From American Affairs Journal, Volume IX, Number 2/Summer 2025:
Today’s consumer capitalist societies present us with a paradox: We are told year in and year out that living standards are rising, but many people—especially younger people—can feel their quality of life decline as time goes on. This feeling is palpable and can be seen in the hardest of the quality of life indices, such as the suicide rate and the rates of drug addiction and overdose. Noneconomic measures show a large decline in quality of life in recent years, but economic metrics show it is increasing.
The old Marx Brothers phrase comes to mind: “Who are you going to believe, me or your lying eyes?” It is time for economists to admit that their metrics are broken. In this essay, I will introduce a conceptual framework to understand what has gone wrong and suggest some provisional ways to fix it.
Classical, Neoclassical, Clinical
Economic theory is typically divided into two broad periods: the classical and the neoclassical. The neoclassical period arose in the nineteenth century, partly in response to Marxism, in the work of economists like Carl Menger and William Stanley Jevons. Neoclassical economics is characterized by a focus on rationality and utility maximization. These are the concepts that any undergraduate who takes a course in economics will be introduced to almost immediately. Students are taught to think of the world as a large collection of goods and services that they must choose between while only having access to a limited budget. “Rational” consumers are those who get the “best bang for their buck” by choosing the basket of goods and services that makes them most content—this is what the economists refer to as “maximizing” utility.
The reader will quickly notice how subjectivist this framework is. This mode of analysis makes no judgment about the consumption preferences of the consumer. Suppose that one consumer maximizes his utility by hoarding empty beer cans. The economist will say that because the cost of empty beer cans is basically zero, the hoarder will be a very happy individual since he will have access to almost infinite empty beer cans. A psychologist may say something different altogether, but the economist is eminently, almost comically, liberal in his approach.
The classical tradition in economics was very different. The classical tradition ran from Adam Smith through David Ricardo to Karl Marx, who is generally recognized as the last major classical economist. The classical tradition drew on the work of the ancient philosophers, notably Aristotle, in formulating its basic approach to commerce. In the classical tradition, there was a distinction between the “use value” of an item and its “exchange value.” The exchange value of an item was simple enough: it was the number of other items any given item was worth—or when money is introduced into the economy, the monetary value of an item in the market. The use value of an item was quite different. Contemporary philosophers might call use value an “essentialist” property, and this notion drew on the philosophies of the ancient world, in which the essence of things was taken very seriously. For classical economists, an item’s use value was its actual usefulness or worth to the “good life.”
Here we see a much more objectivist stance than we see in the modern neoclassical approach to economics. Take the example of the hoarder who desires to hoard as many empty beer cans as possible. The classical economist will be nowhere near as liberal as the neoclassical economist when confronted with such a phenomenon. Rather, the classical economist will state plainly what is obvious to most of us: beyond the capacity to recycle the raw materials, the empty beer can has almost no use value, and the hoarder is simply being irrational and may even be mentally ill. Here, the classical economist agrees with the psychologist, while the neoclassical economist remains trapped in the madhouse.
The Exchange Problem
What does all this have to do with the measurement of relative wealth across space and through time? Surely, these are old, arcane debates, bordering on the metaphysical. Not so. In fact, they have an enormous impact on how people view the world today—especially policymakers and politicians. The reason for this is because, especially in the last thirty years, policymakers and politicians have become obsessively focused on maximizing economic growth. Here, they typically refer to gross domestic product (GDP). If GDP is growing, we are told, society is getting ever wealthier. Since we live in commercial societies and the politician’s main goal is to maximize the wealth of his population, GDP growth should be prioritized over almost everything else.
Buried deep in the GDP metrics we use, however, are assumptions that are almost identical to the neoclassical conception of value. GDP is measured by the number of transactions that occur in any given geographic location over any given period. To get an intuitive sense of this, imagine a household with two parents and two children. Let us imagine we only want to measure the internal GDP of the household itself. That is, we ignore the income that flows into the household from the parents working or the children opening a lemonade stand outside the house. We also ignore the expenditure that flows outward on goods and services. Reduced to the internal GDP of the household, the only relevant payments will be between the parents and the children. The internal GDP of the household will thus consist only of regular payments from the parents to the children in the form of pocket money and any additional payments from the parents to the children for additional labor carried out, such as mowing the lawn or doing the dishes. When a child loses a tooth, even the tooth fairy may contribute a few units of GDP by slipping a banknote under the child’s pillow.
The reason that I use this example is to highlight something very important about the GDP framework: the parents and children interact in an enormous number of ways, but only monetized actions are recorded as contributing to GDP. If the mother cleans the dishes and the father mows the lawn one week, but the children do both for extra pocket money the next week, only the children’s actions are recorded as GDP. A classical economist would see a problem with this. After all, the use value of cleaning the dishes or mowing the lawn is the same regardless of whether the exchange value is different depending on who is undertaking it. At an intuitive level, the classical economist is correct.
Neoclassical economists have long been aware of this problem, but they have defended the GDP framework by saying that unpaid labor and similar non-transactional interactions are a relatively small part of economic activity and remain relatively constant over time. These two claims are related: these sorts of quasi-economic interactions start small, and because they remain a constant share of total quasi-economic interactions over time, they stay small. While this may have been a defensible position in the past, it has become less and less defensible in an age when we are increasingly inclined to monetize images and human interactions.
There now seems to be an impulse on the part of consumerist capitalism to try to monetize as many relationships as possible to maximize GDP. Consider two statistics that put this in stark contrast.....
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It is at this point that Mr. Pilkington changes the trajectory of his essay, very dramatically.
