Growth, no growth, degrowth

I just read the 2nd edition of Tim Jackson’s now-classic Prosperity Without Growth, which has been out for a few months, and it’s a book I’d recommend to anyone but especially economics students. Although most students do now learn about environmental constraints and trade-offs, we do socialize them quickly into thinking about economic growth as the objective of policy. It is all too clear that the failure to take account of externalities and the depletion of natural capital assets means we’ve paid a high price for past growth. Measuring these better to ensure they’re incorporated in the choices society makes is part of my own research.

Havings said this, and commending the book, I have one central problem with its argument, as with some others making similar arguments. And that turns on the understanding of what (GDP) growth consists in. Even those who acknowledge the importance of services in the economy – as Tim Jackson does – then consistently talk about growth as consumer demand for material products, for stuff: “How is it that with so much stuff already we still hunger for more? Would it not be better to halt the relentless pursuit of growth in the advanced economies and concentrate instead on sharing out the available resources more equitably?” So stuff and growth are conflated.

As I’ve been pointing out for 20 years, growth in the advanced economies is increasingly non-material – accepting that we import stuff embodied in goods, which must be accounted for. The archetype of modern growth is a new idea – that an aspirin can avert cardio-vascular problems as well as cure headaches; that apps on one device can replace multiple material objects.

This is why indicators like the Genuine Progress Indicator, that flatline from the 1970s on while GDP rises, are so unpersuasive. I disagree with Tim when he writes: “[T]he continued pursuit of economic growth doesn’t appear to advance and may impede human happiness.” So although I agree completely that the usefulness of GDP as a welfare measure is declining, I don’t think we know how to weigh against each other the environmental minuses and innovation pluses. This is why I’m obsessed with how we conceptualise and measure society’s economic welfare, including measuring assets to give us a handle on sustainability; but many of the innovations do advance human well-being. I remember the 1970s, and though the music was better, many aspects of life were far less satisfying. Patti Smith and Siouxsie & the Banshees aren’t enough to make me want to turn the clock back.

This is an important, possibly existential debate, so I hope the book is being widely read. I also appreciate its (only slightly lukewarm) defence of economics: contrary to the impression some environmetalists seem to give, many economists care passionately about our environment and sustainability, & we think our intellectual tools can make a useful contribution.

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True wealth

Klaxon: this week sees the publication of National Wealth: What is Missing, Why It Matters, edited by Kirk Hamilton and Cameron Hepburn. The book is a collection based on the Wealth Project, itself a follow up to work by the World Bank on measurement for sustainability. As sustainability inevitably involves thinking about the future, there is a need to measure an economy’s stocks of different kinds of capital assets rather than current income or consumption flows (which is what our GDP lens does).

I have a chapter in the book about the political economy of moving to a new framework of economic indicators from the current system of national accounts. This is a shift analogous to changing a global technical standard, in which enough key participants have to make the move to tip everyone else into following suit. I conclude, though, that for this to come about there has to be enough consensus about what new standard to move to, which is still a work in progress. There’s a proliferation of dashboards and alternative indices. We need just one framework to get the shift.

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Agreeing about GDP, disagreeing about the beyond

It’s always a pleasure for me to have a new book about GDP or economic statistics more generally to read (no surprise!) – and this is no longer such a niche taste as it once was. So I very much enjoyed Lorenzo Fioramonti’s The World After GDP: Politics, Business and Society in the Post-Growth Era, a sequel to his Gross Domestic Problem.

The book rightly points to the fact that the many known flaws with GDP as a measure of economic welfare are becoming still more severe. The environmental issues are obvious. There have been longstanding critiques of the omission of much ‘household production’ (although not, as the book seems to suggest, all informal economic activity as it is household services such as cleaning and childcare that are left out; household products such as food is included in the definition of GDP). Still, as the book observes, GDP conceives of firms and governments as productive and households as non-productive and while this has some logic in terms of transactions, it has none in terms of economic welfare.

The digital transformation of the economy is making measurement ever harder: “One of the crucial flaws of GDP is its inability to capture the dynamic value embedded in all sorts of innovations, especially when they reduce costs, distribute access and increase what economists call ‘consumer surplus’.”

Fioramonti also highlights the political economy of GDP – its role as a sole criterion for assessing success or failure, and the growing ‘administrative uses’ such as debt and deficit rules expressed as a percentage of GDP, distorting policies. Unlike Ehsan Masood (in The Great Invention), who argues for a replacement for GDP, Fioramonti favours a suite of indicators. I don’t know which I think is better – there is a strong argument for needing more than one dimension of measurement but there are too many dashboards and sets of goals already. And perhaps people can only pay attention to one summary statistic? Either way, as Fioramonti says here, economic transformations go hand in hand with transformed measurement frameworks.

He makes some points I hadn’t considered and will think about more. For instance, the switch from GNP (the total output of all nationally-owned entities) to GDP (the total output produced within the national territory) provided “an accounting system in support of neoliberal economic globalization,” he writes. That ‘in support of’ suggests intentionality – I don’t know what the historical process was but doubt this was the case. However, it’s an interesting question whether the switch enabled or encouraged globalization (I’ll overlook the n-word).

While there’s much I agree with, there are also points on which I disagree, sometimes strongly. For instance, there is a truly bizarre section on competition, which Fioramonti sees as a wholly negative phenomenon, creating negative externalities. He alludes to competition as ‘random, disorganized interactions’, and yet at the same time describes it as a top down, and centralized process. I’m not sure how he thinks the technological change he refers to elsewhere happens without rivalry between businesses, and clearly sees markets as centralized – but then, how does competition come in to it? He argues also for localized, co-operative production which seems to me a largely romantic dream, which is feasible for some kinds of business (including, perhaps ironically, some ‘sharing’ platforms), but does not scale to an economy capable of providing goods and services to the population as a whole. This section cites Eleanor Ostrom, whose work is indeed marvellous, highlighting the range of possible collective economic institutions, other than markets and centralized states. However, she also underlines that the institutions she explores cannot function beyond a certain scale. The idea that all or many of the products and services in modern economies could be produced at homespun scale is a nonsense. But then, I also think the idea of a post-growth era overlooks the intangible character of modern growth and anyway requires some honesty about what the politics of no-growth would be like – think 10 years of stagnant real earnings, not cosy homesteading.
Still, a certain amount of disagreement adds savour to the book. I really enjoyed reading it, and so will anyone interested in the GDP and measurement debates – and there are plenty of you out there.

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Free innovation

I polished off Eric von Hippel’s Free Innovation on my Washington trip. It’s an interesting, short book looking at the viability and character of innovation by individuals – alone or co-operating in communities. It is free in two senses: the work involved is not paid; and the innovations – or at least their design – is not charged for, although it may subsequently be commercialised by the inventors or by other businesses. The viability of free innovation has been greatly extended by digital technology and the internet: there is more accessible useful information, it is easier and cheaper to co-ordinate among a group. The diffusion of innovations is also easier, although rarely as extensive as when a commercial business takes them up and markets them. In fact, von Hippel argues that there are some strong complementarities between free innovation and commercial vendors, as the latter can bring the scale economies of production and marketing, while the former can enhance the use case, the complementary know-how, that increase the value of whatever it is.

The book has a little theorising, some survey evidence on the wide scope of free innovation, and plenty of nice examples. It ends with a couple of chapters on how to safeguard the legal rights of free innovation and how the pehnomenon might be encouraged. The scope is what interests me particularly. I had already been thinking about phenomena such as open source software as a voluntary public good, which competes with marketed goods – compare Apache with Microsoft’s server software (as Shane Greenstein and Frank Nagle do here). There is clearly a growing amount of substitution across the production boundary going on.

The surveys reported in this book seem to indicate that millions of people are innovating (5-6% of respondents in the UK and US, Finland and Canada) – but equally, some of the innovations are minor contributors to economic welfare and one cannot imagine them ever having a wide market or competing with marketed equivalents. The question is how to get a handle on the scope and scale of all the open source, public good, innovation.

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Facts and values (statistical version)

The trouble with reading two books simultaneously is that it slows down the finishing. But I have now finished a terrific novel, You Don’t Have to Live Like This by Benjamin Markovits – a sort of state of the United States novel except it seems like another age in this grotesque situation of Donald Trump apparently going to become President. And also The Cost of Living in America: A Political History of Economic Statistics, 1880-2000 by Thomas Stapleford.

The title might mark it out as a bit of a niche read – yes, ok – but it is truly a very interesting book. The key underlying message is that all statistics are political, and none more so than a price index. The account is one of the recurring, and recurringly failing, attempts to turn conflicts over the allocation of resources into a technical matter to be resolved by experts. The systematic state collection of statistics is part of the 19th-20th century process of the rationalization of governance as well as being itself “a form of rationalized knowledge making”. Theodore Porter’s well-known Trust in Numbers: The pursuit of Objectivity in Science and Public Life has documented the political appeal of developing and using impersonal, quantitative measures and rules. In my experience, statisticians themselves are far more aware than politicians (or indeed economists) of the highly judgmental nature of their work.

The Cost of Living in America presents the history of the development of price measurement in the US, with a division between the labor movement’s emphasis on the standard of living and cost of living, and the increasingly technocratic development of a price index for use in macroeconomic management. The former began with the study of ‘baskets’ of goods and a debate about what working families needed to maintain their standard of living and keep up with the norm. This was affected by context. For example, the price of certain staples including housing rose faster in wartime. New goods appeared. The debate about price indices increasingly revolved around whether to try to measure the cost of a fixed level of satisfaction, or the cost of a fixed basket of goods?

By the time of the Boskin Commission, this had been resolved decisively in favour of a constant utility index, the minimum change in expenditure needed to keep utility unchanged. (Robert Gordon has since said the Commission under-stated the over-statement of inflation.) This made accounting for quality change and new goods a pressing issue. Many economists started to agree that the statisticians had not adequately accounted for these in their price indices. Economists including Robert Gordon and Zvi Griliches focused on this question, Griliches developing the hedonics approach.

Stapleford writes: “If economists were to claim that their discipline had any claim to neutral technical knowledge, surely that claim required them to have neutral apolitical facts – namely economic statistics. … A constant-utility index was surely the proper form for a cost-of-living index, but the idea that one could compare ‘welfare’ in two different contexts [eg two separate time periods or two countries] without introducing subjective (and probably normative) judgments seemed implausible at best.” Yet applying price indices to macroeconomic analysis of growth or productivity  rather than labour disputes helped depoliticise them. And hedonics tackled the problem by redefining goods as bundles of characteristics. As the book notes, governments became keen on their statisticians applying hedonics, from the mid-90s, when they realised that it implied very rapid declines in some prices and hence higher productivity growth. (And the ‘accuracy’ of price indices is in question again now because of the ‘productivity puzzle‘.)

But this is an uncomfortable resolution. Although this elegant solution links national income statistics to neoclassical utility theory, there seems a category mismatch between a set of accounts measuring total production with the idea that value depends on utility. Setting aside the fact that hedonic methods are not applied to a large proportion of consumer expenditure anyway, this piece of statistical welding is coming under huge strain now because the structure of production in the leading economies is being transformed by digital.

One of the many consequences of the Brexit vote and Trumpery is that economists (and others) are again thinking about distribution. The issue is usually framed as the distribution of growth – when it is there, who gets it? I think the question raised for our economic statistics is far more fundamental: we need to recognise the normative judgements involved in the construction of the growth statistics to begin with. Actually existing macroeconomic statistics embed a tacit set of assumptions about welfare, and a production structure which is becoming redundant. But that of course is my favourite theme.

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