Phil Trammell on the bizarreness of real GDP as a proxy for tracking full automation and explosive economic growth in this recent podcast interview with Epoch After Hours:
Phil
… one thing that I think definitely is in this “Aha, here’s a theoretical curiosity” point is that real GDP is such a bizarre chimera of a variable that you could have full automation and really explosive growth in every intuitive sense of the term and yet real GDP growth could go down.
An example of why it might at least not go up that much, which I think it probably won’t all work out this way but I don’t think this is crazy, is that you get this effect where there’s this common pattern you find where new goods, just as they’re introduced, have a really small GDP share. Because they have zero GDP share before they’re introduced. At first they’re really expensive—we’re not very productive at making them. As the price comes down, as we get more productive, the price falls but the quantity rises faster. The elasticity of demand is greater than one. Every time the price falls a little bit, the quantity rises a lot. So the dollar value of the good rises. So the share is rising. After a while it goes the other way, once the goods are really abundant, at least relative to everything else.
Every time we have the price go up, the quantity only rises a little bit because we’re basically satiated in it. So you get this hump: new goods—small share; goods that have been around for a medium length of time that we’re mediumly productive at—high share, they dominate GDP; old goods like food—small share. So we’re continually going through this hump.
Everyone’s familiar with Baumol’s cost disease. But the way it’s usually presented is that AI might have less of an effect on growth than you might have thought, because we’ll be bottlenecked by the few things that have not yet been automated that you still need people for. And actually, you can have Baumol after full automation. Because, remember the hump, right? Real GDP growth at a given time is the weighted average of the growth rates of all the goods where the weightings are the GDP shares. The GDP shares will be dominated by the goods that we’re intermediately productive at in this view.
So let’s say for every good you have its own specific technology growth rate. Like how quickly it can be produced is some arbitrary function of its current technology level. It can be hyperbolic. You can have A dot equals A squared or something. So for every good, there is some finite date by which we’ll be able to produce infinite quantities of it in finite time.
So it’ll be free. So GDP share will be zero. And we just go through these ever higher index goods, ever more complex goods over time. And at any given time, all of GDP are the goods that have a productivity level of five or whatever happens to be in the middle as far as GDP shares go. So some effect like that can produce something like a Baumol effect even after full automation.
I think it would be pretty weird if that kept the absolute number low. Like anything as low as the current number indefinitely. But the idea that maybe it causes measured real GDP growth to not be that high for a while when the world is starting to look remarkably different doesn’t seem crazy to me. And maybe it’s worth knowing and having as a scenario in your back pocket in case things start looking weird and anyone says “What are you talking about? I don’t see the numbers.” I’m trying to be cautious, but that’s an example of destructive economic theory.
Anson
Do we have any quantitative sense of what the hump looks like?
Phil
That’s a good question. There’s that Besson paper and you could just do a bunch of case studies by good. I should look into that more quantitatively.
and then a bit further down, on the chain-weighting in calculating real GDP growth making it a totally path-dependent measure:
Phil
… I mean, digging into the theory of what chain-weighting is has made me pretty viscerally feel like real GDP is a much slipperier concept than I ever used to think.
Here’s a fun fact. This is crazy. So real GDP and lots of real variables like inflation-adjusted variables, real capital or whatever, let’s say real GDP, is not a quantity. What do I mean? It’s not. Here’s what I mean. Imagine a timeline of some economy. So, the US from 1950 to 2025, 75 years. And imagine an alternative timeline with an alternative economy living it out that’s exactly the same as the US in 1950, at the beginning, in its own 1950, and exactly like the US in 2025, at the end in year 75. But in the middle things happened in a different order. So the microwave was invented in 2006, and the iPhone came out in 1971. And the distribution of wealth changed hands, evolved in a different way. But at the end, it’s exactly the same. Everyone’s got the same preferences. Exchanges the same goods and services for the same dollar bills. Atom for atom. Everything unfolds exactly the same in 2025 and in the 1950 on both timelines. Timeline A, timeline B.
Unless people have homothetic preferences, meaning that the fraction of their income they spend on each good is constant, no matter how rich they are. So no luxuries or inferior goods, which is completely wrong. You don’t spend the same fraction on food when you’re starving as when you’re richer. But unless people have homothetic preferences that are the exact same preferences across the population and totally stable over time—unless those three conditions are met, there is a timeline B on which real GDP growth chain-weighted across the years with perfect measurement is any number.
Anson
Okay.
Phil
Isn’t that crazy? I mean, even the fact that there could be any variation means that, to my mind, real GDP is not a quantity. Because it’s baking in the history. You see what I’m saying? A yardstick shouldn’t matter—the order in which you measure things. It should order things in the same way. But the order in which things happen can change what share of GDP a given good was while it was growing quickly.
So let’s say there’s two of us and one of us is going to be rich one year, and the other one is going to be rich the other year. And the stuff that I like more, I’m going to bid up the price. I’ve got a lot of clones that have my preferences and you’ve got a lot of clones. We bid up the price more of the things we like when we’re rich. The way things happen is that the things we like are growing quickly in absolute units while we happen to have the money. So our preferences are mostly determining what GDP is. And the things you like are growing quickly when you and your clones have the money. Real GDP is going to be higher across the two years than if it’s the other way, where the things I like grow when I’m poor and vice versa.
And it’s that kind of effect that can mean that you can scramble things up so that as long as people depart from perfect homotheticity, constant preferences, same across population, then real GDP can be any number. So maybe I’ve overinternalized this. But given that I’ve overinternalized this, I sort of feel like I can’t separate the theory from the overall opinion I think.
Phil’s point isn’t new, John Wentworth brought it up awhile back:
I sometimes hear arguments invoke the “god of straight lines”: historical real GDP growth has been incredibly smooth, for a long time, despite multiple huge shifts in technology and society. That’s pretty strong evidence that something is making that line very straight, and we should expect it to continue. In particular, I hear this given as an argument around AI takeoff—i.e. we should expect smooth/continuous progress rather than a sudden jump.
Personally, my inside view says a relatively sudden jump is much more likely, but I did consider this sort of outside-view argument to be a pretty strong piece of evidence in the other direction. Now, I think the smoothness of real GDP growth tells us basically-nothing about the smoothness of AI takeoff. Even after a hypothetical massive jump in AI, real GDP would still look smooth, because it would be calculated based on post-jump prices, and it seems pretty likely that there will be something which isn’t revolutionized by AI. …
More generally, the smoothness of real GDP curves does not actually mean that technology progresses smoothly. It just means that we’re constantly updating the calculations, in hindsight, to focus on whatever goods were not revolutionized. On the other hand, smooth real GDP curves do tell us something interesting: even after correcting for population growth, there’s been slow-but-steady growth in production of the goods which haven’t been revolutionized.
There’s a bunch of Metaculus questions on explosive economic growth showing up in GDP (e.g. this, this, this, this etc) which I think are just looking at the wrong thing because the askers and most forecasters don’t get this proxy decoupling. I’ve brought up John’s post before and elsewhere too because it just seemed odd to me that this wasn’t being internalised, e.g. I don’t know if Open Phil still thinks in terms of explosive growth as >30% p.a. GWP like they used to but my impression is they still do. It would be silly if explosive growth was underway yet consensus couldn’t be formed to coordinate and guide large-scale decision-making because everyone was anchoring to real GDP or anything calculated remotely like it.
Phil Trammell on the bizarreness of real GDP as a proxy for tracking full automation and explosive economic growth in this recent podcast interview with Epoch After Hours:
and then a bit further down, on the chain-weighting in calculating real GDP growth making it a totally path-dependent measure:
Phil’s point isn’t new, John Wentworth brought it up awhile back:
There’s a bunch of Metaculus questions on explosive economic growth showing up in GDP (e.g. this, this, this, this etc) which I think are just looking at the wrong thing because the askers and most forecasters don’t get this proxy decoupling. I’ve brought up John’s post before and elsewhere too because it just seemed odd to me that this wasn’t being internalised, e.g. I don’t know if Open Phil still thinks in terms of explosive growth as >30% p.a. GWP like they used to but my impression is they still do. It would be silly if explosive growth was underway yet consensus couldn’t be formed to coordinate and guide large-scale decision-making because everyone was anchoring to real GDP or anything calculated remotely like it.