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Fooled by GDP: Economic Activity versus Economic Growth – Article by Steven Horwitz

Fooled by GDP: Economic Activity versus Economic Growth – Article by Steven Horwitz

The New Renaissance Hat
Steven Horwitz
May 4, 2015
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Even the smartest of economists can make the simplest of mistakes. Two recent books, Violence and Social Orders by Douglass North, John Wallis, and Barry Weingast and Why Nations Fail by Daron Acemoglu and James Robinson both suffer from misunderstanding the concept of economic growth. Both books speak of the high growth rates in the Soviet economy in the mid-20th century. Even if the authors rightly note that such rates could not be sustained, they are still assuming that the aggregate measures they rely on as evidence of growth, such as GDP, really did reflect improvements in the lives of Soviet citizens. It is not clear that such aggregates are good indicators of genuine economic growth.

These misunderstandings of economic growth take two forms. One form is to assume that the traditional measurements we use to track economic activity also describe economic growth, and the other form is to mistake the production of material things for economic growth.

Often at the core of this confusion is the concept of gross domestic product (GDP). Although it is the most frequently used indicator of economic growth, what it really measures is economic activity. GDP is calculated by attempting to measure the market value of final goods and services produced in a particular geographic area over a specific period. By “final” goods and services, we mean the goods and services purchased by the end consumer, and that means excluding the various exchanges of inputs that went into making them. We count the loaf of bread you buy for sandwiches, but not the purchase of flour by the firm that produced the bread.

What GDP does not distinguish, however, is whether the exchanges that are taking place — even the total quantity of final goods — actually improve human lives.

That improvement is what we should be counting as economic growth. Two quick examples can illustrate this point.

First, nations that devote a great deal of resources to building enormous monuments to their leaders will see their GDP rise as a result. The purchase of the final goods and labor services to make such monuments will add to GDP, but whether they improve human lives and should genuinely constitute “economic growth” is much less obvious. GDP tells us nothing about whether the uses of the final goods and services that it measures are better than their alternative uses.

Second, consider how often people point to the supposed silver lining of natural disasters: all the jobs that will be created in the recovery process. I am writing this column at the airport in New Orleans, where, after Katrina, unemployment was very low and GDP measures were high. All of that cleanup activity counted as part of GDP, but I don’t think we want to say that rebuilding a devastated city is “economic growth” — or even that it’s any kind of silver lining. At best, such activity just returns us to where we were before the disaster, having used up in the process resources that could have been devoted to improving lives.

GDP measures economic activity, which may or may not constitute economic growth. In this way, it is like body weight. We can imagine two men who both weigh 250 pounds. One could be a muscular, fit professional athlete with very low body fat, and the other might be on the all-Cheetos diet. Knowing what someone weighs doesn’t tell us if it’s fat or muscle. GDP tells us that people are producing things but says nothing about whether those things are genuinely improving people’s lives.

The Soviet Union could indeed produce “stuff,” but when you look at the actual lives of the typical citizen, the stuff being produced did not translate into meaningful improvements in those lives.

Improving lives is what we really care about when we talk about economic growth.

The second confusion is a particular version of the first one. Too often, we think that economic growth is all about the production of material goods. We see this in discussions of the US economy, where the (supposed) decline of manufacturing is pointed to as a symptom of a poorly growing economy. But if economic growth is really about the accumulation of wealth — which is, in turn, about people acquiring things they value more — then material goods alone aren’t the issue. More physical stuff doesn’t mean that the stuff is improving lives.

More important, though, is that what really matters is subjective value. The purchase of a service is no less able to improve our lives, and thereby be a source of economic growth, than are the production and purchase of material goods. In fact, what we really care about when we purchase a material good is not the thing itself, but the stream of services it can provide us. The laptop I’m working on is valuable because it provides me with a whole bunch of services (word processing, games, Internet access, etc.) that I value highly. It is the subjective satisfaction of wants that we really care about, and whether that comes from a physical good or from human labor does not matter.

This point is particularly obvious in the digital and sharing economies, where so much value is created not through the production of stuff, but by using the things we have more efficiently and precisely. Uber doesn’t require the production of more cars, and Airbnb doesn’t require the production of more dwellings. But by using existing resources better, we create value — and that is what we mean by economic growth.

So what should we look at instead of GDP as we try to ascertain whether we are experiencing economic growth? Look at living standards: of average people, and especially of poor people. How easily can they obtain the basics of life? How many hours do they have to work to do so? Look at the division of labor. How fine is it? Are people able to specialize in narrow areas and still find demand for their products and services?

Economic growth is not the same as economic activity. It’s not about just making more exchanges or producing more stuff. It’s ultimately about getting people the things they want at progressively lower cost, and thereby improving their well-being. That’s what markets have done for the last two centuries. For those of us who understand this point, it’s important not to assume that higher rates of GDP growth or the increased production of physical stuff automatically means we are seeing growth.

Real economic growth is about improving people’s subjective well-being, and that is sometimes harder to see even as the evidence for it is all around us.

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Enemy of Ruin – Quiz and Badge – Fifth in TRA’s Series on Indefinite Life Extension

Enemy of Ruin – Quiz and Badge – Fifth in TRA’s Series on Indefinite Life Extension

enemy_of_ruin

G. Stolyarov II
March 30, 2013
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The Rational Argumentator is proud to announce the fifth in its planned series of quizzes on indefinite life extension, a companion activity to the Resources on Indefinite Life Extension (RILE) page.

Enemy of Ruin Quiz

Read “The Real War – and Why Inter-Human Wars are a Distraction” by G. Stolyarov II and answer the questions in the quiz below, in accordance with the essay. If you get 100% of the questions correct, you will earn the Enemy of Ruin badge, the fifth badge in The Rational Argumentator’s interactive educational series on indefinite life extension.  You will need a free account with Mozilla Backpack to receive the badge.

This badge was designed by Wendy Stolyarov, whose art you can see here, here, and here.


Leaderboard: Enemy of Ruin Quiz

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In Praise of Price Gouging – Article by Ron Paul

In Praise of Price Gouging – Article by Ron Paul

The New Renaissance Hat
Ron Paul
November 12, 2012
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As the northeastern United States continues to recover from Hurricane Sandy, we hear the usual outcry against individuals and companies who dare to charge market prices for goods such as gasoline. The normal market response of rising prices in the wake of a natural disaster and resulting supply disruptions is redefined as “price gouging.” The federal government and some state governments on the East Coast claim that price gouging is the charging of ruinous or exploitative prices for goods in short supply in the wake of a disaster and is a heinous crime  But does this reflect economic reality, or merely political posturing to capitalize on raw emotions?

In the wake of Hurricane Sandy, the supply of gasoline was greatly disrupted. Many gas stations were unable to pump gas due to a lack of electricity, thus greatly reducing the supply.  At the same time demand for gasoline spiked due to the widespread use of generators. Because gas stations were forbidden from raising their prices to meet the increased demand, miles-long lines developed and stations were forced to start limiting the amount of gasoline that individuals could purchase. New Jersey gas stations began to look like Soviet grocery stores.

Had gas stations been allowed to raise their prices to reflect the increased demand for gasoline, only those most in need of gasoline would have purchased gas, while everyone would have economized on their existing supply. But because prices remained lower than they should have been, no one sought to conserve gas.  Low prices signaled that gas was in abundant supply, while reality was exactly the opposite, and only those fortunate enough to be at the front of gas lines were able to purchase gas before it sold out.  Not surprisingly, a thriving black market developed, with gas offered for up to $20 per gallon.

With price controls in effect, supply shortages were exacerbated.  If prices had been allowed to increase to market levels, the profit opportunity would have brought in new supplies from outside the region.  As supplies increased, prices gradually would have decreased as supply and demand returned to equilibrium. But with price controls in effect, what company would want to deal with the hassle of shipping gas to a disaster-stricken area with downed power lines and flooded highways when the same profit could be made elsewhere?  So instead of gas shipments flooding into the disaster zones, what little gas supply is left is rapidly sold and consumed.

Many governments fail to understand that prices are not just random numbers. Prices perform an important role in providing information, coordinating supply and demand, and enabling economic calculation. When government interferes with the price mechanism, economic calamity ensues. Price controls on gasoline led to the infamous gas lines of the 1970s, yet politicians today repeat those same failed mistakes. Instituting price caps at a below-market price will always lead to shortages. No act of any legislature can reverse the laws of supply and demand.

History shows us that the quickest path to economic recovery is to abolish all price controls. If governments really want to aid recovery, they would abolish their “price-gouging” legislation and allow the free market to function.

Representative Ron Paul (R – TX), MD, was a three-time Republican candidate for U. S. President. See his Congressional webpage and his official campaign website

This article has been released by Dr. Paul into the public domain and may be republished by anyone in any manner.

The Real War – and Why Inter-Human Wars are a Distraction – Article by G. Stolyarov II

The Real War – and Why Inter-Human Wars are a Distraction – Article by G. Stolyarov II

The Real War – and Why Inter-Human Wars Are a Distraction

G. Stolyarov II
March 12, 2012
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As a libertarian and individualist, I am thoroughly opposed to the inherently unjust killing of any innocent person. Yet war – organized, armed conflict within a nation or between nations – unavoidably causes the suffering, maiming, and deaths of innocents. I have argued in my videos “A Complete Denunciation of War” (here and here) and “Refuting Ayn Rand on War” that whatever the ostensible abstract aims any war might have, the end result is always the concrete suffering of those who deserve it least: the innocent victims for whom the injustices that brought about the war (such as an oppressive dictatorship) are compounded by the destruction and carnage inflicted by the war itself. The human and economic tolls of war are alone enough to fully justify a complete opposition.

But there is a further reason to oppose wars among human beings: they distract us from the real war that we should all be fighting, against the real enemy that threatens us all. By killing and injuring one another, by destroying the property and infrastructure on which our fellow humans rely, we only clear the way for our mutual enemy to destroy every one of us.

It is difficult to find a single name by which to refer to this mutual enemy, for it consists of many elements with distinct modes of operation. Yet the result of each of these modes is the same: our destruction. While the enemy is difficult to name, it is not difficult to identify in our daily lives.

War among humans is just one of the ways in which the real enemy manifests itself. The cousins of war – murder, theft, rape, political oppression, and plain destructive inanity of a million petty sorts – are ongoing even during times of ostensible peace. But the real enemy’s tactics are not so limited as to rely on destruction inflicted by men alone.

Myriad diseases afflict humans – diseases of infection, internal breakdown, senescence, and self-inflicted folly. Natural disasters – earthquakes, hurricanes, tornadoes, wildfires, blizzards, volcanoes, and tsunamis – inflict colossal damage so often that news of some such calamity occurring somewhere in the world are almost uninterrupted. And then there are the grave existential threats to all humankind: the possibility of a massive asteroid striking the earth and obliterating most higher-order life forms, the possibility of a new ice age imperiling agricultural production and dramatically shrinking the range of habitable land, the possibility of a major epidemic akin to the Spanish Flu pandemic of 1918 killing hundreds of millions of people, or more. And, in the face of the tremendous damage and threats from all of these perils, what do humans do? They turn on each other and amplify the damage over petty geopolitical and ideological quarrels? How bizarre and absurd!

And even in eras where, by a stroke of luck, some humans in some parts of the world enjoy a welcome reprieve from some or even many of these perils, the real enemy manifests itself in more mundane ways. Machines tend to break down; structures tend to break; information tends to be forgotten, lost, or destroyed; food tends to rot and spoil; humans and their animal companions tend to senesce and die – unless something is done about it. In “Progress: Creation and Maintenance” I explained that human creation and creativity are not sufficient for civilization to flourish and advance. We must also preserve and maintain what has been created in the past – or else we shall return to using our unaided minds and bodies against the full range of horrifying perils that surrounded our primeval ancestors.

What is this enemy? While it works in ways that are both sudden and gradual, manifest and insidious, broad and targeted – perhaps the best name for it is ruin. The forces of ruin are the forces of death and decay; they are the many processes by which living organisms and their creations – in their beautiful and immense sophistication – are erased and decomposed, dissolved into the jumble of primitive elements whence they arose. For everything that aspires to be higher and greater, the forces of ruin act to bring it down, to rot in the earth. Everything that is built, grown, and nurtured, the forces of ruin threaten to weaken, diminish, crush, and demolish. Wherever and whoever you are, whatever means are at your disposal, the forces of ruin are targeting you using any vulnerability they can exploit. Will you acquiesce to your annihilation, or will you resist and strive to win back the ground that ruin has conquered and to defend what it has not yet despoiled?

Each human being possesses an intellect that can be harnessed as a weapon of immense power in the war on ruin. Technology and reason are the two products of the intellect which can be deployed as tactics and strategies and win battles against the forces of ruin. Over the long, arduous ascent of man, some of these destructive forces have already been diminished or even eradicated altogether. Smallpox, typhus, and polio are among the minions of ruin that humankind has vanquished. Humans are making gradual but significant inroads against crime, diseases, and even human war itself on many fronts – but the present rate of advancement will not be enough to save us (rather than some remote descendants of ours) from ruin. To save ourselves, we will need to greatly accelerate our rate of technological and moral progress. To do this, we will need to think more creatively than ever before, utilizing all of the hitherto discovered valid technological, economic, political, ethical, and esthetic insights at our disposal and launch a multifaceted bombardment of human ingenuity to eradicate one peril after another. This program cannot be centrally planned or coordinated; it requires the independent, highly motivated action of millions – and hopefully billions! – of autonomous human intellects, each willing to wage a guerilla war against the forces that have held all of us and our ancestors as their slaves and pawns since time immemorial.

To embrace the challenge, in all of its urgency, enough of us need to be free to do so – unbound by the constraints imposed by other men who think they know better and who would wish to keep us in line to serve their momentary interests, rather than the paramount interests of our own perpetuation. Those who wish to impose their vision of the good life through regimentation upon the rest of us overlook the vital fact that, with human independence and creativity thus shackled, entire societies have become sitting ducks – waiting for the forces of ruin to sweep away static, inflexible, primitively “engineered” communities of men. Only the liberty of each of us to act and innovate can lead to a sufficient variety and intensity of ideas and approaches as to keep ruin at bay.

Ruin is deadly serious, but it receives precious little human attention. It is the proverbial elephant in the room (except, unlike an elephant, far more vicious and deadly) which most people have been culturally taught to ignore, so as to maintain comfort and a more immediate focus – so as not to let massive threats interfere with their everyday pursuits. During most of human history, this enemy was so powerful that humans had no real chance against it, and their religions, philosophies, and social norms evolved to teach them that they might as well not try. They might, like the Stoics, decide to accept their inevitable destruction with grace and equanimity – or they might, like the Christians, convince themselves that their destruction would not be ultimate and that they would persevere in another form. In practice, these invented consolations served to capitulate our ancestors to the enemy. We can forgive our ancestors for devising these coping mechanisms in the absence of any real hope. But we cannot forgive ourselves if we, in our more advanced technological and intellectual condition, abandon the fight only because our inherited norms suggest it to be useless to begin with, or even undesirable to pursue.

There are many perils that each of us can choose to confront, and many tactics that we can begin to actualize. One size does not fit all, and the struggle against ruin should be waged by each individual unleashing his or her strengths in the area where he or she thinks them to have the greatest impact. But a good beginning would be to stop undermining and destroying one another. The pettiness and absurdity of human wars in both their causes and in their methods (as if men with guns on a field somewhere, or explosives dropped from the sky onto a city would ever solve any serious problem in a meaningful way!) would be laughable if it were not so tragic in its toll. The same goes for the intellectual, economic, and political straitjackets that humans in virtually every society create for themselves – artificially restraining meaningful exploration of ways to conquer ruin instead of just succumbing to it in a structured fashion, with a privileged few at the top maintaining the illusion of control. An anthill, after all, is powerless before the magnifying glass and the rays of the sun – no matter how much absolute power the ant queen perceives herself to have over her minions. We must be more than ants to win this war. We must all be individuals and recognize each of our individual lives as sacrosanct. We must direct all of our anger and hatred not toward other men – but toward the menace of ruin. The more of us do this now, the greater our likelihood of winning not just some remote bright future for our descendants – but our very lives from the ravages of senescence, disease, and calamity. I can imagine no greater victory or more glorious objective. The spoils of any inter-human war are supremely uninspiring and meritless by comparison.

G. Stolyarov II is an actuary, science-fiction novelist, independent philosophical essayist, poet, amateur mathematician, composer, contributor to Enter Stage Right, Le Quebecois Libre, Rebirth of Reason, and the Ludwig von Mises Institute, Senior Writer for The Liberal Institute, and Editor-in-Chief of The Rational Argumentator, a magazine championing the principles of reason, rights, and progress. Mr. Stolyarov also publishes his articles on Associated Content to assist the spread of rational ideas. He holds the highest Clout Level (10) possible on Associated Content and is one of Associated Content’s Page View Millionaires

Mr. Stolyarov holds the professional insurance designations of Chartered Property Casualty Underwriter (CPCU), Associate in Reinsurance (ARe), Associate in Regulation and Compliance (ARC), Associate in Insurance Services (AIS), and Accredited Insurance Examiner (AIE).

Mr. Stolyarov has written a science fiction novel, Eden against the Colossus, a non-fiction treatise, A Rational Cosmology, and a play, Implied Consent. You can watch his YouTube Videos. Mr. Stolyarov can be contacted at gennadystolyarovii@yahoo.com.