Gross Domestic Product (or GDP), is the most widely and consistently used metric to examine economic activity. While it is certainly an important indicator, it doesn't work as a proxy for standard of living. Here are some reasons why, and a proposal for a more meaningful metric.
For our purposes, we'll look at the popular calculation method by consumption, where GDP = C + I + G + (X − M), standing for Consumption, Investment, Government Spending, and Net Exports.
The first problem with GDP is that it focuses on the movement of money, and not necessarily its value. Whether we observe $1B being spent on building a car factory (investment, which would presumably bear a return at some point in the future) or on researching seagulls (government spending, which most likely will not bear an economic return), all expenditures are treated equally. To be fair, we should expect some equivalence between different expenditures since they are anchored in the trade value of that currency, but similarly to how we can agree that an individual who blows all of his savings on a depreciating asset like a new car will temporarily boost his own "GDP," we can also agree that more is not necessarily better when it comes to this measure, as he is objectively worse off financially.
And so it is with a country's GDP. More is not necessarily better. When consumption accounts for over two thirds of GDP, as is the case in the US, GDP may grow at a healthy clip (perhaps 2-4% per year), but when that consumption is financed through new debt, it sows the seeds for a slowdown later, or even a catastrophe if conditions are bad enough. What we see is that GDP is something of a balancing act. If it's too low, people may suffer due to less aggregate demand, but if it's too high, it can portend an "overheating" of the economy and a subsequent crash.
Furthermore, real GDP is calculated with a discount for inflation (i.e. with growth of 3% and inflation of 1%, the real growth is 2%). But this still creates problems, since an immediate increase in inflation will at first look like economic growth, when in fact GDP is measuring more dollars moving around at less value.
So, what if we developed a metric that doesn't have this Goldie Locks problem? Is there any way to form an index such that more is always better? Admittedly, it's a bit philosophical, because we must examine what people want. "Happiness" seems like a good place to start, but it's too abstract. If we can marry an emotional state like happiness to an economic one, then perhaps we'll be able to pin this idea down in concrete terms.
"Leisure" is such a candidate, as it implies both the qualitative function of doing something you want to do, with the quantitative function of being able to do it, rather, that you can afford to spend that time not earning money. So how can we construct a function for leisure similar to GDP?
First, I think we should agree that we don't want to try and measure leisure outright, but rather should be interested in calculating "potential leisure." This means that we are more interested in whether somebody can go fishing for a week, as opposed to whether they do.
Second, we should agree on some basics, such that certain things can affect your potential leisure positively or negatively. Debt, such as a student loan, certainly impacts leisure in a negative way. Passive income, such as rent, certainly affects it positively. In broad terms, we'll probably want to focus on these assets and liabilities as the cornerstone for GDL.
So we know a few things about what will go into our equation, but what should our index represent? I propose that we should measure the net passive income (keeping in mind that passive income is the income derived from existing capital, such as dividends or rent) of the median individual, as a way to determine the quality of life that they lead, measured in years of leisure. The average wouldn't make sense, because it would be skewed. The point at a which at least half of the population can be characterized is more interesting.
Gross Domestic Leisure = median:(yearly income from assets-yearly ongoing liabilities)/(yearly cost of living) + (assets)/(yearly cost of living).
Notice that we did not include earned income in this equation. Why? Because earned income has only moderate bearing on quality of life. What defines quality of life is how many days, weeks, or months, that your income can counteract your costs. Additionally, because earned income is derived through work, and not during leisure, we cannot count it in our "coast" function, which seeks to examine how long that any given individual might survive at their current rate of expenditure, whilst doing absolutely nothing.
It's an extreme measure, but still important. Any individual should perform this calculation for themselves to determine how long, in the worst possible scenario (say, in the event of an injury), that they could survive with the same lifestyle.
Imagining a simpler world, perhaps a deserted island, shouldn't we expect a castaway to spend as much time as is necessary to establish a leisurely life? He will sew a net to catch more fish, build a house to protect him from the elements, and dig an aqueduct to siphon water his way. But after that? Once his food, shelter, and water are accounted for, he is free to whittle statues, invent the compass, or nap.
So too does this apply to the citizens of the world, who work hard to provide for themselves and their families, not only to eat and be sheltered, but also, to be able to rest.
What does this have to do with Bitcoin? That is the focus of another article.