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Solving Problems does not Increase GDP

December 4, 2013

GDP = (market price of goods) x (the price of those goods).

People use market transactions when they have a problem which is best solved by another human being, who can best be motivated by greed. Suppose your house is dirty, which you consider to be a problem that needs solving. If you clean your own home, that is not GDP. If you kidnap someone and force them to clean your home, that is not GDP. It’s only counted as GDP when you pay someone else to clean your home.

If someone invents a device which permantently renders all houses perfectly clean forever, that is not counted in GDP. Maybe when people first buy the device it will be, but what about the next year or for that matter 10 years hence? That is especially true if the device is free.

The inventions which increase GDP the most:
– Require the cooperation of large numbers of people who don’t care personally about one another
– Alleviate widespread human problems but don’t solve them
– Have low amounts of competition so that people can’t either compete to lower prices

I think that a lot of recent invention has been of the form of solving problems rather than coming up with expensive ways to temporarily ease them. Let’s take the automobile industry. After World War 2, the masses began to purchase cars en masse in order to give themselves the freedom to move where they wanted, when they wanted. Cars were very expensive products, but also highly valued. Compare that to teleworking, or Amazon. Inventions of recent times reduce the need for travel. Sure, almost everyone still owns a car, but by driving it less, the internet reduces the demand for new automobiles and hence GDP. By solving the problem of having to travel, innovation has taken something which was formerly measured as GDP and moved it into a category of a problem which has been solved for free.

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