Wednesday, August 25, 2004

Bogus GDP, Productivity, and Hedonics Part II

A few days ago, the oldman reported on the extraordinary finding that according to the Bureau of Economic Analysis that if you subtracted the final sales of computers from total GDP, then total GDP would actually increase. At least if you did it before 1997, because after 1997 if you subtracted the computer sales portion it would decrease.

Now there has been a lively discussion about the topic, where the oldman noted that according to the BEA methodolgical releases especially this "A Note on the Impact of Hedonics and Computers on Real GDP" that they came to this marvelous conclusion by assuming that the computing power stayed constant over time.

This was an extreme irony since it was previously that the oldman had written about Moore's law and about how it had made a mockery of notion of hedonic adjustments. At that time, the oldman had quoted The Economist giving this explaination of hedonic price adjustments.

In the same way, booming house prices hurt first-time buyers much more than those already on the property ladder. More troubling is the thought that official consumer-price indices might overstate or understate inflation across the board. One line of economic research over the past decade has focused on whether official indices overstate inflation. The consensus is that they do, by failing to adjust sufficiently for improvements in the quality of goods and services, or the availability of newer, more innovative ones. In other words, because a $500 television today is much better than a $500 set of a few years ago it is, in effect, cheaper. This means that inflation is actually lower, for all consumers, than a simple price index would suggest. [emphasis added]

Yet both the assumptions they make in order to correct for this, and the final result of said adjustment to the overal GDP figure comes out as clearly distorted. It just isn't realistic to think if you subtract off 5 billion in 1990 (in 2000-equivalent chain-weighted dollars) final computer sales from GDP you will add 127 billion to the overall GDP. I'm sorry but that's both physically impossible and mathematically nonsense.

Such nonsense can only come from a similarly non-sensical claim. To quote the unfortunate article, "A Note on the Impact of Hedonics and Computers
on Real GDP
" (PDF), that is directly on the BEA website:
What are hedonic price indexes?
Despite their unfortunate name, hedonic price indexes are simply statistical tools for developing standardized per unit prices for goods, such as computers, whose quality and characteristics are changing rapidly. Just as traditional price indexes measure the change in the price of strawberries by holding fixed the weight of the strawberries in a box rather than by the price per box, computers need to—at a minimum—be priced by holding fixed the computing power in the computer box. Traditional price indexes are well adapted to measuring the price of relatively standardized products, but they encounter problems—in terms of data requirements and methods—when the characteristics, market shares, and prices of a class of products are changing rapidly. Hedonic price indexes are one means of addressing these empirical and methodological problems. [emphasis added]

In other words, they ignore Moore's law. Just to make sure there is absolutely no misunderstanding, they later ramble on about:
Hedonic price indexes developed at BLS and elsewhere use a statistical model that employs a regression of the prices of a basket of goods on a set of qualities or characteristics of those goods. Using the statistical relationship between observed price changes and changes in the characteristics and qualities of the goods, a hedonic price index is then developed that measures relative price changes while holding quality and characteristics constant. Thus, the hedonic price index is doing the same thing statistically that a matched-model price index does through sample design.1 [emphasis added]

So what is the impact of these hedonic adjustments?
How widespread and important is the use of hedonic techniques?

The use of hedonic price indexes is increasing, and the components that are deflated by hedonic techniques account for 18 percent of GDP. For most of these components, the impact of using hedonic techniques is small because the matched models used earlier picked up most of the quality changes. For example, the introduction of hedonic price indexes by BLS slightly raised the rate of price increase for VCR’s and for rent but slightly lowered it for televisions.

The main area in which the use of hedonic price indexes has had a large impact is in computers and peripheral equipment, whose quality-adjusted prices have been falling at an average annual rate of about 24 percent in recent years. In 1998, the components for which hedonic price indexes were used contributed a negative 0.2 percentage point to the 1.3-percentage-point increase in the GDP price index; however, among these components, computers and peripheral equipment contributed a negative 0.4 percentage point and thus more than accounted for the negative contribution.

So what's the problem? According to them, prices are falling, right? Well it's sort of nasty. But they assume prices are falling, and therefore inflation is less. And also money that you spend on this stuff is less, because "you're getting more of it." I can't fully do justice to the description of what went on, so I'll just quote Buttonwood:
For all the talk about the miraculous “new economy” of the late 1990s, the truth is that American firms’ profitability was dismal, presumably because any company that did not squander squillions of dollars on technology and shifting out of businesses that actually made money was shunned by investors. By the fourth quarter of 2001, annualised profits had dropped to $324 billion. Big companies, of course, could disguise some of this with accounting practices that were as surreal as the level of the stockmarket.

In other words, hedonic adjustments masked wasted tech spending. How much? 24%. This masking effect apparently lowered costs in a stage magician's trick, therefore masking real labor inputs and outputs, distorting productivity. Does that sound implausible? What do BLS productivity statistics have to do with BEA hedonic tech adjustments? Read this little tract called the "The Effect of Outsourcing and Offshoring on BLS Productivity Measures"
The Effect of Outsourcing and Offshoring on BLS Productivity Measures
March 26, 2004

Recent discussions about the extent of outsourcing and offshoring in the American economy have raised questions about their possible impact on productivity measures. In order to understand the impact, it is necessary to understand the construction of productivity measures and to look at historical trends in the productivity series.

Around 1990, output per hour or labor productivity in the business sector began growing at a faster rate than had been seen in the previous 17 years. Given that productivity measures tend to grow faster during the early stages of economic recovery, the faster growth rate was not widely viewed as unusual at the time.

What was unusual was that the rate of productivity growth accelerated even further beginning around 1995 when normally it would be expected to slow as the recovery matured. While several explanations have been suggested, most economists believed that firms were finally able to harness the information technology revolution to introduce new methods of production, management controls, and services. This view, sometimes called the New Economy Paradigm, argued that a new permanently higher trend rate of productivity growth has occurred. Others cautioned that another explanation may hold or that the effect of information technology might not be permanent...

Business and Nonfarm Business Sector

The quarterly measures of labor productivity, defined as output per hour, for the business and nonfarm business sectors utilize an output measure that is derived from the National Income and Product Accounts produced by the Bureau of Economic Analysis (BEA). Output is measured as the delivery of value-added to final demand and so it does not include intermediate inputs. Imported finished goods and services to consumers reduce these output measures dollar for dollar.

The National Income and Product Accounts (NIPA) lead of course, leads us right back to the funny GDP figures at the BEA where we originally started.

II. Chain-weighting is not the culprit,

It is also not a savior. Accordin to the BEA "Note..." we know the following about chain-weighting: "When chain-type indexes are used, the goods with rapid growth tend to receive lower weights, and growth in real GDP is reduced.". However if we look at the table I reproduced from the GDP less final sales of computers data from the BEA, we could see that even with chain-weighting the numbers were distorted. The idea I've heard that "chain-weighting" will fix any problems is therefore easily shown as wrong.

III. So Where's the Beef?

As far as I can tell, it's because the government not content to having used hedonic adjustment in order to reduce price for the purposes of inflation, went back and used their hedonic estimate factor to multiply their estimate of business investment and output. Say what?!?!?! you ask?

Look here at this chart produced by Nathan Newman in "Is Growth Real?" series. The government estimates of business tech spending consistently deviates from the actual business dollars spent. Again the culprit is the "quality" or hedonic adjustments and again the suspect data comes from the BEA.

Over the latter half of the nineties, actual capital investment in information technology in real dollars stayed almost flat and declined in chain-weighted or CPI adjusted dollars. According to the government, using a reverse application of hedonic adjustments the private sector actually spent four times as much just from 1996 onwards as it actually did. A difference of a mere 209 billion dollars actually.

In other words, the government was not content to merely estimate that people were spending less by using hedonic adjustments, they went back and used those same figures to assume that there was more business activity, spending, and output going on then there actually was.

This would seem shocking. It can't be true, right? Well again, listen to the BEA "Note ..." itself which confirms that this interpretation is the exactly correct one.
Other factors
Although much attention has recently been focused on whether real GDP growth in the latter half of the 1990's has been overstated as a result of the use of hedonic-based price estimates for computers and peripherals and for computer software, there are other reasons to suspect that growth—especially that related to high-tech innovations—has been understated. First, a number of the industries that are heavy users of the new information technology, such as education and certain financial services, are deflated using cost-based indexes or by input and partial output extrapolators. As noted above, if nominal output is deflated by total cost indexes, there is roughly zero multifactor productivity growth, or if real output is extrapolated by labor inputs, there is no labor productivity growth (and if capital inputs grow faster than labor inputs, there is negative multifactor productivity growth). Recently, BEA replaced its input extrapolation for banking services with a new BLS banking services index; this replacement raised real GDP growth rates in recent years by an average of 0.05 percentage point. If similar indexes were introduced into the remaining 20 percent of GDP that is still estimated using cost and input-based indexes, real GDP growth might be revised up substantially.

In other words, if you take into account the actual as opposed to hedonically revised costs, the real number of dollars actually spent then there is "zero multifactor productivity growth" and if you take into account real labor inputs "there is no labor productivity growth" and if you take into account actual capital costs of information technology investments associated with Moore's law turnover and obsolesence issues "there is negative multifactor productivity growth".

That is straight from the horse's mouth. Don't believe me, believe them. Without this accounting gimmicry it's all been a lie. The Emperor has no clothes: caveat emptor.

22 Comments:

At August 25, 2004 at 3:33 PM, Anonymous Anonymous said...

So people(investors) in were essentially being mislead into buying into a Potempkin Village pretending to be the Taj Mahal.

It also raises a couple of qestions, why only have a few individuals such as yourself have pointed this out. The financial houses have legions of analysts who should have came to the same or similar conclusion as you. So why the silence from WallStreet?

Secondly, does this mean our economy is in deeper trouble than initially thought?

Rodger

 
At August 25, 2004 at 4:06 PM, Anonymous Anonymous said...

Two of your best Oldman - which means very good. The previous economy wrapup is something I was planning on writing but I'll have to leave it for a while 'cause there's no point now - you've done it and in more detail and better than I would have.

 
At August 25, 2004 at 6:08 PM, Anonymous Anonymous said...

Ok Oldman.. I have been wandering around the Internet "searching" to see if I can find folks, other than a few gold bugs, who believe that that US governemnt is really as screwed up as you claim re: hedonics in National Accounting Statistics. I can't find the source references to confirm it. I will admit that I'm not surprised that at least some Ludwig Von Mises disciples believe too that there is much mischief at work in current use of hedonics, e.g. Sean Corrigan's 2/25/204 Inflated RhetoricWhat I can find suggests that measurement is an imprecise art and hasn't been all that good all along, with or withour hedonics.

One problem is that most things we want to track on the production side are not time-fungible, instead they "shape shift" through time. Trying to figure out what Cost of Living, etc. means in such a frame it a very complex, politically wicked undertaking. See Alan Greenspan's 1/3/1998 The Problem of Price Measurement.

I'm going to side with Rodger and re-ask his question: Why is it that only have a few individuals such as yourself have "discovered" these onerous flaws or outright manipulations in this particular use of hedonics?"

And I'll add one question of my own, Where's your evidence?
Dave Iverson

 
At August 25, 2004 at 7:22 PM, Anonymous Anonymous said...

Now I'm confused. I thought the mechanism of hedonic adjustments was to observe that "quality-controlled" nominal computer prices are rapidly falling (true), but then correcting for this fall by adjusting the GDP deflator downwards (and, consequently, real GDP upwards) to show the "actual" amount of computer quality your getting.

In an example, let's assume last year's median PC cost $1000, and this year's costs $1000 as well. But, this year's is 20% more "powerful" (for the purpose of hedonic adjustment). That is, assuming last year's model had 100 "power units", this year's has 120. Last year's price of a power unit was $10, this year's is $8.33. So you record the $1000 for nominal GDP. But you have to account for the increased power, and so you figure a -16.7% contribution into the GDP deflator. So it is not the nominal GDP that is inflated, but the inflation-adjusted real GDP, by way of hedonically undermeasuring inflation. Similarly for CPI inflation.

Now this was simplified, and the adjustments may actually go into all kinds of numerators and denominators, so we may end up with slightly higher nominal GDP and slightly higher GDP inflation than in my model. (But hopefully not with higher GDP and _lower_ inflation.)

My quibble with this simplistic adjustment is that these quality metrics for one thing do not scale linearly to actual benefits, and secondly the benefits should already appear in GDP in their own right.

If this year's car model has a maximum speed of 140 mph instead 120 mph last year, it doesn't mean that I will go through my daily commute quicker. And if I were to increase my commute speed, the benefit would show up in longer work hours or more leisure time. But I will not accept the concept that the hypothetical benefit is expressed in a supposedly lower car price.

-- cm

 
At August 25, 2004 at 9:20 PM, Blogger Oldman said...

I don't know why "it's only a few" Dave, but in my experience reality was never a popularity contest. Most of the correct calls of the last decade I've made - poo pooing the millenium bug, predicting $28 a barrell oil in a year when it was selling at $11 pb, calling the top of the market, predicting in early 2000 that we'd have a ground war in the middle east by 2003 escalating into 2004, calling the gold market, and predicting the fact that no WMD other than broken down labs would be found in Iraq - as well as the failure of the occupation shortly after the invasion - all of these were against the sentiment of the times.

Now I am not a contrarian. It's just that I do independent analysis. I look at the facts. I research them. I read people's methodology and I do basic number crunching to see if their claims are feasible.

It's not magic. It's just believing first, foremost, and last only in "just the facts please." Now I'm not sure why people are so often in disagreement with me, but I think it's because they're not arguing from the facts.

It's hard to beat reality ya know. Yet people try all the time.

 
At August 25, 2004 at 9:22 PM, Blogger Camille Roy said...

Well to be honest I thought the hedonic pricing, 'New Economy' trope was in line with the obvious: falling employment among bank tellers, customer service people and so on. The impact of automation relating to me-as-consumer has been clear for a decade. So of course one looks for an explanation, and hedonic pricing seems to be attempting to explain this transformation.

It's misleading to compare increase in computer speed to an increase in auto speed. Faster computers support applications that solve new kinds of problems, they don't simply solve the old problems faster.

I agree this economy is a very complex system and the models probably do not work properly. That doesn't mean the concept is without merit.

 
At August 25, 2004 at 9:33 PM, Anonymous Anonymous said...

Ah now, Camille has a good point.

What are the things computers do now that they didn't do before? And why would you measure these by reducing computer price weights rather than by measuring their productivity simply by seeing if more is produced elsewhere? Because let's say a computer lets me create 20% more than before - it isn't letting me create 20% more computers - it's letting me create 20% more widgets. And it'll be measured in widget production - if it exists. Trying to measure it pre-emptively would mean measuring it twice, if it even exists.

Ian Welsh

 
At August 25, 2004 at 10:06 PM, Blogger Oldman said...

I agree with Ian. I'm not against the idea of automation. I just don't believe that the productivity increases are authentic. Why? Because the increases in aggregate output seem to have funny numbers masking a stagnation or decline. I think that technology is enabling us to make more, using less labor, but the underlying trend is not that more is being made - at least here - but that production is being eliminated here and being transferred elsewhere.

So you see, the tech hedonics, GDP, productivity, and the offshoring question are all tied together. One is being used as a smoke-screen for the other. Of course in the end, it can't mask the lack of job growth. However the notion is to muddle the argument as much as possible in order to prevent people from realizing what is going on, that it is even going on.

 
At August 25, 2004 at 10:19 PM, Anonymous Anonymous said...

Rodger here,

Oldman please don't take my questioning about the number of analysts detecting this cooking of the books too serious. In fact I agree with your argument and applaud your work.

The question was essentially rhetorical in nature. My answer to it is this; the big boys knew the statistics were being cooked, but as long as they were making money they didn't care. Of course others would be suffering from group think, some in denial, etc.

That said, the picture painted thus far is quite worrisome. It makes me wonder what other business statistic is being cooked ala Enron?

 
At August 26, 2004 at 12:25 AM, Anonymous Anonymous said...

Camille, Ian: Yes, comparing autos and computers is a bit flawed. The point I wanted to make is that as much I will for most practical purposes not make use of my car's increased engine power and max speed to reduce my commute from say 20 min to 15 min because there are other limiting factors, the fact that office PCs have 50-100X higher/larger processing speed, RAM, disks etc. does not lead to vastly increased office productivity because of other limiting factors. (And I'm not saying that 50X more CPU speed leads to 50X hedonic price inflation.) There is a big productivity boom once paper corresopndence & filing is computerized, but then it tapers off and becomes more gradual, with growth rates significantly below physical processing power characteristics. The growth comes more from software than hardware these days. The PC replacement cycle becomes more extended.

Yes, with computers there are non-linear effects, in that certain applications become feasible only beyond a certain critical mass in performance. There are these days all kinds of web-based or intranet-based productivity tools that could only be developed with a certain minimal standard in graphic display quality & performance at a specific price point (so that massive deployment leads to economy of scale). Also network technology was tied to similar performance & quality standards for both operation of networks, as well as computerized design & manufacturing of high-precision, low-tolerance parts. Moreover, quality, versatility, and ubiquity of software to make use of hardware potential is in part a function of computer penetration and accessibility to software talent. There are many feedback loops in the system, nobody is denying that.

But pretending that computer sales were by some assumed/imputed factor higher does not strike me as the proper way of measuring it, and it also distorts incentive structures, does it not?

And the fabulous new applications you are talking about, while they exist and I by no means want to trash-talk them (being a software engineer myself), are I'd say mostly in "specialty" branches of the industry, in terms of volume. For 90% or so it is old plain correspondence, spreadsheets, database reports, etc.

Camille, what say you?

-- cm

 
At August 26, 2004 at 7:32 AM, Anonymous Anonymous said...

Oldman: Looking at the aggregate of your postings it seems your spelling out that something big is about to happen. What do you expect to happen over the next two years (stock market, employment, etc.)?

-Lukas

 
At August 26, 2004 at 7:46 AM, Anonymous Anonymous said...

I like what you are doing in general and respect your work, but I think your critisms of Hedonics pricing is overboard. Yes, there are problems with it and it does ocassionally generate weird results. but overall the data is better because of it. There is no denying the fact that tech prices have been falling extremely fast and that there really was a tech boom in the 1990s.

The real point is that the data is more acurate because of Hedonic pricing than if it were not used.

For example, the Nathan Newman chart is a really bad example of a little knowledge being a bad thing. All he is doing is comparing real to nominal numbers. Unless inflation is zero this always produces different results. In effect he is arguring that computer prices did not fall in the 1990s and that is obviously wrong.

Before going any futher into this subject I suggest you talk to the people at BEA. If you do I am sure you will find them very helpful and able to address all your concerns.

The computer issue you bring up is not a problem of Hedonic pricing. It is an index number problem in an area where prices are underging very large price changes. Traditional price indices are very good when they are dealing with a constant product with minor price changes. But when you get a product where that is undergoing both substantial quality changes and price changes they are very poor. Hedonic does a good job of dealing with these problems but it is not perfect.

Spencer

 
At August 26, 2004 at 10:00 AM, Blogger Oldman said...

Well Spencer, I intend to continue looking into this subject. However, I would argue that so far the balance of the information I've been quoting is straight from the horse's mouth - quoted directly and in context from BEA and BLS publications. No one forced them to say they were ignoring Moore's law for instance.

Even if the Newman chart is off, and I'll be checking more into it, even the paper about Walmart and tech improvements that you kindly showed me that the Federal Reserve presented was filled with bad juju accounting problems.

I've also seen the inflated tech numbers elsewhere, and on much firmer argued ground. I included Nathan's chart because it's visual, not because it's definitive. I hope you will keep an open mind and cede that the bulk of the evidence I've presented is taken directly from BEA and BLS publications, and hence shocking that it's that direct.

 
At August 26, 2004 at 11:20 AM, Anonymous Anonymous said...

Oldman said,

the … tech hedonics, GDP, productivity, and the offshoring question are all tied together. One is being used as a smoke-screen for the other. Of course in the end, it can't mask the lack of job growth. However the notion is to muddle the argument as much as possible in order to prevent people from realizing what is going on, that it is even going on.I agree in part. As a government bureaucrat myself, I’m not going to discount all notions of mischief from the mix, but I really believe that what we have at work in this complex and politically wicked setting is more a problem of people trying to force-fit too much complexity and “emergence” into rational accounting systems, and then trying to use such systems both to look at the past and to predict or govern the future. It's a bit too reductionistic for my blood.

While listening to NPR this AM I heard David Wessel (Washington Bureau Chief for the Wall Street Journal) talking about the CPI, computers and whatnot. Wessel’s view is that yes there is a difference between what is being reported and what consumers feel in their pocketbooks.

But part of that difference is escalated expectations of entitlement on the part of the consumers. We believe that we deserve more each day from our computer expenditure in part because we are getting more – i.e. productivity.

Like efficiency, productivity is hard to measure. I always try to pin people down re: efficiency by asking Efficient at what? Efficient for whom? Efficient by what standard? Efficient for how long? I add one more question that I got from Garrett Hardin to the “for how long” question: And then what? We might do well to ask such questions about productivity as well.

Finally, we must talk about both “errors or sins of commission” (which this discussion has been about) and “errors or sins of omission” (which takes us into the realm of what is not measured in the CPI which includes, as I understand it, housing (instead rent is a proxy), and most direct energy prices.

Many argue that prudent monetary policy ought not only look at narrowly focused inflation parameters, but ought to have some indication of emerging bubbles in asset inflation as well. Again, we are dealing with complex systems.

I like to pitch Genuine Progress Indicators as a “good start” to begin replacing too-narrow focus on GDP, CPI, productivity, etc.

Dave Iverson

 
At August 26, 2004 at 11:34 AM, Anonymous Anonymous said...

I don't know what happened to the hyperlink in my previous post. My reference should have been to Genuine Progress Indicators, a project of Redefining Progress.

Dave

 
At August 26, 2004 at 5:56 PM, Anonymous Anonymous said...

Spencer: I did not intend to say that hedonic adjustment is generally without merit. But please explain to us (and I mean this seriously) the merits (and mechanism) of hedonic adjustments for computers (many of which qualify as tools and not as "consumable" end products). Presumably improved computers have an _actual_ productivity impact; why has another improvement to be imputed on them?

-- cm

 
At August 27, 2004 at 9:12 AM, Blogger Anonymous said...

"Why is it that only have a few individuals such as yourself have "discovered" these onerous flaws or outright manipulations in this particular use of hedonics?"

They weren't "discovered", they were put in place intentionally based on a particular theory of what price was measuring, namely that all of the improvments in technology were absolute improvments, and these absolute improvments were also incremental improvments.

That all of the increased productivity and "wealth" in the US on an energy weighted basis came from computer hardware and lower wages was pointed out by Solow in 2002.

Earlier this year I found that the h-weighed CPI-U diverged from the non h-weighted measures of Consumer Price Index starting in 1988, at a rate that was .88 correlated to the S&P 500 - namely, wall street knows that the improvements in the value of US corporations come almost entirely from networking and storage technology plus lower relative wages. In the sense that the market has "priced" in the same amount of "value" as computer technology has created.

It's not a conspiracy or a "flaw" it is an attempt to price, in dollar terms an exchange system. It's the market, not the government that is having problems pricing information correctly.

 
At August 27, 2004 at 9:15 AM, Blogger Anonymous said...

Also

http://www.nytimes.com/aponline/business/AP-Economy.html?hp

As one can see, the mere progress of technology itself is not enough to float the economy, it is the ability of companies to deploy final demand products based on improvments in technology - cell phones, dvd players and the like. Failing to do this means that GDP will hobble along at a rate slower than the borrowing used to finance it.

 
At August 27, 2004 at 3:05 PM, Blogger Camille Roy said...

"And the fabulous new applications you are talking about, while they exist and I by no means want to trash-talk them (being a software engineer myself), are I'd say mostly in "specialty" branches of the industry, in terms of volume. For 90% or so it is old plain correspondence, spreadsheets, database reports, etc."

Oh I think there's been a very large increase in the impact on overall economic productivity due to improvements in computer technology, hardware & software. Anything using Java, EJB. Anything using resource allocation and planning software. I don't work for Amazon or Ebay but I'm sure they can do what they do because of these improvements, which are related to processor speed, memory cost, storage cost. I have a $500 workstation downstairs with 768 megs and a paltry 20 gb drive. When I was working for HP 10 years ago, the biggest drives in our whole lab were 3 gb. As a result the kind of software tools I use has gone through incredible improvement. The kinds of software I can develop is impacted substantially.

The problem is really how to measure these improvements. Again the *kinds* of problems computers can solve has undergone a transformation, impacting business processes. Wal-mart is of course an egregious example of worker exploitation, but I'm sure their IT is an excellent example of using the new features and functionality throughout the business.

I think as the open-source movement continues to get strengthen, these increases in productivity for no or low cost will have interesting deflationary effects.

 
At August 28, 2004 at 12:36 AM, Anonymous Anonymous said...

Camille: Your point is well taken; I can appreciate myself the vast increase in raw (!) computer power over the last two decades that I have been using computers. Yes, computers have made many new applications either possible or broadly feasible, and have led to dramatic advances in manufacturing, industrial processes, design, research, and the sciences. It is not my point (and I'd suggest most anybody else's) to deny or downplay this.

What I don't accept, however, is equating this with what is effectively a GDP surcharge. When a new medical procedure becomes available in your health plan of which you could benefit, your employer installs a gym at your office, or they introduce a new management awareness program so that employees are treated better, they don't tell you that you just got a 5% raise, do they? (And it _isn't_ the equivalent of a raise.)

There is a deeper problem here -- the concept that every benefit that somebody may experience or any quality improvement or additional option of doing something useful, every minute one wants to enjoy, or every breath one wants to take, must be expressible in some dollar and penny amount. Then there is the related concept that anything in the world, no matter how complex, subjective, multi-dimensional, etc., can be rated at a linear scale, and a tradeoff of anything against anything can readily be made, the only technical problem being the determination of the appropriate "exchange ratio" or "utility function".

Of course people want to model their world, but there is more to it than the reductionistic/mechanistic/mercantilistic translation of everything into the means of exchange. Especially economists are prone to this.

Back to computers, if they lead to such a productivity boost, then that should be measured in GDP already, to the extent that it is expressed in money (final sales, etc.). Imputing a supposed producivity boost on every machine that is used to read email, write correspondence, or run the occasional database report, strikes me as misguided at best. Even when talking about software development or scientific applications, the productivity boost is often overrated.

-- cm

 
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