Joe’s Transactions: Impact on GDP and National Well-Being
No, not Joe Biden. This is just your average Joe. Let’s look at some transactions he might be engaged in, and whether they increase national/global GDP and/or overall well-being/happiness:
A transaction that makes the consumer happy or less sad
Joe buys painkillers after surgery; or Joe pays for a relaxing spa day. GDP goes up, net well-being goes up.
A transaction that the consumer thinks will make them happy but doesn’t, or makes them less happy (on net) over time
Joe is in a bad place, and on a downward spiral with alcohol. Joe buys his 5th scotch of the night for 15$. GDP goes up, but the drink contributes negatively to his overall long-term net well-being. But what about net well-being across the economy? That $15 is distributed across the bar owner, the liquor distributor and the liquor company. The money makes them all happier. But…if Joe had instead spent the $15 on something better, it would have made a different set of people just as happy and Joe happier as well. Joe binges, GDP goes up, net well-being goes down.
A transaction that plays a part in making a lot of people less sad
Joe gets paid his salary at Moderna for cutting-edge vaccine research. GDP goes up, fewer people get violently sick or have family members killed. GDP goes up, net well-being goes up. (If you’re a vaccine skeptic, please know that Jesus loves you too.)
A transaction that lets you make more people happy in the future
Joe pays for ChatGPT subscription that he expects will will help him edit faster and write more content without compromising quality, bringing new readers and more money. Assuming Joe’s Substack on stoic philosophy does no harm and makes some of his readers slightly happier, this transaction not only contribtutes to GDP but is expected to contribute to more GDP in the future and likely contributes positively to future well-being of both Joe and his readers.
A transaction that is good for us, not so much for others
Joe is a nerd and pays biotech company to buy viral DNA to play around with in his backyard. Joe is happy, company is happy to sell more viral DNA, but if Joe messes up and the virus leaks, there’s a small chance of not just Joe being sad but millions of people being sad, that would overwhelm how much happiness Joe got from it in the first place. GDP up, net-well being possibly down.
A Lamborghini transaction
Joe spends his bonus on a Lamborghini because he believes Sal will sleep with him if he increases his relative status, which he predicts will make him happy. Sal does in fact sleep with him. If Joe had no Lamborghini, Sal would have slept with Indian guy Amit and been equally happy. But now, Joe is slightly happier for a day, Amit is slightly more sad, Sal couldn’t care less and Lamborghini is 300,000 richer as a company. GDP up, no change to net-well being.
The counterfactual-Lamborghini transaction
Joe returns enlightened from an Ayahuasca retreat. Joe decides his bonus money is better spent on a grant of $300,000 to a psychedelic research center that he believes in unlikely to be funded by the private market. Joe feels good about his choices and his 300,000 has a non-trivial probability of making thousands of people less depressed in the future, some of whom might be more productive as a result and make even more people better off. Philanthropic grants don’t contribute to GDP, but expected well-being is up.
The end-of-life transaction
Joe knows his days are numbered. What a shame it would be to die with $2M in the bank. He spends it on the most extravagant 3-month vacation ever. Joe is super happy. No reason to think it makes anyone else happier than any other similar type of transaction Joe could have made. GDP is up, net well-being is up.
The counterfactual end-of-life transaction
In this world, Joe knows his days are numbered. Joe’s kids are smart, ambitious and have lots of ideas to innovate and change the world. Joe decides to leave them his inheritance of $2M. Transfers of wealth don’t add to GDP but if his kids are indeed all of those things, you can expect it add to future GDP and perhaps future well-being.
Generalizing….
We have to start with the basic assumption that if one party produces something that another party consumes, the fact that they each did so means they believe this would make them better off (all else equal). It’s also useful to think of GDP as a measure of economic activity instead of production, as
states here. And this builds intuition for why GDP tells us something about well-being (even if it’s deeply imperfect). Any time someone engages in an economic transaction, they’re moving from previous state X to new state Y, where U(Y)> U(X)But…people could be misguided about what makes them happy, either due to cognitive biases or just bad forecasting skills. The better we are at predicting our own happiness over time and aligning our purchases accordingly, the better GDP does as a proxy for improvements in well-being.
It’s possible for two people to make each other happy and make everyone else sad, while adding to GDP. Externalities.
The naive conclusion to draw is that we should all mostly spend our time consuming or producing things that directly buy happiness or decrease suffering. It could be even better if instead, we engaged in transactions that make larger numbers of people even happier in the future. This takes broadly two forms - being more productive, such that we could make better or more goods and services for people; or saving, such that the fruits of our labor could be used to fund other people to make more or better goods and services in the future.
However, it would be crazy to keep reinvesting or making ourselves productive ad infinitum.. What’s the point of it all, as some pop philosopher would ask? At some point, we should cash-in our chips (or shall I say ecstasy-in our cash). If we were rational about using capitalism to maximize well-being, when should we reinvest vs cash out?
It’s possible to transact in a way that’s mostly zero-sum in terms of well-being, like the Lamborghini trade. This is not to be confused with transactions that seem economically zero-sum like trading stocks (which don’t contribute to GDP anyway). Yes, someone wins and someone loses but the process of winning and losing reflects different underlying expectations, aspirations, preferences that map on to well-being in different ways, and that system actually might promote overall well-being by keeping markets efficient.