A letter in today’s FT from John Hay says some thoughtful things about economic activity and GDP. The letter is in response to an FT editorial critical of plans in the UK (and elsewhere) to encourage new auto purchases via an incentive to scrap older cars:

So if breaking a window (or car) encourages money to move faster, it will increase GDP, or economic activity. But GDP fails to capture either wealth (the shopkeeper’s savings) or the point of economic activity – the satisfaction of human needs. The usual way we measure those things, GDP, is actually the sum of all the costs of satisfying those needs that were satisfied in a year. As such, GDP cannot distinguish between avoidable or wasteful costs and those that are unavoidable.

For the same reason, making tax law more complex would create work for accountants and hence raise GDP. But by wastefully consuming resources and labour, it would reduce society’s ability to satisfy other needs.

Economic progress is about finding ever cheaper solutions to problems – such as moving a load from A to B – so that more resources can be devoted to new problems, like finding a cure for cancer. Output, conventionally measured, is more a symptom of this process than a cause.

While people will debate legitimately what constitutes avoidable or wasteful costs (e.g., auto manufacturers will welcome policies to scrap older cars, others may not), the notion of finding cheaper solutions to problems seems to be a far more politically tractable basis for collective political action than resolving debates over what constitutes the worth of investment, even if people debate the notion of “cheaper.”

This straightforward criterion for evaluating an action calls to mind Sarewitz and Nelson on criteria for technological fixes, and probably is a version of their number one:

I. The technology must largely embody the cause–effect relationship connecting problem to solution.

II. The effects of the technological fix must be assessable using relatively unambiguous or uncontroversial criteria.

III. Research and development is most likely to contribute decisively to solving a social problem when it focuses on improving a standardized technical core that already exists.

Cheaper, cause-effect, building on what we know. These criteria are just about the opposite of the dominant approach to climate policy:

Make energy cost more.
Address emissions indirectly (while mostly ignoring adaptation).
Design a massive new and untested derivatives market.

At some point the differences between common sense and reality will have to be reconciled. The political process will inevitably make this happen, but it could take a while.