Comment by kspacewalk2
2 years ago
Two economists are walking in a forest when they come across a pile of shit.
The first economist says to the other “I’ll pay you $100 to eat that pile of shit.” The second economist takes the $100 and eats the pile of shit.
They continue walking until they come across a second pile of shit. The second economist turns to the first and says “I’ll pay you $100 to eat that pile of shit.” The first economist takes the $100 and eats a pile of shit.
Walking a little more, the first economist looks at the second and says, "You know, I gave you $100 to eat shit, then you gave me back the same $100 to eat shit. I can't help but feel like we both just ate shit for nothing."
"That's not true", responded the second economist. "We increased the GDP by $200!"
The revealed preferences in this story display that for these two individuals there is at least $100 of value in viewing this spectacle, and no more than $100 distaste in performing this spectacle. Sadly GDP does not measure how much surplus value was created by these two transactions, given that maximizing utility is a better normative goal than maximizing GDP, but GDP did indeed increase by $200 and it is accurate in indicating that at least total utility was increased (less unaccounted for externalities like unfertilized trees or whatever).
> value
In this case we have two approximately equal economists, but in general any discussion about revealed preferences, utility, and value is remiss without a parallel discussion on how value is wealth-weighted. Feeding a starving orphan creates 0 economic value because the orphan has no money, but figuring out how to merge companies into a monopoly creates extreme amounts of economic value by way of making rich investors even richer.
> 0 economic value
Economic value is not only distinguished as economic measurement. This is why utility theory and revealed preference theory exist.
I mean… yes. That is how this works. The problem with its implied understanding is that the economists don’t appear to have gained anything from the work they paid the other to do. GDP is generally a pretty decent stat because people tend to pay things to do things that provide them with some sort of value.
With notable exceptions for things like war.
Right. Presumably in that scenario both economists thought it to be at least $100 worth of entertainment to watch the other eat shit, while both also thought $100 was enough compensation to eat it. Everyone is better off.
Just because you think you're better off doesn't mean you're better off though.
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> GDP is generally a pretty decent stat because people tend to pay things to do things that provide them with some sort of value.
Only if the net value is positive-sum.
Setting a city on fire, or giving cancer to a million people, or just going down the street, smashing every parked car's window with a tire iron will likely increase national GDP.
Liekwise, people pay a lot of money for net negative-sum industries - the health insurance industry in the US immediately springs to mind. We'd all be better off without that parasite.
We do have to assume that externalities are not so material as to render such stats misleading, yes.
I mean, we have to pay someone to guarantee coverage in the event of catastrophic losses. You might even call them insurance companies.
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Net negative sum would by definition lower GDP.
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But wouldn’t that be true of any kind of performance art? What value is created by me paying to watch a musician/movie/baseball? Fundamentally seems the same as watching someone eat shit for my amusement.
Your enjoying of it. The economists in the story don’t acknowledge enjoying making the other eat shit.
It is valuable to society to do things that create joy.
Shit eating may not hold up specifically.
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A at-home dad get paid nothing to take care of his children.
He takes a 50k job, pays à baby-sitter 20k (said babysitter couldn't find a service job that could pay him 50k, weirdly), and voilà, 70k GDP.
I’m not going to argue that GDP is a perfect metric, because it clearly is not. But I feel obliged to point out that 5/7 of the GDP created in your own scenario is a guy doing presumably valuable work, and 2/7 is the baby sitter doing previously unaccounted for work; which is also based on wages, perhaps more fit to their skills.
It would be great if we could measure work done without exchange of goods however that is generally not so large as to totally distort the general numbers. To no discredit of the work parents do.
> He takes a 50k job
so, he produces 50k value somewhere
Healthier gut biome, people pay for this stuff.
It’s supposed to go in the other end though. Stomach acid is unforgiving.
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In the real world, each would have had to declare $100 of income and pay the appropriate income tax. The more they eat, the more often money changes hands, the more tax income the government receives. Velocity of money. https://en.wikipedia.org/wiki/Velocity_of_money
There are so many funny punch lines available after the second shit pile is eaten
"We earned 100$ each!"?
"We earned 60$ each and owe the state 40$!"
Or do you have a better suggestion? I will retell this story so please share.
The first economist picks the shit from the ground and sells it to somebody with a box for 25$, which delivers it to another person for 50$, which wraps it in a film and sells it to another person for 75$, which finally hands it to the second economist for 100$. GDP 250$. Add more links to the supply chain as you please.
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This sounds good and funny at first but how is this different from this scenario: A software engineer pays a dentist for servicing his teeth and he turns around to pay the software engineer to build an appointment system for him? Clearly lots of value was created so unless this is to illustrate that GDP calculations can't filter out bogus transactions (bogus according to whom), I can't really make sense of it...
Eating shit provides very little value to anyone.
This example points out that we also have to look out whether GDP is also tied to valuable activities.
Things that come to mind are gambling, buying lottery, trading arts / crypto / stocks, and generally entertainment.
Some activities offer very little value.
This means these low value activities should reflect a minor part of your total GDP.
If the majority of your GDP comes from people in your own country trading arts with each other, you are fucked.
Well, there's also $200 worth of shit no longer left on the ground, now that we have an established market rate of $100 per pile of shit.
and proved, yes, there is such as thing as a free lunch... it'll just taste like shit
Here is a less scatological parable about GDP.
Alice loves widgets. She would pay $100 for a widget. She goes on line and finds Bob offering widgets for sale for $100. Err, that is not really what she had in mind. She imagined paying $30 for a widget, and feeling $70 better off as a consequence. She emails Bob: How about $90?
Bob feels like giving up altogether. It takes him ten hours to hand craft a widget and the minimum wage where he lives is $10 an hour. He was offering widgets for $150. $100 is the absolute minimum. Bob replies: No.
While Alice is deciding whether to pay $100 for a widget that is only worth $100 to her, Carol puts the finishing touches to her widget making machine. At the press of a button Carol can produce a widget for only $10. She activates her website, offering widgets for $40. Alice orders one at once.
How would Eve the economist like to analyse this? She would like to identify a consumer surplus of 100 - 40 = 60 dollars, and a producer surplus of 40 - 10 = 30 dollars, for a total gain from trade of 60 + 30 = 90 dollars. But before she can do this she has to telephone Alice and Carol and find out the secret numbers, $100 and $10. Only the market price of $40 is overt.
Alice thinks Eve is spying for Carol. If Carol learns that Alice is willing to pay $100, she will up the price to $80. So Alice bullshits Eve: Yeh, I'm regretting my purchase, I've rushed to buy a widget, but what's it worth really? $35. I've over paid.
Carol thinks Eve is spying for Alice. If Alice learns that they only cost $10 to make, then she will bargain Carol down to $20. Carol bullshits Eve: Currently they cost me $45 to make, but if I can grow volumes I'll get a bulk discount on raw materials and I hope to be making them for $35 and be in profit by 2016.
Eve realises that she isn't going to be able to get the numbers she needs, so she values the trade at its market price and declares GDP to be $40. It is what economist do. It is the desperate expedient to which the opacity of business has reduced them.
Now for the twist in the tale. Carol presses the button on her widget making machine, which catches fire and is destroyed. Carol gives up widget making. Alice buys from Bob for $100. Neither is happy with the deal; the total of consumer surplus and producer surplus is zero. Alice is thinking that she would have been happier spending her $100 eating out. Bob is thinking that he would have had a nicer time earning his $100 waiting tables for 10 hours.
Eve revises her GDP estimate. She has committed herself to market prices, so it is up 150% at $100. Err, that is not what is supposed to happen. Vital machinery is lost in a fire, prices soar and goods are produced by tedious manual labour, the economy has gone to shit, producing no surplus instead of producing a $90 surplus. But Eve's figures make this look good.
If you zoom out and look at the aggregate widget contribution to the GDP (price * # sold), it is likely that the effect is either much reduced or goes away entirely. Fewer people will buy for $100, depending on price elasticity on demand the GDP number may in fact end up accurately reflecting that something shitty took place.
Thanks for the instructive example! Gives a much clearer understanding of GDP.
Anyone have recommendations for Economics books that explain such concepts with simple to understand examples?
This story ... was really good. I feel funny stories like these are way to rare today. They used to be way more common.
Tangential, but your joke got a laugh from Elon Musk: https://twitter.com/elonmusk/status/1699289522167517475