Elon Musk is wrong about GDP

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Summary

Of all the dubious claims uttered recently by Elon Musk, I have yet to see a more interesting one than his tweet asserting that “a more accurate measure of GDP would exclude government spending. Otherwise, you can scale GDP artificially high by spending money on things that don’t make people’s lives better.” Whether or not he is serious, the idea is worth a closer look, because it explicitly expresses one instructive misunderstanding and heavily implies a second. The explicit misunderstanding is that an accurate measure of GDP — gross domestic product — would include all and only the things that make people’s lives better. It wouldn’t. The implicit one is that GDP needs to be accurate because governments try to maximise it. They don’t. (Look around.) I was surprised to learn from Diane Coyle’s new book, The Measure of Progress, that when GDP measures were first being hammered out, the Musk view nearly triumphed. Government spending was included in GDP only after a vigorous debate. Part of the reason for its inclusion was crude politics: the second world war was raging and governments didn’t want their military spending to be ignored. The more solid justification for including government spending in GDP was theoretical: the economist John Maynard Keynes had formulated a theory of macroeconomics based on aggregate demand, including government demand. A measure of GDP that pretended government did not exist would be useless for trying to understand and stabilise the economy. GDP is the value of all goods and services produced in an economy. That definition raises an immediate question: value according to whom? The answer is — sort of — value according to the market. If you grow wheat, its value is defined as whatever you sold it for, less whatever it cost you to grow. But what if the good or service is not sold in a market transaction? If it is still valuable, then, in principle, it should still be included in GDP. In practice, it may not be. For example, if you pay so...

First seen: 2025-04-29 14:23

Last seen: 2025-04-29 14:23