Measure what is measurable, and make measurable what is not so.
-Galileo Galilei
Any science contends with a difficult problem: there are things we want to understand, but we cannot easily measure those things. Any tool for measurement will inherently have technical limitations (that is, limited by the technology of the time) and be subject to arbitrary choices by those doing the measuring. Sometimes we may not even be able to directly measure the thing, instead we have to rely on proxies, or on a lack of information, to track what we’re interested in. Consequently, the measurement one uses is not the same as the thing itself. It is merely a representation of the thing.
Unfortunately, those untrained in scientific thinking will often mistake the measurement for the thing. This is very common in economics. Take, for example, the Consumer Price Index (CPI). CPI is a measurement of inflation using a basket of consumer goods. The basic idea is that if prices are moving independently of one another, there should be limited movement in the Index. However, if the Index is consistently changing in a certain direction, there is likely inflation (the Index is rising) or deflation (the Index is falling). However, the Index can rise for reasons other than inflation. If even one price changes and all else is held equal, the Index would change simply because of how the Index is calculated. It is a weighted average of all prices in the basket. One change therefore moves the whole Index.
To make my point more concrete, let’s say that the price of gasoline were to rise considerably and no other price were to change. The CPI would naturally rise given gasoline is a component of the Index. No economist would say there is inflation; inflation is a general rise in prices and this is just a single price rising. But those who think that CPI is inflation would misunderstand and consequently misdiagnose the situation. They confuse the measurement for the thing itself.
We see the same thing for Gross Domestic Product (GDP). GDP is a measure of economic activity, and its growth rate is a measure of economic growth, but it is not economic growth in and of itself (nor is it a theory of economic growth). The measurement of GDP, like the CPI above, is an accounting identity that attempts to act as a proxy for economic growth. But, like with CPI, those who confuse the measurement for the thing erroneously conclude that an increase in GDP necessarily means economic growth is occurring. The measurement of GDP is defined as New Consumption + New Investment + New Government Spending + New Net Exports. If any of those variables change, GDP will necessarily rise. That is true. But it does not follow that the rise in GDP necessarily means economic growth is occurring. America in World War 2 and the USSR showed that conclusively. US GDP rose significantly in World War 2 because of the huge increase in government spending. But, by many measures, people were worse off than during the Great Depression: consumer goods were hard to find because so many materials were needed for the war effort, people had to grow their own food—it was not an economy that supports a good life. In the USSR, GDP was rapidly approaching the US. Indeed, some were even predicting the USSR would overtake the US. But once the USSR collapsed and we saw behind the veil, the standard of living for Soviet citizens had barely changed since the fall of the Tsars. GDP was propped up by government spending, and thus became an unreliable indicator of economic growth.
The confusion between the measurement and thing I have discussed here is a perpetual problem for any sort of central planning or industrial policy. The central planners must establish some goal, which in turn requires some measurement. But then the project becomes all about hitting the measurement rather than promoting the goal. Ultimately, this leads to the plan to fail in its goal even if it hits the measurements.
Update: Thank you to David Henderson who pointed out my description of GDP above wasn’t strictly speaking correct. The measurement of GDP is an identity. The concept of GDP is not. Also, John Hall correctly pointed out in the comments below that GDP is economic activity, not growth. I have updated the paragraph to better reflect what I meant.
READER COMMENTS
John Hall
Sep 16 2025 at 6:22pm
GDP is a measure of economic activity, not economic growth.
Jon Murphy
Sep 18 2025 at 10:38am
Yes, you are correct. I updated the paragraph to be more clear in what I mean.
David Seltzer
Sep 16 2025 at 6:22pm
Jon: Good stuff. Even in measurement, some conflate mean and median. Looking at a symmetric distribution, one could use either mean or median. If the distribution is skewed or outliers are present in the data, it is better to use the median as a central measure.
Warren Platts
Sep 17 2025 at 7:46am
Averages hide a multitude of sins, to be sure…
Mactoul
Sep 17 2025 at 12:24am
GDP is a proxy of economic activity and this implies that economic activities are a subset of all human activities. And presumably, it measures only licit economic activities, not illicit such as drug dealing, arms running etc. Or subletting without informing tax authorities, and other under-the-table transactions.
Thus, GDP looks from the state’s perspective. Which is again not surprising given the context GDP was devised. It has even been claimed that without Kuznets’ innovation it would have been very difficult for America to have won the war and in particular to have fed insatiable demands of Manhattan Project.
So, GDP is a tool for central planners and their ilk. What it means for those of other persuasion? Does GDP has any significance for classical liberals?
Jon Murphy
Sep 17 2025 at 7:08am
Yes. But as I discuss in the post, it is a misunderstood tool.
I don’t understand your question. Why wouldn’t it?
Mactoul
Sep 17 2025 at 11:48pm
GDP is a tool devised for and by central planners. It treats govt expenditures as positive while presumably classical liberals would have govt expenditure as a negative (in the sense that govt expenditure drains from welfare of individuals aggregated somehow).
So, the utility of GDP measure for classical liberals is unclear.
Regarding the Soviet GDP, was the problem of measure or measurement?
That is, was the Soviet GDP high because of high expenditures of the Soviet govt or the items in the GDP were inflated (i.e overestimated)?
Jon Murphy
Sep 18 2025 at 7:33am
That’s incorrect; even a rudimentary understanding of how GDP shows that it is not true. And if it were true, it’d be a huge own-goal for Central planners given GDP is higher in free economies than planned ones.
Again, why? You’ve gotten the purpose of calculating GDP wrong.
Warren Platts
Sep 17 2025 at 4:15am
I’m a sailor in the Navy. I’m looking at a radar screen from within the Combat Information Center (CIC). I see a blip. I can measure the blip’s bearing and range. Hmm… The bearing is staying the same, yet the range is decreasing (rapidly). Now, who in the world would somehow conflate the blip with an incoming enemy fighter jet (or maybe an innocent airliner carrying 300 people)?
The sine qua non of any science is the ability to measure. I don’t care what it is: if you’re studying land snails in the Bahamas or cutthroat trout subspecies in Wyoming you’ve still got to count the scales along the lateral line, the fin rays, the number of pyloric caeca, etc.
I’m tempted to say that if you can’t measure it, it does not exist. Yet, does God exist? We can’t measure Him or It, to be sure, yet that does not entail that He or It does not exist.
Does love exist? How do you measure that? I don’t think you can. But at that point you’ve left science and have entered the realm of English literature.
So the real question is: Is economics an actual science or is it a subspecies of English literature, perhaps a la a Charles Dickens novel?
Let’s be clear about what we’re really talking about: the pressing, ongoing discussion is about the net gains from trade. In particular, did the USA benefit measurably from the relaxation of trade barriers enacted by NAFTA and PNTR?
There are two rough measures to gauge the gains from trade: GDP growth rates or net welfare. The latter is way more squishy because you have to somehow assess consumer surpluses and producer surpluses. Moreover, GDP is what Ricardo himself used in his original model: both Portugal and England saw an increase in GDP — albeit the Portuguese increased more than the English, yet it was still a “win-win” situation for both sides.
So basically, what Jon is trying to do here is create a theoretical escape hatch for economic theory: if there was no turbocharging of the GDP growth rate (and there certainly wasn’t in the case of the United States), that does not entail that we are nonetheless still better off as a result of free trade! But then again, this begs the question of how do you measure the net gains from trade? And if you can’t measure the net gains from trade, how do we know they exist?
Jon Murphy
Sep 17 2025 at 11:44am
This has been a very enlightening comment
Warren Platts
Sep 17 2025 at 5:10pm
Sorry Jon: I didn’t double my intended double negative that was meant to express my understanding of your position. It should read, “if there was no turbocharging of the GDP growth rate … that does not entail that we are *NOT* nonetheless still better off as a result of free trade!”
Perhaps I should attempt to steel man this position a bit more. There are at least two arguments for free trade that can be made even if the gains from trade are unmeasurable (or even if the measured net gains are negative).
There is the anarcho-capitalist argument: I should be free to make any kind of business deal I want with any other consenting individual I want, no matter where they live or what language they speak or what creed they believe in (or not) and to hell with any imagined net gains for the places where I happen to be hanging my hat at the moment. Indeed the very idea of a “collective” is ontologically problematic and if taken seriously inevitably leads to political totalitarianism. This argument is valid, perhaps even sound, but I wouldn’t call it a scientific argument given that its premises rest on ethical and metaphysical grounds.
A more scientific argument would state that there are net gains from trade and that these are somehow measurable but if it’s the case that the net gains for the United States negative, this does not invalidate the argument for free trade because *we* (meaning all the individual humans living on Planet Earth) are still better off on average in terms of world GDP, net welfare, utility, or what have you. This is actually an old argument that has its roots in the post-WWII Marshall plan. I’m sitting on a document published by the UN in the 1960s that flat out says the USA should run trade deficits with the developing world in order to develop developing countries even at a cost to the U.S. economy because the USA would be better off in a prosperous world in the long run. Paul Samuelson said the same thing in at least one of his Congressional depositions: he was frank that the U.S. working class would take a hit for sure & that the gains to the U.S. as a whole were not guaranteed, but it would be worth it to bring a billion people in the PRC out of abject poverty.
This argument might have made sense in the 1960s or 1970s but does not make sense now. Arguably, that policy backfired bigly. Any net gains from trade will now be eaten up by the new arms race as Cold War II kicks off. Again, there were voices in the wilderness that warned what would happen geopolitically (cf. Mearsheimer & google the memory-holed Wolfowitz Doctrine sometime). But nobody paid any attention and now here we are….
Jon Murphy
Sep 18 2025 at 8:46am
I knew what you meant. I am saying your comment shed light on how you think. Your sophomoric philosophy of science sheds light on your reasoning.
Knut P. Heen
Sep 17 2025 at 6:12am
I have heard economists being confused about CPI increases too. Green policies tend to increase the price of energy. Higher energy prices spill over to almost all other goods (because energy is a necessary input to any machine or heating/cooling device). It is therefore difficult to separate a general price increase due to higher energy prices from monetary issues.
Thomas L Hutcheson
Sep 17 2025 at 11:20pm
But an increase in prices from an energy driven impetus (and others not falling) cannot happen without monetary validation. ALL inflations are monetary phenomena.
Monte
Sep 17 2025 at 3:07pm
Very thought-provoking comment, Warren. Regarding your question, I’d suggest Economics is more of a faction – a construct of facts and fiction that occasionally yields a model that works until it doesn’t (ie. Malthusianism, Say’s Law, Labor theory of value).
Thomas L Hutcheson
Sep 17 2025 at 11:13pm
If only one price changed, it woud be a very odd kind of “inflation,” but why NOT call it that? What would you call the class of price movements in which only one price changed? And in terms of a policy response, the monetary authority might feel the need to move some instrument to insure that that all the relative prices in the economy could adjust without any market of failing to clear.
And since GDP is NOT consumption or well-being, or living standards, what is wrong with saying its change IS economic growth?
Jon Murphy
Sep 18 2025 at 8:47am
A change in relative prices. Why not stick with the Principles description?
Comments are closed.