Years ago, if your phone battery died, you could just order a replacement and swap it yourself. Now, you either pay someone to replace it or probably more commonly, just buy a new phone altogether.
The efficient option is replacing the battery. The inefficient option is discarding a fully functional device along with all the materials, labor, and logistics that went into it and purchasing a new one. But yet, the second option generates far more economic activity, and that activity shows up as higher GDP.
In isolation, i would think that’s not necessarily a problem. But if more companies shift toward models that reduce efficiency for the end user, wouldnt it starts to resemble a kind of hidden tax? Consumers would be paying more to achieve the same outcome. Im assuming that increased spending would likely boost GDP, but it would come at the cost of real purchasing power.
As far as I can understand, what makes this sustainable is credit. If consumers had to rely solely on income, they’d be pushed toward more efficient choices. But with expanding access to credit, they can absorb higher costs and maintain consumption even if that consumption is increasingly inefficient for a longer period of time.
Essentially my question is,
Does GDP actually reflect real economic improvement, or is it mostly a reflection of how much cost can be pushed onto end consumers and sustained through credit?
Does inefficiency fueled by perpetual credit stimulate GDP as much as efficiency?
byu/GoldThenCrypto inAskEconomics
Posted by GoldThenCrypto
2 Comments
You are confusing reduction of waste with efficiency. There is some link, but it’s not defined by it.
There are many definitions of efficiency. The most commonly used ones are Pareto efficiency, where you make someone better off without making anyone else worse off. There is allocative efficiency, where marginal benefit equals to the marginal cost of production which maximises the total welfare of the economy. There is productive efficiency, where the average cost of production is minimised. There is X efficiency, where you get more production with the same inputs.
None of these really focus on waste. It is very easy to be more wasteful while also being more efficient. The phone example is a pretty good one. Consumers want smaller and waterproof phones, manufacturers want lower costs of manufacturing; both can be achieved by having non-replaceable batteries.
These sorts of stories ultimately don’t hold up.
In the long run, borrowing in of itself doesn’t allow you to consume *more*, it just allows you to consume future income today. You can’t print yourself rich, and you can’t borrow yourself rich, either.
This is also very broken-window-fallacy-y. A phone that’s just worse and lasts not as long just means you’re consuming less of something else to replace it more often. That is also ultimately unfit to actually grow the economy or increase GDP.
It’s also usually really not so simple. Companies sold phones with easily replaceable batteries in the past. If consumers had a strong preference towards them, one would assume they are still around. And obviously if you ask people, they will just want the perfect phone that does everything and costs very little. In the real world, there are tradeoffs. User replaceable batteries might mean a higher price, a thicker phone, more weight, less water resistance, etc. “Back in the day” a lot of phones had replaceable batteries, nowadays a lot are IP67/68 certified. People also still replace their phones more quickly than the battery degrades and phones only get software updates for a limited period of time. So when people replace their phones before battery capacity becomes an issue anyway, there isn’t that much benefit to replaceable ones.
It’s very easy to tell stories but most of the time the reality is more complex and people’s actions often belie their words.
But no, to answer your question, everything else being equal, worse, more “inefficient” products would lead to less GDP, not more, because spending that could go towards more productive uses gets diverted to unproductive ones.