There is a problem with the way we measure economic activity.
We include products of actual value, such as food that restaurants cook and serve to customers, right alongside products of only theoretical value, such as food that restaurants cook and throw away unserved.
Some of the “products” we count are so very abstract, they could be completely empty of any value, and we wouldn’t be able to tell. This is especially true in deals between one public corporation and another in which no tangible product is exchanged. Many of these deals serve mainly to make each company’s financial statements show more profit or less risk than is actually present.
These abstractions threaten to crowd out the things we are really trying to create — food, drinking water, housing, clothing, transportation, and the other real products that go together to form what in financial circles is called the real economy. The real economy contains the things that really matter in the end. Abstractions are valuable only to the extent that they support the real economy. Eventually, you have to take out some of your money (an abstraction) and use it to buy food (something you really need). As my mother warned me when I set out to make my fortune on Wall Street, you can’t eat credit default swaps.
The abstract economy has become so much bigger than the real economy that it is no longer possible to measure economic progress using economic aggregates. GDP, the oft-cited measure of national income, can go up even as the real economy shrinks. Financial measures of wealth can go up while material wealth declines. Anecdotes are more powerful than economic statistics if you want to know how well the economy is treating people.
How about you? Are you focusing too much on statistics and abstractions and losing track of what you really want?
Forget your salary and bank account for a moment and consider this: How easily are you getting the things you really want? Stop worrying about health “coverage” and answer this: How is your actual health? Instead of checking the latest count of your online “friends” — how happy are you?
This kind of check is good anytime, but it is especially important when the economy around you has been affected by a bubble, such as the currently declining credit bubble. In economic theory we assume that values can be represented by amounts of money, but that assumption fails us when a bubble exaggerates the value of something. You can avoid or escape the influence of a bubble by looking at what is actually important to you.
This is the same thing the economy in the aggregate must do to recover from the credit bubble. It is harder for the whole economy to do, though, because the usual aggregate measures of economic success, such as GDP, can be especially misleading around a bubble. That’s why it is sometimes hard to identify the public policy moves that will get the economy going again.
