Discussion GDP, banner figures and macro-solutions

by Michael Wise _______25th November 2018

Anyone who looks at a website like this will probably have an awareness of the speech that Robert Kennedy gave in 1968 about the limitations of Gross National Product as the measure of a nation’s wealth.

“For too long we seem to have surrendered personal excellence and community value in the mere accumulation of material things,” he told students at the University of Kansas on March 18th 1968, before pointing out that GNP counts “air pollution and cigarette advertising” but not “the health of our children, the quality of their education or the joy of their play”.

“It does not include the beauty of our poetry,” he continued “or the strength of our marriages, the intelligence of our public debates or the integrity of our public officials”. Nor “wit, courage, wisdom, learning, compassion, devotion to country”.

It was around the turn of the 1990s that the United States joined the rest of the world in adopting Gross Domestic Product (GDP) – the total value of goods and services produced in a year, as opposed to GNP, which measures the income of citizens – as the basic measure of wealth and, as a consequence, societal satisfaction and government efficacy.

But, of course, the fundamental point remains unchallenged. As RFK summed up: “It measures everything in short, except that which makes life worthwhile.” As I put this blog together it’s Black Friday, which might re-enforce the point.

But that’s more of a philosophical question, rather than a practical one. An article about GDP was published on the Unherd website this week in which the writer, Peter Franklin, pointed out that “economics is a slippery business”. How best to measure production, given GDP’s bellwether, banner status? By the sounds of it, it’s a challenge that can have consequences.

Franklin cited an article for the Global Poverty and Inequality Dynamics Research Network which said that the methodology has changed in recent decades, meaning that western economies look richer (compared to others) than they really are.

“Choice of statistical method doesn’t change how rich or poor people actually are,” he points out “but the authors observe that the bias to the West does impact on our perception of growth in the world and also on the weight of western influence in global institutions like the World Bank and the IMF”.

Examples of questionable inclusion in the GDP figure – and now, therefore, classed as productive activities – are financial intermediation services, R&D activities and owner-occupied dwellings.

Franklin zeroes in on the latter – which in effect constitute an imaginary rent and are included in the GDP figure alongside actual rents paid to landlords – and he argues that “taking rent out of GDP would remove some (deeply perverse incentives) for policy-makers”.

He adds: “Ever wondered why government does such a bad job of solving the housing crisis? Well, if it did a better job, and rental values came down, GDP would take a corresponding hit.

“The real productive economy would benefit hugely from lower, more stable rents and land values – but that’s not the sort of thing factored into the models of bean-counting finance ministries.”

Plenty would agree – not, perhaps, with the theory that removing rents from GDP would remove an incentive not to solve the housing crisis, but with the more general point that GDP, and other macroeconomic measures, have too firm a grip on policy makers and the models they use.

For example, here is what Dr Joseph Lampel, one of the authors of a report ‘The Ownership Dividend’, which examines employee-owned businesses and finds links to improved productivity and management practices, had to say on the subject as part of our Voices of Progress inquiry:

“Economists are in charge of policy in this country, in most countries. Economists tend to like big machinery arguments.

“Employee-ownership is a micro-argument and is really to do with the nuance of management at firm level: the creation of attitudes, cultures, training, mindset. For economists, this doesn’t factor into their theories.

“Economists like things like interest rates, productivity, incentives for investment, tax regimes; they look at employee-ownership and they say, ‘Well..okay’ and when they give advice to politicians, it’s based on an attempt to try to stimulate productivity at the macro level.”

So would a weakening of the influence economists have over government policy makers represent progress?

“Absolutely. I have strong feelings about it. I have nothing against economists in general, but it’s completely lop-sided.

“I go to lectures by some very well-known [people] and they always give the same arguments: change the interest rate, change the investment, give investment credits. Maybe invest more in training, as far as they’re willing to go. And giving vast subsidies for this or that – for technology – and that will do the job.

“And it doesn’t. Another 10 years pass and it does not do the job. So there’s something endemic going on.”

Dr Lampel adds: “Why do they never have people with expertise on management, on organisation, the issues of knowledge and skills at the firm level, not the macro level?

“Launching a huge apprenticeship programme, that’s good. But it’s like you have one arm and the other is limping; it’s not being employed.”

To look at the news right now, and to hear people talk, it’s clear that politics is in a serious state of dysfunction. And to cap it all, we now hear that the Prime Minister is attempting to deliver an EU withdrawal based on a (claimed) pretext; a fundamental misreading of voters’ concerns and intentions.

It’s a state of affairs that smacks of a leadership that either does not listen to voters or does not know how to. One that views the world at a remove, that relies too much on favoured advice and eschews other opinions.

Mrs May might be an egregious case. But it does seem that the politicians who shape our economy are too beholden to macroeconomic banners such as GDP rather than more micro, practical solutions that might stand a better chance of easing, or fixing, a particular problem.

Surely there is a necessity – an urgency even – to look beyond tried and trusted methods and advice, which might offer more impressive banner figures than those from four months earlier, but which fail to address issues that cannot be seen or acknowledged because policymakers are too removed from them and too reliant on a particular dogma? A number on a spreadsheet might be easy and convenient, but it will never tell anything like the full story.

The worry is that a reliance on what appears simple and convenient will only increase. In this world of social media, factoids, soundbites, unlimited distractions and supposedly limited attention spans, perhaps readily available figures such as GDP will be cited ever more readily by those who seek to justify themselves.

If that proves the case then it will also prove that they have neither the wit nor the inclination to consider fresh, alternative ideas and models. A noticeable trend in recent years has been the slowness with which governments have reacted to the growth of information technology, which offers exponential power and also the potential for great upheaval.

The irony here is that in a world full of nuance, complexity, and rapacious technological endeavour, those that hold sway are, by the very nature of their positions, time-limited, removed from the throng and lacking understanding. Yet it is they who make decisions that have the biggest impact.

That is why they should listen to a wider selection of people, proffering different ideas. Add the magic ingredient – time – and we might stand a better chance of addressing society’s ills.

Much like a company putting purpose before profit, a nation that looks at GDP a whole lot less will be better placed to boost it.