11th March, 2016 – Brian’s Musings #3 – Measuring Life
It’s nearly a century since a group of American economists came up with the notion of gross domestic product (GDP). The concept was simple. Add up the value of all the goods produced in a country and you have a measure of its economic well-being. Investors, rating agencies, economists and politicians still pore over GDP numbers as though they are the holy grail. But is it still a valid measure of economies?
In 2008, France’s President Sarkozy asked Joseph Stiglitz, Amartya Sen and Jean Paul Fitoussi to examine the relevance of GDP as a measure of economies in the twenty first century. Their very readable report concluded it was still a good measure of the goods produced in a country but there also needed to be measures of income, consumption and people’s well-being. Because of the variability of equality within a country, they counselled looking at median rather average per capita numbers.
They went on to comment that market prices are distorted by the fact that there is no charge imposed on carbon emissions and no account is made of these costs in the national accounts. A tendency to measure gradual change does not prepare one for abrupt alterations caused by outlier events. Measuring quality change is a major challenge. Governments play an important role in modern economies yet productivity changes in the provision of government services are ignored.
The household perspective should be emphasised taking account of payments between sectors, such as taxes to government, social benefits and interest paid, and should also reflect payment in kind. Consider income and consumption jointly with wealth; a household that spends its wealth on consumption goods increases its current well-being but at the expense of its future well-being. Many services that households produce for themselves are not recognised in official income and production measures. Further, households are increasingly moving from non-market to market provision of services. Finally, they pointed out that no value is placed on leisure.
Just as I was mulling on all of this I came across the then state of the art laptop I owned when I started MBendi twenty one years ago. Today’s equivalent is 20% of the price in 1995 currency and, assuming Moore’s Law, 500 times more powerful. The value of solar panels and wind turbines produced around the world might be little changed from year to year, yet the cost per kilowatt-hour has dropped dramatically. Robots in factories working 24 hours a day have cut production costs. How are all these productivity gains factored into GDP?
Then take the Internet. Today you can read top newspapers from around the world free of charge. The incremental cost of producing and delivering an additional electronic book or movie is infinitesimal. When I needed information back in 1994, I would get in my car, drive to the library and look it up; today I just type a couple of keywords into a search engine and up pops the information I need. Everywhere people are adding more information to the web and not expecting a cent of recompense.
In their stimulating book, The Second Machine Age, Brynjolfsson and McAfee devote several chapters to exploring this further. Digital products and services might be free but they do have value. Digitisation reduces GDP because prices are lower or free. They recommended measuring the time spent using free services. Online feedback on everything from restaurants to physical products improves quality. They point out that GDP doesn’t measure intangible assets such as intellectual property, organisational capital, user generated content, human capital or learning. Although income may drop, households may move from using paid to free online services with no change in standards of living.
By the end of mulling on all of this my head was buzzing – and still is. My only conclusion is that traditional GDP is a very poor measure of the state and progress of the world we share. What to use instead?
Useful Links
The management summary of the Report by the Commission on theMeasurement of Economic Performance and Social Progress is brief and thought provoking.
It’s nearly a century since a group of American economists came up with the notion of gross domestic product (GDP). The concept was simple. Add up the value of all the goods produced in a country and you have a measure of its economic well-being. Investors, rating agencies, economists and politicians still pore over GDP numbers as though they are the holy grail. But is it still a valid measure of economies?
In 2008, France’s President Sarkozy asked Joseph Stiglitz, Amartya Sen and Jean Paul Fitoussi to examine the relevance of GDP as a measure of economies in the twenty first century. Their very readable report concluded it was still a good measure of the goods produced in a country but there also needed to be measures of income, consumption and people’s well-being. Because of the variability of equality within a country, they counselled looking at median rather average per capita numbers.
They went on to comment that market prices are distorted by the fact that there is no charge imposed on carbon emissions and no account is made of these costs in the national accounts. A tendency to measure gradual change does not prepare one for abrupt alterations caused by outlier events. Measuring quality change is a major challenge. Governments play an important role in modern economies yet productivity changes in the provision of government services are ignored.
The household perspective should be emphasised taking account of payments between sectors, such as taxes to government, social benefits and interest paid, and should also reflect payment in kind. Consider income and consumption jointly with wealth; a household that spends its wealth on consumption goods increases its current well-being but at the expense of its future well-being. Many services that households produce for themselves are not recognised in official income and production measures. Further, households are increasingly moving from non-market to market provision of services. Finally, they pointed out that no value is placed on leisure.
Just as I was mulling on all of this I came across the then state of the art laptop I owned when I started MBendi twenty one years ago. Today’s equivalent is 20% of the price in 1995 currency and, assuming Moore’s Law, 500 times more powerful. The value of solar panels and wind turbines produced around the world might be little changed from year to year, yet the cost per kilowatt-hour has dropped dramatically. Robots in factories working 24 hours a day have cut production costs. How are all these productivity gains factored into GDP?
Then take the Internet. Today you can read top newspapers from around the world free of charge. The incremental cost of producing and delivering an additional electronic book or movie is infinitesimal. When I needed information back in 1994, I would get in my car, drive to the library and look it up; today I just type a couple of keywords into a search engine and up pops the information I need. Everywhere people are adding more information to the web and not expecting a cent of recompense.
In their stimulating book, The Second Machine Age, Brynjolfsson and McAfee devote several chapters to exploring this further. Digital products and services might be free but they do have value. Digitisation reduces GDP because prices are lower or free. They recommended measuring the time spent using free services. Online feedback on everything from restaurants to physical products improves quality. They point out that GDP doesn’t measure intangible assets such as intellectual property, organisational capital, user generated content, human capital or learning. Although income may drop, households may move from using paid to free online services with no change in standards of living.
By the end of mulling on all of this my head was buzzing – and still is. My only conclusion is that traditional GDP is a very poor measure of the state and progress of the world we share. What to use instead?
Useful Links
The management summary of the Report by the Commission on theMeasurement of Economic Performance and Social Progress is brief and thought provoking.
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