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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National wellbeing

I just read by Paul Allin and David Hand, a very nice overview of the issues in going ‘Beyond GDP’. It came out in 2014, about the same time as my , so unfortunately I’d not had chance to read it before writing mine. In the couple of years since, the momentum behind the agenda to go ‘beyond’ has certainly increased. This book is a very clear, and rigorous but non-technical explanation of the scope of the issues, and the state of play. As Allin and Hand describe, there has been a good deal of work on looking at alternative ways of defining and measuring ‘wellbeing’ directly, and at wider approaches to assessing whether or not society is progressing.

[amazon_image id=”1118489578″ link=”true” target=”_blank” size=”medium” ]The Wellbeing of Nations: Meaning, Motive and Measurement[/amazon_image]

I am more cautious than they are about any survey-based direct measurement of wellbeing. There seems to be a lot still to understand about the psychology, and about how people’s judgements are formed. After all, we don’t just introspect, we’re also influenced by social context – have we just read an upbeat book about progress? or rather, just read the execrable Daily Express? I’m more with the programme when the book looks at how to (greatly) improve what we do now. For instance, report net national income per capita, not total GDP. Include income distribution and environmental measures. As they note, there are already statistics on many indicators that would give a richer picture of economic welfare. Jones and Klenow have a very nice recent paper on a single summary measure of aggregate economic welfare rooted in economic theory: it calculates a consumption equivalent measure combining income/leisure, distribution and life expectancy. This omits questions of environmental sustainability but good progress is being made on environmental ‘satellite’ accounts and natural capital measurement.

There are some important questions not addressed by Allin and Hand. They describe a proliferation of approaches to measuring wellbeing and indeed call for a thousand flowers to bloom. In my view, if there is no narrowing down of the options, the existing standard of GDP and the conventional national accounts will be far harder to dislodge. A new focal point is needed. (I have a paper on this out soon. Others – like Ehsan Masood in – call for a single index for this reason although for different single indices.)  The reason is not tidy-mindedness, but rather the role that official economic statistics play in holding governments to account.

The other question ignored by all of what you could describe as the pro-wellbeing literature (not that I’m against well-being) is innovation. In disparaging GDP growth as a metric, they overlook the fact that GDP growth is not mainly about more shoes, food and vehicles of the same kind, it is mainly the introduction of innovations, from small changes in variety to profound new technologies like the smartphone or the personalised cancer treatment. GDP doesn’t measure these well, and there is a fuzziness as between quality change potentially reflected in prices and real growth, and unmeasurable consumer surplus. But innovation is a huge contributor to wellbeing and people will continue to like ‘growth’. No-growth is a non-starter outside authoritarian and autarkic polities.

These caveats aside, I really liked the book and it is well worth a read if you’re interested in this territory. As many people are – statistics is the new rock and roll.

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The Wealth Project

On Monday & Tuesday I attended an absolutely terrific conference, The Wealth Project, which is about “changing how we measure economic progress,” to quote the conference strapline. The aim is to develop concepts and measures of different kinds of wealth so that policies and decisions take due account of the future potential for consumption and well-being, as well as the short term. This has been a preoccupation of mine since at least writing as well as my . The Wealth Project will produce a book around the end of 2016 or start of next year.

Meanwhile, it’s always interesting to see what books people cite at conferences. This week I noted: C.A.Bayly, ; David Hume, ; Karl Polanyi, ; Dieter Helm, . I referred back to the recent crop of GDP books and the Inspector Chen novel featuring GDP growth as villain.

[amazon_image id=”0631236163″ link=”true” target=”_blank” size=”medium” ]The Birth of the Modern World, 1780-1914: Global Connections and Comparisons (Blackwell History of the World)[/amazon_image]  [amazon_image id=”0140432442″ link=”true” target=”_blank” size=”medium” ]A Treatise of Human Nature: Being an Attempt to Introduce the Experimental Method of Reasoning into Moral Subjects (Penguin Classics)[/amazon_image]  [amazon_image id=”B017LCJ8XE” link=”true” target=”_blank” size=”medium” ]Natural Capital: Valuing the Planet by Dieter Helm (2015-05-01)[/amazon_image]

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