Consider A and B, who discover that, together, they can have more clothing and more food if each specializes: A in the manufacture of clothing, B in the production of food. Through voluntary exchange and bargaining, they find a jointly satisfactory balance of production and consumption. A makes enough clothing to cover himself adequately, to keep some clothing on hand for emergencies, and to trade the balance to B for food. B does likewise with food. Both balance their production and consumption decisions against other considerations (e.g., the desire for leisure).
A and B’s respective decisions and actions are microeconomic; the sum of their decisions, macroeconomic. The microeconomic picture might look like this:
- A produces 10 units of clothing a week, 5 of which he trades to B for 5 units of food a week, 4 of which he uses each week, and 1 of which he saves for an emergency.
- B, like A, uses 4 units of clothing each week and saves 1 for an emergency.
- B produces 10 units of food a week, 5 of which she trades to A for 5 units of clothing a week, 4 of which she consumes each week, and 1 of which she saves for an emergency.
- A, like B, consumes 4 units of food each week and saves 1 for an emergency.
Given the microeconomic picture, it is trivial to depict the macroeconomic situation:
- Gross weekly output = 10 units of clothing and 10 units of food
- Weekly consumption = 8 units of clothing and 8 units of food
- Weekly saving = 2 units of clothing and 2 units of food
You will note that the macroeconomic metrics add no useful information; they merely summarize the salient facts of A and B’s economic lives — though not the essential facts of their lives, which include (but are far from limited to) the degree of satisfaction that A and B derive from their consumption of food and clothing.
The customary way of getting around the aggregation problem is to sum the dollar values of microeconomic activity. But this simply masks the aggregation problem by assuming that it is possible to add the marginal valuations (i.e., prices) of disparate products and services being bought and sold at disparate moments in time by disparate individuals and firms for disparate purposes. One might as well add two bananas to two apples and call the result four bapples.
The essential problem is that A and B will derive different kinds and amounts of enjoyment from clothing and food, and that those different kinds and amounts of enjoyment cannot be summed in any meaningful way. If meaningful aggregation is impossible for A and B, how can it be possible for an economy that consists of millions of economic actors and an untold variety of goods and services?
GDP, in other words, is nothing more than what it seems to be on the surface: an estimate of the dollar value of economic output. It is not a measure of “social welfare” because there is no such thing.
Given that, why do I sometimes use GDP statistics? And, if GDP is really a meaningless aggregate, is there a valid, alternative way of depicting aggregate well-being? To be continued.
Greed, Cosmic Justice, and Social Welfare
Utilitarianism, “Liberalism,” and Omniscience
Utilitarianism vs. Liberty
Accountants of the Soul
Rawls Meets Bentham
Enough of “Social Welfare”
The Case of the Purblind Economist