I see where you're coming from but I'm not entirely convinced. To extend the old jib against Kenysians, just because the government lets out a contract for a construction company to dig a hole and a contract for another company to fill it up again, instead of directly employing the guys with shovels doesn't mean there was anything productive accomplished even if the former situation has all the hallmarks of happening 'in the market'.
You're making the assumption that the surgeon would have spent the hour mowing the lawn performing surgery, i.e compensated work. I think it's equally reasonable to assume she could have spent that hour reading a book, or playing a musical instrument, or running. She could have also have spent that hour at a museum or play or musical performance, which would also have generated some GDP but less than an hour of her performing surgery, but we don't try to account for the difference between the two.
Part of Theil's, and many other people's arguments, about the effect of second jobs on GDP is that a person with a non-working partner has to demand compensation sufficient to support their dependents. I think that makes it something of a misnomer to say that the stay-at-home spouse was uncompensated. They are being compensated by the working spouse in the same way a child care provider would but he's absolutely right that those intra-family transactions were not captured in GDP historically. So we're comparing GDP measured using family units against GDP measured by individual activity. If we deconstructed historical GDP to account for the intra-family transactions we might very well see the lower levels of growth.
Some people are trying to define GDP one way, and you're trying to define it another. You're talking past these people by ignoring the concept they are trying to get at, it's not clear you're providing a new insight by doing so.
What we observe in the real world is that uncompensated childcare is highest amongst low and high skill people. Low skill people can't afford daycare. High skill people can afford to live on one income. It's the wives of the wealthy, usually themselves high skill and potentially high earning, that have a higher stay at home rate than the middle class. In this sense we could call being a SAHM a superior good as shown by revealed preferences.
Talking to most actual parents, it seems that there are three things that keep women in the workforce when they have young kids.
1) Two incomes only way to afford basic necessities (especially real estate).
2) Worry that if one takes a break for five years they won't be able to get back into their career (impact after returning rather than lost wages during).
3) Even when adequate, husbands income not reliable enough to risk it all on single income.
The net result of turning childcare from something with low marginal cost (a parent watching three kids instead of two doesn't cost anything more) to something linear (each additional kid costs more daycare) has the effect of deeply depressing fertility. Perhaps daycare is part of the general trend to pull forward consumption to the present at the expense of the future (when you have a lot of grandkids).
One problem in this area (not specifically measuring GDP) is that no nation seems to have been able to educate its women without also having its fertility fall below replacement level and thus getting on a path to extinction, South Korea being the most extreme example. Another thing I'm unsure about is whether, if women work instead of staying at home, it drives the price of housing up so much that it wipes out the financial gains (especially once you add in child care). Some women like to work, but we now have a society where women pretty much have to work, and don't have (enough) babies. In that sense, GDP doesn't even measure the health of society, given that we are growing GDP but shrinking the population.
"Should the surgeon stay home to do child care? Again, in a world of specialization and trade, that is not the case. If anything, we probably have too much uncompensated child care in the economy. "
How does Mr. Kling imagine the "more compensated" form of child care operating in the economy? Will this make children happier? Will it make parents happier? Will it make society better? It appears to me that Mr. Kling imagines children to be like farm animals who exist for no other purpose than to feed the economy and consequently, the management of children, like farm animals, should be done most efficiently, for the economy's sake.
Does Mr. Kling consider that many parents wish they could spend more time with their children? Does he consider the unmeasured loss of happiness that occurs because parents have to work and do not have the time to enjoy their children? This loss of "income", just as the lack of uncompensated care, is not measured in GDP. If anything we have too much loss of parental happiness in the economy.
I support Kling's arguments of what GDP measures. I find his perspective on family and children to be discouraging. I think he needs to spend more time with Bryan Caplan.
Arnold, I agree that Thiel's implied interpretation of GDP is probably not correct. As you might say, the economy is not a GDP "factory." However, although I agree that specialization and trade often lead to economic progress, that isn't always the case. As a counterexample to your surgeon/lawnmower case, I'm not sure it would be a good idea for a parent to outsource childcare to a third-party, if the tradeoff involves the parent commuting 30 miles to a minimum wage job. In the middle of these two extremes are cases where the trade-offs are probably positive, and do create economic progress, but probably not to the extent reflected in the GDP statistics (i.e., economic benefits might be quite mild). In such cases, I think Thiel is probably correct that the GDP statistics overestimate the economic benefit.
This all said, I realize that GDP growth is not necessarily intended to reflect economic progress (i.e., we are not a GDP factor). But many folks don't know that.
It's almost a nitpick, but "commercial activity" fits your meaning better than economic activity. So the number is not fake, but that doesn't undermine Thiel's point.
Every dollar of production that moves into commercial realm gets counted, regardless of how many dollars of value were produced by the shift.
In fact I feel I am repeating your main point. But then are you actually disagreeing with Thiel on anything substantive? Is it that you think the commercialization of childcare is close to 100% value producing?
If a middle class mother pays for daycare using 2/3 of the salary she gets from a job administering some regulation that did not even exist 50 yeast ago, how much value has been produced?
how much marginal added production/value is added by a change is very relevant.
surgeon doing $1k surgery instead of mowing the lawn has added almost $1k in extra value/ productivity.
whereas the mom serving in Macdonald's for minimum wage while her child is called for by a maid hasn't added mooch marginal value.
your point is technically right. obviously GDP is calculated in the mechanical way and whatever it means doesn't matter as much. but Thiel is asking whether you actually did something of value
A lot of what is not being captured in the GDP numbers is that while the measure of total economic activity is going up, the perceived standard of living by the average person is stagnating or going down. Sure you can get a big screen tv for next to nothing, but NIMBY and restrictive zoning drive up the cost of housing to the point where both parents have to work, and miss out on time with their children, just to afford a smaller home than what they grew up in. GDP measures the increase in economic activity while camouflaging the drop in standard of living and life satisfaction
"An economy where everyone tills their own soil comes out looking as advanced as an economy where just 2 percent of people grow all the food and everyone else provides other useful goods and services."
I wonder how your view as to what is the more advanced economy takes into consideration resiliency. It seems to me that an economy wherein all I know how to do is to turn the wrench at the widget factory and I pay for everything else to be provided by others, and everyone else has a similarly limited range of abilities, will tend to have lower chance of survival than one in which we sacrifice some efficiency for resiliency.
I didn't read all of it, but it seems misguided, whether I hire someone to build my deck or I build it myself, that seems to add equally to the GDP... in my limited understanding.
Why is it called "Gross Domestic Product" if it is not a measure of production? It seems like "Gross Domestic Exchange" or "Gross Domestic Market Activity" would better label the metric you describe.
The upshot is that some historical societies would be characterized by zero GDP. Take a society typified by agricultural households that don’t specialize. Everyone has the same amount and quality of land, the same number of cows, etc. None of that production would couldn’t as GDP. Only the part paid to the landlord (boss, feudal lord, city-state’s high priest, or whatever) would count. As a former student of medieval economies, that seems to miss a big part of the picture, though perhaps catching the rising exports from the nearby countryside to the towns is enough.
Re: "Economic activity consists of specialization of trade. That means outsourcing."
Specialization and trade are intrinsic to the household. Individuals in households often establish an a division of labor, and cooperate for mutual benefit, without outsourcing and without using monetary compensation. In a word, a household depends partly on *reciprocity.*
Thus economists may reasonably interpret "economic activity" to include childcare by one parent, whilst the other parent has formal employment outside the household.
Aristotle, or one of his students, wrote a book, entitled "Economics," which he construes as household management:
Coase posits that markets and firms are distinct institutions for coordinating economic activity. He explains that firms exist in a market economy because doing some economic activities in-house is more profitable than outsourcing everything. Markets rely on the price mechanism to coordinate economic activity. By contrast, firms plan internal economic activity, given market prices (including market wages).
The household (Aristotle) and the firm (Coase) are two distinct species of a genus, *formal organizations for reciprocity.* Both the household and the firm involve economic activity. The household, unlike the firm, usually eschews explicit use of market wages to incentivize internal reciprocity. The household features tiny scale and intimate relations, which enable it to rely on planning and solidarity to achieve reciprocity in economic activity.
See Robert C. Ellickson, "Unpacking the Household: Informal Property Rights around the Hearth," Yale Law Review 116:2 (November 2006) 226-328:
I find this kind of analysis of the arm-chair economics of very wealthy Americans who decide to be in the spotlight very helpful indeed. Thiel strays from his field very casually and makes remarks that require a great deal of knowledge and thinking to get right. More economists should pursue this theme.
I see where you're coming from but I'm not entirely convinced. To extend the old jib against Kenysians, just because the government lets out a contract for a construction company to dig a hole and a contract for another company to fill it up again, instead of directly employing the guys with shovels doesn't mean there was anything productive accomplished even if the former situation has all the hallmarks of happening 'in the market'.
You're making the assumption that the surgeon would have spent the hour mowing the lawn performing surgery, i.e compensated work. I think it's equally reasonable to assume she could have spent that hour reading a book, or playing a musical instrument, or running. She could have also have spent that hour at a museum or play or musical performance, which would also have generated some GDP but less than an hour of her performing surgery, but we don't try to account for the difference between the two.
Part of Theil's, and many other people's arguments, about the effect of second jobs on GDP is that a person with a non-working partner has to demand compensation sufficient to support their dependents. I think that makes it something of a misnomer to say that the stay-at-home spouse was uncompensated. They are being compensated by the working spouse in the same way a child care provider would but he's absolutely right that those intra-family transactions were not captured in GDP historically. So we're comparing GDP measured using family units against GDP measured by individual activity. If we deconstructed historical GDP to account for the intra-family transactions we might very well see the lower levels of growth.
Some people are trying to define GDP one way, and you're trying to define it another. You're talking past these people by ignoring the concept they are trying to get at, it's not clear you're providing a new insight by doing so.
What we observe in the real world is that uncompensated childcare is highest amongst low and high skill people. Low skill people can't afford daycare. High skill people can afford to live on one income. It's the wives of the wealthy, usually themselves high skill and potentially high earning, that have a higher stay at home rate than the middle class. In this sense we could call being a SAHM a superior good as shown by revealed preferences.
Talking to most actual parents, it seems that there are three things that keep women in the workforce when they have young kids.
1) Two incomes only way to afford basic necessities (especially real estate).
2) Worry that if one takes a break for five years they won't be able to get back into their career (impact after returning rather than lost wages during).
3) Even when adequate, husbands income not reliable enough to risk it all on single income.
The net result of turning childcare from something with low marginal cost (a parent watching three kids instead of two doesn't cost anything more) to something linear (each additional kid costs more daycare) has the effect of deeply depressing fertility. Perhaps daycare is part of the general trend to pull forward consumption to the present at the expense of the future (when you have a lot of grandkids).
I think the term "uncompensated" is misleading. Childcare by mom was compensated, just implicitly rather than explicitly.
One problem in this area (not specifically measuring GDP) is that no nation seems to have been able to educate its women without also having its fertility fall below replacement level and thus getting on a path to extinction, South Korea being the most extreme example. Another thing I'm unsure about is whether, if women work instead of staying at home, it drives the price of housing up so much that it wipes out the financial gains (especially once you add in child care). Some women like to work, but we now have a society where women pretty much have to work, and don't have (enough) babies. In that sense, GDP doesn't even measure the health of society, given that we are growing GDP but shrinking the population.
Kling writes:
"Should the surgeon stay home to do child care? Again, in a world of specialization and trade, that is not the case. If anything, we probably have too much uncompensated child care in the economy. "
How does Mr. Kling imagine the "more compensated" form of child care operating in the economy? Will this make children happier? Will it make parents happier? Will it make society better? It appears to me that Mr. Kling imagines children to be like farm animals who exist for no other purpose than to feed the economy and consequently, the management of children, like farm animals, should be done most efficiently, for the economy's sake.
Does Mr. Kling consider that many parents wish they could spend more time with their children? Does he consider the unmeasured loss of happiness that occurs because parents have to work and do not have the time to enjoy their children? This loss of "income", just as the lack of uncompensated care, is not measured in GDP. If anything we have too much loss of parental happiness in the economy.
I support Kling's arguments of what GDP measures. I find his perspective on family and children to be discouraging. I think he needs to spend more time with Bryan Caplan.
Arnold, I agree that Thiel's implied interpretation of GDP is probably not correct. As you might say, the economy is not a GDP "factory." However, although I agree that specialization and trade often lead to economic progress, that isn't always the case. As a counterexample to your surgeon/lawnmower case, I'm not sure it would be a good idea for a parent to outsource childcare to a third-party, if the tradeoff involves the parent commuting 30 miles to a minimum wage job. In the middle of these two extremes are cases where the trade-offs are probably positive, and do create economic progress, but probably not to the extent reflected in the GDP statistics (i.e., economic benefits might be quite mild). In such cases, I think Thiel is probably correct that the GDP statistics overestimate the economic benefit.
This all said, I realize that GDP growth is not necessarily intended to reflect economic progress (i.e., we are not a GDP factor). But many folks don't know that.
It's almost a nitpick, but "commercial activity" fits your meaning better than economic activity. So the number is not fake, but that doesn't undermine Thiel's point.
Every dollar of production that moves into commercial realm gets counted, regardless of how many dollars of value were produced by the shift.
In fact I feel I am repeating your main point. But then are you actually disagreeing with Thiel on anything substantive? Is it that you think the commercialization of childcare is close to 100% value producing?
If a middle class mother pays for daycare using 2/3 of the salary she gets from a job administering some regulation that did not even exist 50 yeast ago, how much value has been produced?
how much marginal added production/value is added by a change is very relevant.
surgeon doing $1k surgery instead of mowing the lawn has added almost $1k in extra value/ productivity.
whereas the mom serving in Macdonald's for minimum wage while her child is called for by a maid hasn't added mooch marginal value.
your point is technically right. obviously GDP is calculated in the mechanical way and whatever it means doesn't matter as much. but Thiel is asking whether you actually did something of value
A lot of what is not being captured in the GDP numbers is that while the measure of total economic activity is going up, the perceived standard of living by the average person is stagnating or going down. Sure you can get a big screen tv for next to nothing, but NIMBY and restrictive zoning drive up the cost of housing to the point where both parents have to work, and miss out on time with their children, just to afford a smaller home than what they grew up in. GDP measures the increase in economic activity while camouflaging the drop in standard of living and life satisfaction
"An economy where everyone tills their own soil comes out looking as advanced as an economy where just 2 percent of people grow all the food and everyone else provides other useful goods and services."
I wonder how your view as to what is the more advanced economy takes into consideration resiliency. It seems to me that an economy wherein all I know how to do is to turn the wrench at the widget factory and I pay for everything else to be provided by others, and everyone else has a similarly limited range of abilities, will tend to have lower chance of survival than one in which we sacrifice some efficiency for resiliency.
I didn't read all of it, but it seems misguided, whether I hire someone to build my deck or I build it myself, that seems to add equally to the GDP... in my limited understanding.
an interesting argument and counter argument - thanks
Why is it called "Gross Domestic Product" if it is not a measure of production? It seems like "Gross Domestic Exchange" or "Gross Domestic Market Activity" would better label the metric you describe.
The upshot is that some historical societies would be characterized by zero GDP. Take a society typified by agricultural households that don’t specialize. Everyone has the same amount and quality of land, the same number of cows, etc. None of that production would couldn’t as GDP. Only the part paid to the landlord (boss, feudal lord, city-state’s high priest, or whatever) would count. As a former student of medieval economies, that seems to miss a big part of the picture, though perhaps catching the rising exports from the nearby countryside to the towns is enough.
Re: "Economic activity consists of specialization of trade. That means outsourcing."
Specialization and trade are intrinsic to the household. Individuals in households often establish an a division of labor, and cooperate for mutual benefit, without outsourcing and without using monetary compensation. In a word, a household depends partly on *reciprocity.*
Thus economists may reasonably interpret "economic activity" to include childcare by one parent, whilst the other parent has formal employment outside the household.
Aristotle, or one of his students, wrote a book, entitled "Economics," which he construes as household management:
https://en.wikipedia.org/wiki/Economics_(Aristotle)
Compare Ronald Coase, "The Nature of the Firm:"
https://en.wikipedia.org/wiki/The_Nature_of_the_Firm
Coase posits that markets and firms are distinct institutions for coordinating economic activity. He explains that firms exist in a market economy because doing some economic activities in-house is more profitable than outsourcing everything. Markets rely on the price mechanism to coordinate economic activity. By contrast, firms plan internal economic activity, given market prices (including market wages).
The household (Aristotle) and the firm (Coase) are two distinct species of a genus, *formal organizations for reciprocity.* Both the household and the firm involve economic activity. The household, unlike the firm, usually eschews explicit use of market wages to incentivize internal reciprocity. The household features tiny scale and intimate relations, which enable it to rely on planning and solidarity to achieve reciprocity in economic activity.
See Robert C. Ellickson, "Unpacking the Household: Informal Property Rights around the Hearth," Yale Law Review 116:2 (November 2006) 226-328:
https://www.yalelawjournal.org/article/unpacking-the-household-informal-property-rights-around-the-hearth
I find this kind of analysis of the arm-chair economics of very wealthy Americans who decide to be in the spotlight very helpful indeed. Thiel strays from his field very casually and makes remarks that require a great deal of knowledge and thinking to get right. More economists should pursue this theme.