Peter Cochrane's Hard Drive 1999 Economists from another planet? LOOKING through economic data recently, I came across three broadly contradictory statements for the global economy. One suggested steady but unimpressive growth, another that it would be almost flat and the third suggested a slow decline. This seemed so obviously wrong from any practical standpoint that I was prompted to revisit this area some 30 years after I last studied macro-economics. I still remember being singularly unimpressed by the mechanisms for gathering raw data and the models employed. Any relation between data, forecasts and reality seemed almost accidental. Gross domestic product is considered to be the broadest measure of aggregate economic activity that encompasses every sector. And, I quote, "for investors it is the consummate measure of economic activity because it dictates how investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market doesn't mind growth but is extremely sensitive to the economy growing too quickly and paving the road to inflation. By tracking the GDP, investors will know what the economic backdrop is to their portfolios." This seems to be based more on doctrine than any scientific or practical basis. The definition of GDP is delightfully varied, but broadly falls like this: "A measure of the total production and consumption of goods and services - the market value for all final goods and services produced within a nation in a given time period. Intermediate goods such as plastic, glass, wood, cotton, etc are not counted since they are not in their final state. Including only final goods and services prevents double counting and avoids a GDP overstatement. Final goods include household purchases. GDP comprises four key components: consumption (C), investment (I), government (G), net exports (NE)" and can be calculated thus: GDP = C+I+G+NE. Yep, the economy of Planet Earth is defined by a single one-line linear equation. Sure, there is a lot more mumbo jumbo about the categories, contributions and definitions of what goes into the equation, but nothing of significance, or, for that matter, anything vaguely related to the true economics of the planet. At this point I have three questions: where are the black, grey and bit economies in all of this? They are very real and very significant, and, in the case of the grey and bits, growing very fast. From a practical standpoint it seems that the GDP of our planet should be principally defined and measured in terms of the transformation of materials and bits. Their actual and final consumption may turn out to be a secondary effect in the overall rating of human endeavour. Would it not be better to embrace a more meaningful entropic measure to reflect total wealth creation? The accepted definition and formula above seem to fall far short of the mark. I suspect that the true GDP is actually tracing some exponential curve like Moore's law for chip development and performance. If this is the case, economists can expect some serious repercussions from sticking with an 18th century perspective and not embracing the gross bit product. One day they may wake up to find their world gone, along with the significant tax revenues it generates. It will have been replaced almost overnight by a bit economy growing at an exponential rate. Peter Cochrane holds the Collier Chair for the Public Understanding of Science & Technology at the University of Bristol. His home page is: |
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