http://www.youtube.com/watch?v=jNXoaIRL8CI
GDP, the most popular way economists attempt to quantify economic activity, is a recent invention and one that won’t stand the challenge presented by measuring output when services are dominant as they are in the UK.
The first attempt to construct national accounts in the way we understand them was made by the US federal government in the 1930s.
The question of what should be included in GDP and the challenge of possible double-counting was a problem from the start. Others included the exclusion of non-traded activities like housework done by women.The production and sale of a new version of a popular product with upgraded services is deemed to add nothing to GDP if it isn’t sold for a higher price.
Where conventional national accounts techniques really fail is when they are applied to services. That’s not because of the measurement techniques. It’s because services are intangible and their value is unquantifiable and incommensurable.
You can’t measure a service created in one service interaction with another. They are unique to the participants. And the amount of money paid is not a price in the conventional sense of the word. It’s the liquidation of a personal obligation to the supplier of the service that lays the foundations for further, satisfactory service interactions.
GDP is a measure designed to deal with an economy wholly or largely dominated by the production of tangibles, things that can be measured in some way that are exchanged as commodities in mass markets. It was always unsatisfactory as Kuznets himself acknowledged since the subjective is present in every tangible transaction. There’s always been an intangible component to economies dominated by farms, factories and mines.
The applicability of the concept to economies like the UK’s where services account for 80 per cent and more of output and employment is rightly open to serious question.
Economists, spurred by their need to prove they are scientists, are seeking to develop alternative measures of the output including the Human Development Index, which captures data about a range of services including education.
All these efforts will ultimately fail. Value created in economies dominated by services is intangible and only subjectively perceptible at the level of the individual. Any attempt to aggregate their value using price or an analogue will fail and lead to bad policy-making.
Value-creation in services can’t be measured or stimulated by corporations, whether they are government-owned or privately-owned. Only the individual freed to make a wider range of choices about what he or she does with his or her intelligence and skills can create value. Corporations can help, but their role is supportive at best. Often, it is counterproductive.
The right response to the challenge is not a better measure of output.
It’s a better way of understanding what value is and how it’s created in economies dominated by services.