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In light of some recent discussions, I have a question about GDP for people with better economic knowledge then me. In particular, I'm thinking about the comparison between "clean" source of energy vs "unclean" source of energy in terms of gdp changes it causes (it doesn't need to be energy, could be food or whatever). I've heard the claim before that GDP does not properly price in externalities, but as far as I can judge, it's even worse than that: GDP makes externalities seem positive!
I'll set up a very simplified example to get at what I mean. Assume two groups of each 10 people, let's call them the cleanies and the dirties. Both groups are mostly subsistence farmers so we ignore almost everything except food. Unlike real-life subsistence farmers though, they put up all their food on a shared market so we get to accurately assess their generated food with a GDP. The cleanies do "clean" farming that generates no externalities and each generates one unit of food, so they generate a GDP of 10. The "dirties" generate 10 units of food with only 5 farmers, but the other five are collectively hired by the farmers to clean up the externalities to the degree that it is bearable and getting 1 unit of food in return. The collective GDP is then 15 units, despite living standards being worse since the externalities are too expensive/impossible to perfectly clean up entirely (these uncleaned externalities are the usual "externalities are not priced in" that is often talked about). As far as I can see, neither per capita corrections nor PPP corrections change anything about this.
Am I misunderstanding something here?
Yeah, it's just a miniature version of the broken window fallacy, where it's claimed breaking windows generates more economic activity - the farmers hire the cleaner with money they'd spend on some other service, and the cleaner spends work-time he'd spend on some other task. And even if the cleaner wasn't going to spend that work-time on another task, the cleaner then has extra money, which he spends on some new service...
This is captured in Bastiat's essay That Which Is Seen, and That Which Is Not Seen, where the fallacy's name comes from.
Note that this is just an econ approximation - maybe the farmer was going to save that money for 30 years, maybe the cleaner was poor and the farmer gives him money instead of walmart so overall welfare is improved, but it explains the average case.
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i think usually people cleaning up externalities would otherwise be doing something else to produce GDP in the economy so the issue is usually not so bad in practice. also, in practice how GDP is calculated might not include some cleaning externalities. GDP is based on final goods otherwise you could just increase GDP by infinitely splitting production into smaller steps. some externality cleaning is going to look like an 'input' to a final product.
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