…Suppose we lived in the world of Harry Potter, and one day in the late 1950s RCA hired a wizard to wave his magic wand and transform all of the world’s black and white sets into color sets. This would clearly represent a large increase in the standard of living—a larger increase, in fact, than the non-magical process whereby people have to buy new, more expensive, televisions. Yet the government in the alternate universe would almost certainly have recorded a smaller increase in GDP. Our own BLS would see consumers buying more expensive televisions while in the Harry Potter universe consumers would be happy with the old, cheap ones. Hence, consumers circa 1970 would be wealthier in that universe than in ours, but official GDP statistics would show just the opposite.
Today these magic wands exist. For example, a couple of years ago, Google waved a magic wand that transformed millions of Android phones into sophisticated navigation devices with turn-by-turn directions. This was functionality that people had previously paid hundreds of dollars for in stand-alone devices. Now it’s just another feature that comes with every Android phone, and the cost of Android phones hasn’t gone up. I haven’t checked, but I bet that this wealth creation was not reflected in GDP statistics. And it’s actually worse than that: as people stop buying stand-alone GPS devices, Google’s innovation will actually show up in the statistics as a reduction in GDP.
The point here is—don’t worry, be happy!—our lives really are better, despite our official measures saying otherwise.
This may be so, but this phenomenon certainly presents problems, big problems, of its own. If you use a statistic—GDP, in this case—then by and large you’re accepting its ability to describe real life, and if you accept it and rely on it you will change your life to optimize for that statistic. We’ve changed our economic lives to orient to producing higher levels of GDP and premised our lives on the successful expansion of GDP and now that GDP, productivity and wages are not rising as promised we have problems. The problem is debt: we borrowed money to finance the present’s efforts at expanding the GDP of the future; unfortunately the technology we invented ended up being useful for purposes other than GDP. Unfortunately we can’t offer to pay our debts in units of happiness (“But my leisure time was so fun!”), and so we have a serious debt problem that has to be tending towards solved sometime during this decade.