Unmeasured Sources of Prosperity

In my last post, I considered the difficulty the government has in reflecting innovations in its analysis of economic growth, because measurement by rule cannot capture economic reality. Here I continue the theme by discussing the failure of government statistics to take account of the improvements in health care and then consider some objections to the idea that economic growth is continuing at a rapid pace rather than stagnating.

In a brilliant article,  economists Kevin Murphy and Robert Topel showed that improvements in longevity have provided huge social gains not counted in GDP. Indeed, they calculated that including the value of these gains added from 10 to 50 percent to GDP depending on the period analyzed.  And their calculations do not include gains to the quality of life, which they estimate are on the same order of magnitude. Thus, improvement in social well-being has been substantially understated in government GDP figures.  

Larry Summers has similarly observed that the last half century’s gains in health care have been so great that it is not at all clear whether one would choose the 1950’s standard of living with today’s health care or the standard of living today with 1950’s health care. This point alone militates against any claim that economic progress has slowed down over the last half century.

Even if government statistics are incapable of capturing long run technological improvements, some have objected that society is still relatively stagnant today. For instance, it is argued that the technological inventions in the 1800s, such as the railroad, or in the 1900s, such as the invention of antibiotics, marked a greater change in people’s lives than we experience today.

It is true that the railroad, the car, and the airplane may rival any single contemporary invention with the exception of the internet itself. But, the computational revolution creates breadth and depth of invention—from ready access to favorite music anywhere anytime to the development of genomic medicine. Moreover, the inventions of prior eras generally did not improve at the same speed as do the computational inventions of today. A car today is better than one made a hundred years ago, but not nearly to the degree a computer is better than its counterpart of even fifteen years ago. That is, at least until cars started to become embedded in the computation as they have in the last few years.

In other words, technology accelerates and with it our prosperity because we have discovered new frontiers like computing capable of faster acceleration than the inventions of old. Thus, the argument by entrepreneur Peter Thiel that the relatively small recent improvements in the speed of transportation undermine the case for technological acceleration is backwards. And if transportation is understood as an aspect of the more general function of making more and better connections among people, the computer revolution has been accelerating that function far beyond the progress made possible in the age of steam and rail, or of oil and airplanes.