Tag Archives: GDP

Going beyond GDP: walking the talk

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Today I’m working on a talk for a conference organised by the Royal Economic Society, Royal Statistical Society and Institute for Fiscal Studies on the agenda for modernising economic statistics. The day’s programme covers a wide range of questions including regional statistics and measuring the digital. My contribution will be about ‘beyond GDP’. I was just reflecting that in the two years since my book, GDP: A Brief But Affectionate History was first published there have been enough other books on this issue to declare it a new genre.

Precursors were in 2009:

[amazon_link id=”B00E32LW1C” target=”_blank” ]Mismeasuring Our Lives[/amazon_link] by Sen, Stiglitz, Fitoussi (the report of the Commission set up by former President Sarkozy)

[amazon_image id=”B00E32LW1C” link=”true” target=”_blank” size=”medium” ]Mismeasuring Our Lives: Why GDP Doesn’t Add Up by Stiglitz, Joseph E., Sen, Amartya, Fitoussi, Jean-Paul published by New Press, The (2010)[/amazon_image]

and in 2013:

[amazon_link id=”019976719X” target=”_blank” ]Beyond GDP: Measuring Welfare and Assessing Sustainability [/amazon_link]by Marc Fleurbaey and Didier Blanchet

[amazon_image id=”019976719X” link=”true” target=”_blank” size=”medium” ]Beyond GDP: Measuring Welfare and Assessing Sustainability[/amazon_image]

Then:

[amazon_link id=”0691169853″ target=”_blank” ]GDP: A Brief But Affectionate History[/amazon_link] by Diane Coyle

[amazon_image id=”0691156794″ link=”true” target=”_blank” size=”medium” ]GDP: A Brief but Affectionate History[/amazon_image]

[amazon_link id=”1780322720″ target=”_blank” ]Gross Domestic Problem[/amazon_link] by Lorenzo Fioramonti

[amazon_image id=”1780322720″ link=”true” target=”_blank” size=”medium” ]Gross Domestic Problem: The Politics Behind the World’s Most Powerful Number (Economic Controversies)[/amazon_image]

[amazon_link id=”0801451639″ target=”_blank” ]Poor Numbers[/amazon_link] by Morten Jerven

[amazon_image id=”0801451639″ link=”true” target=”_blank” size=”medium” ]Poor Numbers: How We are Misled by African Development Statistics and What to Do About it (Cornell Studies in Political Economy)[/amazon_image]

Later:

[amazon_link id=”B015X37CI6″ target=”_blank” ]The Little Big Number[/amazon_link] by Dirk Philipsen

And new/forthcoming:

[amazon_link id=”1681771373″ target=”_blank” ]The Great Invention[/amazon_link] by Ehsan Masood

[amazon_image id=”1681771373″ link=”true” target=”_blank” size=”medium” ]The Great Invention: The Story of GDP and the Making (and Unmaking) of the Modern World[/amazon_image]

[amazon_link id=”B01EB74DFU” target=”_blank” ]The Power of A Single Number[/amazon_link] by Philipp Lepenies.

[amazon_image id=”0231175108″ link=”true” target=”_blank” size=”medium” ]The Power of a Single Number: A Political History of GDP[/amazon_image]

When this kind of thing happens, there is certainly change afoot.

A radical GDP rethink needed

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This is possibly stretching the definition of ‘book’, but at 259 pages, the Bean Review of Economic Statistics certainly has the heft to be classed as one. Either way, it’s worth a post here. This is not only because it covers one of my favourite subjects, [amazon_link id=”0691169853″ target=”_blank” ]GDP[/amazon_link], but also because it signals a milestone in economic thinking.

Professor Charles Bean launching his report

Professor Charles Bean launching his report

Since the 2009 report of the Sen-Stiglitz-Fitoussi Commission (summed up in the book [amazon_link id=”B00E32LW1C” target=”_blank” ]Mismeasuring Our Lives: Why GDP Doesn’t Add Up[/amazon_link]) there has been some policy traction for the ‘Beyond GDP’ agenda, not least because it builds on a long-standing set of critiques from environmentalists and researchers on well-being. Indeed, this week’s Economist argues for including unpaid ‘home production’ in GDP, something debated in the 1940s and campaigned for by feminist economists ever since.

The Bean Review is to my mind more radical because it questions the ‘GDP’ part. It contains considerable detail (and kindly citing some of my work) on the multiple ways conventional national income accounting is more and more a mismatch for the structure of the economy – looking at intangibles, the gap between market output and consumer surplus, the production boundary, the consequences of digitisation and lack of business model invariance of the statistics, and more.

[amazon_image id=”B00E32LW1C” link=”true” target=”_blank” size=”medium” ]Mismeasuring Our Lives: Why GDP Doesn’t Add Up by Stiglitz, Joseph E., Sen, Amartya, Fitoussi, Jean-Paul published by New Press, The (2010)[/amazon_image]

There is a great deal of interest in the question of economic measurement now. The additional challenge to the existing statistics from the digital sector has helped with policy traction – although it does mean the GDP question is seen largely through the prism of whether mismeasurement ‘explains’ the productivity slowdown – as in this new paper by Byrne, Fernald and Reinsdorf, Does the US have a productivity slowdown or a measurement problem? These are not mutually exclusive in the way the title suggests. There’s an embarrassment of possible causes of the productivity slowdown, ranging from demographic trends to under-investment related to the crisis, and it isn’t sensible to consider that measurement issues predominate.

More interesting than how much of current measured productivity growth is due to mismeasurement is the deeper question of whether the national accounts definitions remain the best way to conceptualise a largely service-based, increasingly intangible, increasingly customized and globalized economy, while failing to measure systematically non-market activities when the production boundary is blurring, and ignoring entirely the depletion of capital in the form of infrastructure or natural capital. (That’s a rhetorical question.) The Bean Review essentially poses the same question and indicates firmly that the UK and the ONS should take the lead in the debate. I’m a stats geek of sorts, but to me that seems very exciting. As Mario Pisani of the Review team tweeted:

Mario_Pisani
UK was pioneer of national accounting – we need to take stats ‘back to the future’ or miss parts of modern economy https://t.co/Ln4u5xqhN5
11/03/2016 08:53

Stewardship for the future

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This week brings my first meeting of the Natural Capital Committee, to which I was recently appointed. This is the Committee’s second phase (set for five years), its first running from 2012-2015. As part of my homework, this weekend I re-read chair Dieter Helm’s book [amazon_link id=”0300210981″ target=”_blank” ]Natural Capital: Valuing the Planet[/amazon_link].

51MeUzEvTLL._SX333_BO1,204,203,200_It’s a very accessible and clear explanation of why it’s important to value natural capital and how to go about it. As Dieter explains, there’s no doubt that economic growth has for some time been unsustainable. To be clear, that means that future generations (which could include our older selves) will have lower living standards because we have depleted by so much the capital stock providing economic services. (I would add infrastructure too, as part of the sustainability challenge, and there are similar issues as looking at renewable natural capital.)

The book presents the case for re-investing in natural capital in order to enable sustainable growth – it argues against the ‘no growth’ environmentalists. The mechanism it proposes is an aggregate natural capital rule: “The aggregate level of natural capital should not decline.” If there is damage done in one place, it has to be made good by compensating gains elsewhere. The rule can be applied to renewables, and can be extended to non-renewables by requiring a natural capital fund to compensate for extraction (much as the Norwegians do for their oil and gas extraction).

This is a radical change when you start to look at the amount of money that might be involved. The book suggests it is of the order of at least 4% of current GDP. And of course the details are extremely complicated. To state just two hurdles: we do not have good statistics on natural capital, although the Office for National Statistics does have a programme of work on this; and it is hard to value non-marketed assets and transactions, especially when there are substantial externalities, non-linearities and system interdependencies. Cost-benefit analysis – the only tool economics has to offer – applies to marginal (linear) changes and in practice does not try to value external benefits.

One of the book’s examples about habitats and how to think about the trade-offs compares great crested newts and nightingales. Both are protected species, but nightingales’ habitats are much harder to recreate elsewhere, arguing for a higher barrier to developing the kinds of woodland where they live. I can’t resist recounting an anecdote about newts. If you visit construction sites, as I sometimes have, there will often be a fence half a meter high around the work – to keep out the newts, which have to be carefully relocated from inside the site to outside. In my BBC Trust days, I was quizzing the great Sir David Attenborough about the fate of the poor great crested newts. He said (and who knows, maybe he was joking) that the newts had only got into the legislation by accident and the little creatures are not at all rare. Indeed, he had some in his suburban garden. If you were a newt, isn’t that the best garden you could pick as your home?

Male Great Crested Newt (Triturus cristatus) with breeding colours, underwater, captive UK

Male Great Crested Newt (Triturus cristatus) with breeding colours, underwater, captive UK

Anyway, I’m delighted to have been appointed to the Committee. It speaks to my own pre-occupations with sustainability ([amazon_link id=”0691156298″ target=”_blank” ]The Economics of Enough[/amazon_link]) and measuring the economy ([amazon_link id=”0691169853″ target=”_blank” ]GDP: A Brief but Affectionate History[/amazon_link]). This is exciting territory in terms of the economics, and profoundly important in terms of all our futures.

[amazon_image id=”0691156298″ link=”true” target=”_blank” size=”medium” ]The Economics of Enough: How to Run the Economy as If the Future Matters[/amazon_image]  [amazon_image id=”0691169853″ link=”true” target=”_blank” size=”medium” ]GDP: A Brief but Affectionate History[/amazon_image]

Sharing the economic growth

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Thanks to a recommendation from Martin Wolf, I’ve just read [amazon_link id=”0521094461″ target=”_blank” ]Theoretical Welfare Economics[/amazon_link] by J de V Graaff, a 1971 reprint of a 1957 primer on this subject – Martin told me it had been his university text. While in my undergraduate course we certainly covered welfare economics, it was as a settled body of knowledge, and I don’t recall reading anything like this on the earlier debates.

[amazon_image id=”0521094461″ link=”true” target=”_blank” size=”medium” ]Theoretical Welfare Economics[/amazon_image]

It’s a very clear and interesting discussion – succinct too, at about 150 pages. One of the most interesting aspects is how comprehensively the author demolishes the idea that questions about the size of the economic pie and its distribution can be separated. He lost the argument in later economics of course – economists assume, and often state, that these are separable. However, the strength of Graaff’s counter-argument is evident. At the formal level, he covers the inconsistency of the Kaldor/Hicks notion that losers from a change in allocation can (potentially) be compensated – Skitovsky originally showed that the (potential) Pareto optimality of any change depended on the initial distribution. (Here is a good Interfluidity explanation.) But the book also explains it far more intuitively:

“In a one commodity world some definite meaning could be attached to a phrase like ‘the size of national income’; and we could legitimately  say that welfare depended on the size and the distribution of this one commodity. But as soon as we leave a one-commodity world this ceases to be true. There is no unambiguous meaning we can attach to ‘the size of national income’ when we have a heterogeneous collection of goods and services. How can we combine the various goods into a single quantity that can be said to have a ‘size’? By weighting them and striking an average? This is certainly a possibility. But we can only get the relevant weights from a welfare function; and if we have the usual Paretian one … it will only tell us what weights to use when the distribution of goods among members of the community is given. Only in a very limited sense can welfare be said to depend on ‘size’ and ‘distribution’ – for the two elements are no longer independent and cannot be separated out.” [my italics]

He adds that the index numbers usd in constructing national income cannot be an indicator of change in welfare – they simply provide information relevant to a balanced judgement. “Index numbers of aggregate output or consumption should always be supplemented with information about the distribution of income and wealth – and also with separate indexes of investment, personal and collective savings, and expenditure on collective goods like defence. The more informatio made available, the more likely it is that a balanced judgement will be obtained.”

So here I think we have one of the earliest arguments for the ‘dashboard’ approach to measuring economic progress. But also an irrefutable case – with as many singing and dancing cross-partial derivatives as you like – for never leaving income distribution out of an assessment of how the economy is doing.

The rhetoric of economics, ctd.

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From [amazon_link id=”0521094461″ target=”_blank” ]Theoretical Welfare Economics[/amazon_link] by J De V Graaff: “On the one hand, it could be argued that the term ‘real national income’ is a mere definition, devoid of normative significance. … On the other hand, it could be objected that ‘the real national income’ is an emotive expression; and to say it has increased in to imply that the state of affairs thus described is approved or is in some sense thought to be good or desirable.”

He argues – and I wholeheartedly agree – that we should use the terminology as people normally understand it, with its normative connotation, and not like economists insisting that all that [amazon_link id=”0691169853″ target=”_blank” ]GDP[/amazon_link] measures is what it is defined to include.

[amazon_image id=”0521094461″ link=”true” target=”_blank” size=”medium” ]Theoretical Welfare Economics[/amazon_image]