It’s all about GDP

Who would have thought economic statistics would become such a hot topic? Certainly not me when I decided a couple of years ago to write a book about GDP for non-specialist readers. It isn’t as if GDP has lacked for critics. Over the decades there have been both environmentalist and feminist critiques, not to mention the blossoming interest in the direct measurement or targetting of happiness or subjective well-being. Still, there is a new wave, more focused on the political economy and historical context of the policy focus on GDP growth and rankings. There are (at least) two conferences on statistics over the next few months, following a joint RES/RSS/IFS conference earlier this month. Surely the scholarly debate, like the policy interest reflected in the Bean Review, is a precursor of change?

The latest book I’ve read is Matthias Schmelzer’s The Hegemony of Growth: The OECD and the Making of the Economic Growth Paradigm. The book begins with what has become familiar territory, the development of the forerunner of GDP and the system of national accounts in world war II, building on pioneering work by Colin Clark and Simon Kuznets. What became GNP (and GDP) differed crucially from these pioneers’ ideas, however, by moving away from a clear relationship with economic welfare, and embedding Keynesian macroeconomics. As Schmelzer writes: “The emergence of macroeconomic policies based on such theoretical constructs as consumption, demand, savings, investment, expenditure and their relationships made the rigorous measurement of these aggregates a public necessity, reaching far beyond the mere interest in the comparative wealth of a country and the different production factors.”

The book provides a distinctive focus by exploring in detail the role of the OECD in the spread and normalisation of the new accounting standards and, by the late 1950s or early 1960s, the adoption of GDP growth as a policy target. The organisation’s forerunner, the OEEC, had been the distributor and overseer of Marshall Aid throughout Europe. The American administration had, as it still does, great influence over its approach. The heating up of the Cold War led the Kennedy Administration to insist on the centrality of growth, making GDP as much a weapon of the Cold War as it had been of the Second World War. Schmelzer says: “The public acceptance of economic expansion as a political goal, as well as the active support of influential societal groups such as capital, labour or the press, had to be actively produced.”

He goes on to describe how orienting the OECD around the goal of growth took it steadily into areas of policy previously not linked to the economy at all, such as science policy and education. In addition, through the aid donors’ club at the OECD, the Development Assistance Committee, the idea became firmly embedded that economic growth and development were essentially the same. Through both geographical reach and policy expansionism, the book portrays the OECD as a key organisation in shaping the ‘growth paradigm’ – even though it also, paradoxically, also gave birth to the earliest, and influential, critique of ‘growthmanship’ in the shape of the Club of Rome report.

The book ends by speculating that the famous ‘hockey stick’ of exponential growth might be about to become an equally familiar S-curve because of ‘secular stagnation’, not least because of environmental limits. Schmelzer argues that GDP growth is part of the paradigm of ‘high modernism’ so brilliantly described in Seeing Like A State. The ‘hegemony of growth’ may be ending; it is certainly changing as the context has changed so dramatically. My money is on the idea of growth being transformed in order to measure better sustainability and economic welfare, but this is exactly what all the new wave of scholarship is investigating. The outcome will be just as contingent and negotiated through political and historical processes as the emphasis on GDP growth was in the first place.

This book provides an interesting perspective on the GDP debate; I hadn’t previously registered the importance of the OECD’s role in particular. The author has clearly dug deep into the archives and provides a lot of fascinating material, shedding new light on what is steadily becoming increasingly well explored territory. There are other new books for the non-specialist out on this subject. I have reviews on two out soonish, Ehsan Masood’s The Great Invention (in Nature) and Philipp Lepenies’ The Power of a Single Number (in the Journal of the History of Economic Thought).

These titles join an older batch of general titles; not only my own GDP: A Brief but Affectionate History but also Zachary Karabell’s The Leading Indicators, Dirk Philipsen’s The Little Big Number, Lorenzo Fiaramonti’s Gross Domestic Problem, Sen, Stiglitz and Fitoussi’s Mismeasuring Our Lives.

 

And there are more. Morten Jerven looks at African economic statistics in Poor Numbers. Brett Christophers addresses the measurement of finance in Banking Across Boundaries. Expect more to come!

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The social life of platforms

All of a sudden, platforms are everywhere. I’ve written an issues paper on platforms which will be out (on the Toulouse School of Economics website) in a couple of weeks. It tries to summarize what we know already and what questions remain for both economic researchers and policymakers (lots). But there are also all of a sudden several books out. One, Platform Revolution, by Geoffrey Parker, Marshall W. Van Alstyne, and Sangeet Paul Choudary I reviewed already here; it’s addressed at a business audience. Another, The Matchmakers, by David S Evans and Richard Schmalensee has arrived this week. Evans’ earlier Platform Economics (2009) was (I think) the first on the subject. The excellent The Inner Lives of Markets by Ray Fisman and Tim Sullivan has some sections on platforms also – I reviewed it here.

  

This post is about another new book, out in the UK on 17 June, Arun Sundararajan’s The Sharing Economy: The end of unemployment and the rise of crowd-based capitalism. There are fewer books specificially on ‘sharing’ (or P2P) platforms; the other I know about is Botsman and Rogers What’s Mine is Yours.

Despite the subtitle, The Sharing Economy does not over-hype these platforms although it certainly takes a positive attitude to their potential. For example, the book points out: “There haven’t yet been any large scale digital peer-to-peer rental marketplaces for assets other than automobiles.” Scale is difficult in P2P contexts; the prize is particularly large in the case of cars. The average car owner uses it 4% of the time, with an average 20% occupancy, so there is a 1% utilization rate on an asset whose value the book estimates as equivalent to 13% of global GDP. Logistics is a key challenge in many asset-sharing contexts, keeping the platforms geographically confined.

The book also flags what seems to me an important hurdle, namely raising the financing for the large losses incurred in the early stages of growing a platform to its critical mass, where the indirect network effects and scale economies can kick in. Venture capital is the main mechanism for doing so – crowd funding can’t achieve the same scale. So the big sharing economy examples are American, funded by rich investors – and hence, I think, much of the anger aroused by Uber and Airbnb in general commentary.

There are economic characteristics required also for a successful sharing platform. If asset-based, the assets need to be not too big and not too small (cars, but not aircraft carriers or saucepans). There must not be large economies of scale in production, or it would be just another consumer-facing digital business.

One of the very interesting sections of the book concerns the social characteristics of the sharing economy. Its origin myths place it outside the conventional monetary economy, with roots in time banking for the neighbourhood, welcoming strangers with hospitality, and so on. Again, the hostility to the big sharing platforms stems partly from their departure from the original social norms. But as Sundararajan points out, social design is vital to the success of the platforms because they rely so heavily on trust and reputation to function. He writes: “I believe some of the shifts we see in capitalist exchange over the coming years will reflect a reintegration of gift economies into an economic system that has become inefficiently commercial.” So this is intriguing: he sees platforms other criticise as bringing commerce into social contexts as a route for reinjecting the social into the commercial. For instance, P2P markets are successful in dense urban areas.

What are the hurdles to further expansion of the sharing economy? Sundararajan sees financing as one, although this may be changing. The notorious blockchain could perhaps enhance trust. Innovations such as the software layer provided by Stripe could be on the verge of making it much easier to monetize a platform-provided service. Other trust ‘infrastructures’ the book highlights innovations such as Traity a ‘general purpose portable reputation platform’.

As the book points out, sharing economy (and other) platforms are hybrids: between a market and an organization; between centralized control and decentralization; between the personal and the public; between the social and the commercial. He touches on one of my favourite subjects: how little we know about the sharing economy because it falls between existing statistics. (I am working now with the ONS as one of their Fellows to think through what statistical collection might be needed.)

And he concludes – as I do in my forthcoming paper – that economists need to provide policy makers with more evidence and better tools for understanding the impact of these new platforms. I also agree with Sundararjan’s conclusion that the knee-jerk regulatory response – stop them happening – is not one that will serve the public. Regulatory needs will change – he argues that platforms can be effectively self-regulatory in many respects. Ratings provide real-time, large scale monitoring of quality, for instance, which will do a more effective job than a government regulation rarely monitored or enforced. Reputation is literally vital to a sharing economy platform. But there will be other respects in which policy intervention is necessary, including rethinking how aspects of social security such as maternity pay or pensions can be delivered when a significant proportion of the workforce does not contract with a single employer for a substantial length of time. This need has been clear for 20 years; now is the time for policymakers to act.

So all in all, a very interesting book by one of the most knowledgeable researchers on the sharing economy. Well worth a read.

Realism and utopia – a guest review

A guest review by Koen Smets

In the same way that most drivers consider themselves better than average, I suspect most people consider themselves realists – not too optimistic, and not too pessimistic. I certainly do, and so I find myself right in the group at which Rutger Bregman’s Utopia for Realists is aimed.

It is Bregman’s first book to be published in English, bundling many ideas that he has written about before, notably in regular pieces for the Dutch website De Correspondent. Its subtitle, The case for a universal basic income, open borders, and a 15-hour work week, suggests it is not quite another lightweight campaigning pamphlet, but an ambitious attempt to show not just why these radical aspirations must be pursued but also how they can be realized. My expectations were raised accordingly. Unfortunately, Utopia for Realists rather falls short of its ambition.

Bregman starts off with a somewhat breathless catalogue of human achievements in health and wealth: we really have never had it so good. The mediaeval fantasy of the Land of Plenty has become reality. Nevertheless, we’re miserable, and for the first time ever we believe that children will be worse off than their parents. That makes it the ideal moment for a genuinely big project, according to Bregman the optimist.

15 hours per week

“Money is time,” Bregman observes. He channels Keynes and John Stuart Mill, both of whom had predicted we would work less and less, and shows how, for many decades, we have been buying time with our increased wealth. But by the late 1980s we suddenly stopped sacrificing money to get even more free time. Bregman blames social pressure, fuelled by commercial interests. Even so, is this is not simply playing into preferences inherent in human nature? Time is only one of the numerous things we can trade for money.

We may work less than our ancestors, but we are weighed down by stress, and overtime is rife. Bregman bombards the reader with solid and comprehensive research to show where it all went wrong, and his conclusion is straightforward. Working less will solve pretty much all our troubles: stress, climate change, accidents, unemployment, emancipation of women, and the ageing population. “We inhabitants of the Land of Plenty could work fewer than 15 hours a week by 2050, and earn the same amount as in 2000,” Bregman says, echoing Keynes’ prediction from 1930, which foresaw the same for 2030.

But if this is such a no-brainer, why are so few people actually working 15-hour weeks? Have today’s CEOs been abandoned by the enlightenment that made business leaders like Henry Ford and WK Kellogg cut the working week in the 1930s? How come the public sector, outside the harsh commercial realities of private enterprise, is not leading the way?

Bregman points at surveys which found that people from all over the world would prefer two weeks’ extra holiday over two weeks’ extra pay by a factor two. So apparently we want more leisure, but we work more. This is reminiscent of what David Ogilvy said: “People don’t think how they feel, they don’t say what they think and they don’t do what they say.” Bregman’s solution to this paradox is resolutely paternalistic: “Collective action – by companies, or better still, by countries.”

Poverty

The best way of lifting people out of poverty is to give them money, says Bregman. No sign of paternalism here: “Put the choice in the hands of the poor,” he recommends, eloquently dismissing the myth that poor people cannot handle money. But alleviating poverty by giving one-off cash grants to poor and homeless people is hardly a solid case for a Universal Basic Income (UBI) – a steady income stream going to anyone who “has a pulse”.

The problem is not that people will turn into lazy couch potatoes – the Mincome experiment in Canada in the 1970s showed that people are nothing like the neoclassical homo economicus, who simplistically responds to incentives, and who would stop working if there was free money. There was barely a decline in working hours.

The problem is with the sums. Bregman claims that, “For the first time in history, we are actually rich enough to finance a sizable basic income.” But what size? A study by Matt Bruenig estimates the cost for eradicating poverty in the USA at “only $175 million”. Distributed equally over the US population, every person would get about $550 per year, or just over $10 per week.

And even that needs to come from somewhere – technology, Bregman believes. The robots will come and take our jobs, and that is a good thing: it means we can, “Reject the dogma that you have to work for a living.” Just tax the robots. Sounds simple, but it conceals huge complexity: automation applies differently to different jobs and in different countries.

The world came very close to an actual, real, nationwide unconditional income for poor families – in the USA, no less. Bregman devotes an entire chapter to the rise and fall of a seminal UBI under president Richard Nixon in 1969. But thanks to rhetoric, defeat was snatched from the jaws of victory: the prospect of “inciting the poor to even greater idleness”, based on a tendentious analysis of the welfare system in Speenhamland in 1830s England, was the death knell of the proposal.

Unfair wages

Another of Bregman’s bêtes noires is the gap between the wage for a job and its societal usefulness. Why, he wonders, should wealth shifters like bankers earn more than wealth creators like teachers or indeed garbage collectors? He might as well get worked up about the fact that even the most expensive litre bottle of water costs a lot less than a kilo of gold.

Are there really ever more people earning money without contributing anything of tangible value to society? Once all societal needs – food, shelter, healthcare, education – are fulfilled, things shift to the individual transaction level. We may regret the fact that there are so many lawyers in the US, and be puzzled by the fact that this doesn’t mean Americans are better protected than citizens of countries with fewer attorneys. But somehow, every lawyer is – we may assume – deriving her income from someone who willingly pays her for her services, money her client has a choice to spend differently. Unless we can show why this is not a mutually beneficial transaction, value – in the eye of the beholder – is being created.

Bregman’s solution is simple, though: “Higher taxes would get more people to do work that’s useful.” It seems to escape him that a higher tax doesn’t discriminate between the incomes of people who shift wealth and those who create wealth. It penalizes both in the same way.

Redistribution and efficiency

Much of the book is balanced and factual, but on a few occasions Bregman morphs into a campaigner on speed. There is a weird rant against advertising. There is a bizarre attack on the market economy (“The modern marketplace is equally uninterested in usefulness, quality, and innovation. All that really matters is profit.”) There is a peculiar condemnation of our “fixation on ‘efficiency’ and ‘gains’, as though society were nothing but one big production line.” These contribute little or nothing to the central ideas, and the style erodes the credibility of the book’s other arguments..

Bregman – no doubt to the delight of the owner of this blog! – also devotes almost an entire chapter to the most widely used instrument for measuring progress, Gross Domestic Product, taking great relish in demolishing it. But he is really kicking in an open door: the shortcomings of the GDP are well-known and well-documented. None of the alternatives, from Gross National Happiness and the Genuine Progress Indicator to the Index of Sustainable Economic Welfare and the OECD’s Better Life Index satisfy him either.

By now, it should not be a surprise that Bregman advocates a larger public sector: they can leverage activities that “cannot be made more efficient”, such as education and healthcare. He believes that, “The more efficient our factories and our computers, the less efficient our healthcare and education need to be; that is, the more time we have left to attend to the old and infirm and to organize education on a more personal scale.” This is an idiosyncratic interpretation of the concept of efficiency.

Bregman seems to miss the fact that we are economic beings: if we sacrifice something, whether it’s time, effort or money, we want to get something in return that we feel is worth it. We want to be efficient when it’s not the task we are enjoying, but the outcome of the task. That is not only why the Land of Plenty is so appealing, but also why we have made so much progress towards it.

A larger public sector without any notion of efficiency sounds like a dangerous path to take. Yet Bregman says, “Governing by numbers is the last resort of a country that no longer knows what it wants, a country with no vision of utopia,” as if the amount of subsidy the state will give to ‘inefficient’ activities, and the ways in which it will be able to raise the necessary revenue are not numbers that, eventually, matter greatly.

Open Borders

But Bregman also has a libertarian streak. He criticizes conventional aid for spending pitifully small amounts of money to projects with questionable outcomes. If we were really serious about relieving global poverty, we would open our Western borders. That would make the world twice as rich as it is now, and boost wealth by sixty-five trillion dollars.

So what stops us? We are hypocrites, hiding behind fallacious objections. Migrants will take our jobs, they will force our wages down, they are too lazy to work, and they’ll never go back. Bregman counters them all, as in the best parts of the book, with plenty of evidence. But the angst across the EU in relation to a population of refugees amounting to barely 1% of its population shows that we’re some way off accepting the economic logic of the win-win argument of open borders.

A disappointed realist

In the final chapter, Bregman wonders whether he might be caught out by confirmation bias: “If I’m being honest, I sometimes wonder if I’d even let myself notice if the evidence were pointing another way. Would I be observant enough – or brave enough – to have a change of heart?”

Ultimately, the book majors on explaining why its three central radical thoughts are good ideas – and this is indeed a hallmark of confirmation bias. Looking at the arguments against, and putting up solid counterarguments is not enough. “The question is not can new ideas defeat old ones; the question is how,” says Bregman. And on that last question, the answers are sadly lacking.

A realist would have wanted to see how the loss and risk aversion that prevent the West from opening up its borders to economic migrants could be conquered.

People in the rich West have plenty of options to make different trade-offs between time and money. The barriers to adopting a 15-hour week are not high, and both employers and employees would be fools not to take advantage of the apparent win-win situation it offers. Yet it’s not happening. A realist would have wanted to see an explanation for this reluctance, and ideas on how to overcome it.

And above all, a realist would have liked to see solutions to the fundamental issue with a UBI: how to pay for it. The problem, as Bregman explains, is not that the UBI will be a disincentive to work. It is that, in order to raise enough money to provide a UBI that is high enough to live on, it is the taxation on high incomes that will act as a disincentive. “Only a fraction of our prosperity is due to our own exertions,” says Bregman. But the other fraction is not generated without some exertion. And if there is not enough incentive for people to actually put in the effort to produce 100%, even if they’re only personally entitled to 10%, the other 90% remains elusive.

Koen Smets is an accidental behavioural economist, who works as an organization development specialist. He uses elements from both orthodox microeconomics and behavioural economics to bring about behavioural change. He is on Twitter as @koenfucius

Markets in all their glory

I knew I was going to enjoy The Inner Lives of Markets by Ray Fisman and Tim Sullivan when, early in the book, it mentions the use of Kakutani’s fixed point theorem in the proof of existence of general equilibrium. Not that this should put you off. All of the economics covered in this delightful book (shipping on 9 June in the UK, already shipping in the US) is described clearly and with a lovely lightness of touch.

As the book explains, “A market is just a technology, a mechanism where participants have the chance to directly affect resource allocation through an expression of their preferences.” They can be organised and run in many ways, and are varyingly effective at that principal task of allocating resources. The book begins (after an introduction featuring the famous Radford paper (pdf) on the economy of a WW2 prisoner of war camp) by explaining the elegant abstraction of general equilibrium theory and the welfare properties of markets. It goes on to the variety of ways in which the welfare properties do not hold, due to asymmetries of information, through the lens of a particular model or approach to modeling.

The first of these is Akerlof’s lemons model of second hand car sales – the adverse selection that can ultimately cause a market to collapse when sellers have more information about the product than buyers. Of course there are markets for second hand cars: devices such as warranties and nice showrooms help compensate for the information asymmetry. The book goes on to Spence’s introduction of signalling in labour and other markets.

There is a nice chapter covering auctions – including online auctions – and how these are evolving. The use of online auctions is decreasing over time; it seems the transactions costs are actually rather high, at least for most buyers. As the chapter observes, prices achieved in online auctions on sites like Ebay are about 10% lower than fixed prices for the same items, so this is rather a high transaction cost. The ‘auction discount’ across markets has grown over time from 3% in 2003 to 15% now. I liked this observation in the book about the scope for using auctions: “This lack of use [in practical applications] of the Vickrey [2nd price] auction was something of a puzzle to economists, who were captivated by the way that, in its elegant simplicity, the mechanism helped magically cure the bidders’ headaches over strategizing and over-paying.” It reminded me of a conversation with a friend who was helping test the auction one regulator had designed for a sale of spectrum licences; she said, “It was great fun. The economists assumed we wouldn’t talk to each other but of course we cheated like anything!”

The book proceeds on to digital platforms, and ends with Roth-style matching markets such as the kidney exchange – the latter a shorter version of Roth’s own excellent book, Who Gets What and Why.

One of the interesting threads through this new book is the strong defence it puts up of the integral role of maths in economics. Critics of economics often, of course, see the mathematization of the subject as one of its big flaws – how can you reduce the complexity of society to a few equations? Equally of course, this is nonsense (even though – as Paul Romer has explained – there is misuse of maths too): the humanities also use ‘models’, but with words rather than symbols – the causes of the First World War? Actor-network theory? And careful statistical inference cannot happen without representing the relationships being tested algebraically. The Inner Lives of Markets goes further, explaining that key insights in understanding and improving the way markets work came about because economists were using mathematics. Akerlof got his ‘lemons’ insight from attending a class on topology. Auction theory and market design similarly depend on sophisticated algorithms.

The  book is an ideal read to introduce students to these areas of economics, and to describe to general readers the power and usefulness of a part of economics not very visible to the public but where substantial progress has occurred during the past 10 or 20 years. (The authors’ previous book, The Org, did the same for industrial organisation.) Digital platforms for example wouldn’t exist without digital technology, but equally wouldn’t exist without the economic technology. The Inner Lives of Markets is a very nice complement to and update of one of my favourite books, John McMillan’s Reinventing the Bazaar. It is clear and readable, with lots of examples of familiar, everyday contexts. It would be terrific if the message gets out that economics is about so much more than the ups and downs of the financial market and the arcana of macroeconomics.

More to read

It’s always a pleasure to get the new season’s catalogues from the publishers, albeit alarming to be getting Autumn listings before there has been much summer, and is it really the end of May already? First off the block, or rather through my letterbox, is the one from Princeton University Press. Up front is a book that will thrill Dave Birch: The Curse of Cash by Ken Rogoff. “The world is drowning in cash – and it is making us poorer and less safe,” starts the blurb. Eminent economists are finally coming round to Dave’s views.

Many other enticing titles listed. Philipp Ther’s Europe Since 1989. The Nobel Factor by Avner Offer and Gabriel Soderberg (how the creation of the prize in 1969 changed economics). The Euro and the Battle of Ideas by Marcus Brunnermeier, Harold James and Jean-Pierre Landau. The Power of Networks by Christopher Brinton and Mung Chiang. The Age of Risk by Emily Nacol. There’s a textbook I read in proof, Ethan Bueno de Mesquita’s Political Economy for Public Policy, a terrific synthesis of welfare economics and political economy considerations. All these and more. From just one publisher. And I made the mistake of going into a bookshop with a spare half hour yesterday.

I was also intrigued by The Princeton Field Guide to Dinosaurs by Gregory Paul. A field guide: do dinosaurs really roam New Jersey?

The Princeton Field Guide to Dinosaurs: Second Edition (Princeton Field Guides)

Update: how could I have missed on a first read through a new book by Joel Mokyr, A Culture of Growth: The Origins of the Modern Economy. A must-read for me.