed in a recent essay, Innovation and Inequality, the most important phenomenon for consumption in modern world is that economic value is now more and more created by information that arranges material rather than the material itself. As a result, we all can enjoy a higher level of consumption from the common pool of innovations that rapidly become inexpensive or even free. Income differentials are less important given that common pool.

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Friday Roundup, December 20th

The current Liberty Law Talk is with author Christopher Lazarski on his new book, Power Tends to Corrupt: Lord Acton's Study of Liberty. Our Books essay this week is by Todd Zywicki on Nassim Taleb's Antifragile: Things That Gain From Disorder. Zywicki applies Taleb's insight that an antifragile "system . . . gains from disorder and volatility—i.e., exposure to stresses improves the operation of the system and makes it stronger," to financial regulation, arguing this approach would lead to better results than the regulatory philosophy of Dodd-Frank. Alberto Mingardi @Econ Lib on Chris DeMuth, Hayek, and Obamacare. George Will: Can the passive Congress…

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