Doug French, writing over at Mises Daily, lays out exactly why GDP is mostly
a meaningless statistic and certainly is not a real indicator of the health of
an economy. He does it in the context of addressing, and in large part
praising, an argument made by Megan McArdle at Atlantic Monthly magazine.
Here’s his argument in a nutshell.
First he approvingly notes McArdle’s example:
a new home built during the boom…pumped up the GDP numbers during the
boom, but now the “house sits empty while bankers, borrowers, and
regulators squabble. One of the 2.4 million excess homes on the market, its
only function right now is to bankrupt its owner.'”
Then he goes on to make the general point:
GDP does not, and cannot, reflect the waste of enormous effort, and
precious natural resources, that went into building something that suddenly no
one wants.” Yes, all of the malinvestment made GDP soar, but ultimately
just wasted capital…”The GDP framework cannot tell us whether final goods
and services that were produced during a particular period of time are a
reflection of real wealth expansion, or a reflection of capital consumption.
In other words all GDP numbers can tell us is that money is being spent.
They can tell us nothing about whether it is being spent on anything worthwhile
or that consumers want. The perfect example comes during the boom period of a
business cycle. As the business cycle theory of Hayek and Mises shows, federal
reserve policies create lots of spending, but the spending is called
malinvestment, i.e., investment on projects and that will not be
profitably valued by consumers. GDP during this period rises, but so what. It
is investment in factories that will have to be closed down, in housing and
office space projects that will have no buyers, etc. These handsome looking GDP
numbers are in fact phony and misleading.?
