VIAGRA AND THE WEALTH OF NATIONS

SYNOPSIS: Ponders how new goods and services cannot be taken into account of GDP. As a result, real GDP understates the full benefit of what's being invented.

What popped into your mind when you first read the headlines about

Viagra? Well, I thought about that, too. But as a typical, fun-loving

economist I also found myself wondering how the Commerce Department

would account for the wonder drug in its estimates of the gross domestic

product -- and from there wandered into a reverie about the meaning of

economic progress.

Government statisticians will, of course, have no difficulty slotting

Viagra into their estimates of ''nominal'' G.D.P., the sum total of all

the money spent in the economy. Viagra's contribution will simply be the

total amount that people spend on the pills, or, equivalently, the

profits earned and wages paid in the drug's manufacture and

distribution. What's more, we can be pretty sure that Viagra's numbers,

while music to the stockholders' ears, will make very little difference

to the national totals. The new drug's spectacular sales are small

change in an $8 trillion economy. And besides, most of the spending on

this new product will come at the expense of spending on other things --

say, romantic vacations and candlelight dinners.

But nominal G.D.P. doesn't tell us much. Most of the time, the

economic number we care about is ''real,'' or inflation-adjusted,

G.D.P., which is supposed to measure the purchasing power as opposed to

the dollar income of the economy. Basically, nominal G.D.P. is converted

into real G.D.P. by dividing it by a price index -- a ''deflator'' --

that is supposed to measure the average cost of goods and services sold

in the economy.

So far, so good. But what happens with the introduction of Viagra, or

Propecia, or whatever the next big thing may be? Statisticians can't

compare the prices of these drugs with what they were last year because

they weren't around last year. So inevitably, estimates of the deflator

take account only of the goods that have been around for at least a

little while.

So what? Well, this year some men can buy something they wanted

pretty badly -- or baldly, in the case of Propecia -- and they can get

it at a reasonable price. Last year they couldn't buy what the pills

provide at any price, and probably would have gladly spent far more at

clinics or in therapy to get lesser results. So surely, in some sense,

the nation's purchasing power has increased because of the availability

of those pills.

Yet the numbers you see on real G.D.P. don't reflect that increase --

and they never will. Eventually Viagra will be in the index, and as its

price falls in the face of competition, the deflator will fall and

measured real income will rise. But at no point will the statistics ever

capture the big payoff, the one that happened when Viagra became

available for $10 a, um, pop.

How could the statisticians get this right? It would have to involve

a subjective evaluation: each person would have to be asked, and would

have to answer truthfully, the question ''How much money would you have

spent last year (with your ever-growing bald spot and that other

problem) to be as satisfied as you are now?'' Averaging over the

population, we would come up with a true measure of the change in the

cost of living, and we would deflate G.D.P. by that.

In fact, where they can, the statisticians do try to do something

more or less along these lines, adjusting the price of automobiles and

many other products by imputations for improved quality. But nearly

everyone admits that the imputations fall well short of capturing the

real improvement in living standards. Officially, the median family in

1996 had only slightly higher real income than it did in 1973; in

reality, that median family would be extremely upset if forced to go

back to a 1973 standard of living (no VCR, no microwave, no A.T.M.'s).

So what's the moral? Should we smugly assume that the official

statistics understate economic progress, that the New Economy is

speeding us to a new age of economic bliss? Not so fast. For one thing,

it is by no means clear that our age of technological marvels is any

more marvelous than the age our parents, grandparents or

great-grandparents lived in.

Viagra is only the latest in a long line of medical miracles --

antibiotics, smallpox vaccine, anesthesia -- just as the Internet is

only the latest in a line that goes back to the fax machine, the

telephone and the telegraph. While the statistics do understate today's

true rate of economic progress, they always have.

But there is a deeper point. The value of Viagra is not a

dollar-and-cents issue. Rather, it is a psychological question -- what

we are really asking is how much better off the drug makes people feel.

But isn't that true of economic progress in general? And once you put it

that way, you have to wonder whether we are really making that much

progress after all.

Consider: According to the official statistics, the median family in

1947 had almost exactly the same purchasing power as the 20th-percentile

family -- just a little ways above the poverty line -- of 1996. And the

statistics surely understate the true increase in purchasing power. Does

that mean that most people in 1947 were poor? Well, they didn't feel

poor. Conversely, the 60th percentile in 1996 officially had about the

same real income as the 95th percentile in 1947, and again this surely

understates the real progress.

Does this mean that most Americans are now upper middle class? They

don't feel that way.

In other words, as soon as you try to think seriously about how to

measure Viagra's effect on the nation's wealth, you realize what a

dubious enterprise such comparisons are. I have nothing against

calculating real G.D.P. as accurately as possible; we need that number

for all kinds of purposes. But the rather vulgar case of Viagra reminds

us that, in the end, economics is not about wealth -- it's about the

pursuit of happiness.