Economic Misconceptions from the Columbia Journalism Review

Michael Mandel

Gal Beckerman of the Columbia Journalism Review is not happy at all with my cover story on intangibles. Unfortunately, in objecting to my story, Beckerman falls into a simple economic misconception, writing:

R&D is already factored into GDP. Companies research and develop better products. Gross domestic consumers buy more of these products. So, presto! ...... same old GDP number.

That may sound plausible, but it's simply not right. First, note that the same flawed argument can be applied to investment in physical equipment as well. After all, if Intel invests $3 billion in a new factory, say, to produce better and cheaper microprocessors, consumers get the benefits through their purchases of computers. Why bother to add the $3 billion investment into GDP?

The answer should be obvious. The factory is a long-lived investment which provides returns not just this year, but years into the future. That's why Intel's investment gets added into GDP, separate from the value of today's production of microprocessors.

Similarly, R&D is a long-lived investment, which pays off for years to come. There's an asset created, the stock of knowledge, which didn't exist before.

Before it's here, it's on the Bloomberg Terminal.