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The Problem With Replacing GDP – Whose Prejudices Do We Encode?

Lord knows there are enough problems with GDP. We’re not counting what we really want to know, the consumer surplus. We’re getting the effects of the digital economy wrong. We entirely ignore domestic production which is a bit of a pity. And we’ve the awful fact that GDP goes up if we double the pay of the bureaucrats. So, yes, we’d rather like to think up some better measure of how we’re doing.

But that runs into a terrible problem. Whose set of prejudices about the way the world should be do we then encode into our new measure? Take this:

If we want to understand whether the economy is really delivering for its citizens, we need some new indicators. The Institute for Public Policy Research (IPPR), where I am the chief economist, is proposing a dashboard of five outcome indicators, to be updated annually, which would directly measure our progress against the outcomes the public wants the economy to deliver – broadly shared prosperity, justice and sustainability. Our chosen indicators are the distribution of the gains from growth; poverty rates among children and adults; levels of wellbeing among individuals at different income levels; the gap between the median income of the poorest region of the UK and the richest; and the gap between projected carbon emissions and the cost-effective path to decarbonisation.

Sure, we can see some liking those targets, those measures. But they are encoding a very specific view of the world.

The distribution of the gains from growth. Think on it. Say we’ve two economic outcomes. Everyone becomes 1% better off, all in proportion. The poor become 2% better off, the rich 3%. That second outcome leaves all better off than the first. But our measure of the distribution of the gains from growth leads us into believing that the second is the worse outcome. Which is nonsense of course unless you’ve got some very strong indeed opinions about inequality.

No, Wilkinson and Pickett are wrong.

Poverty rates – but there that’s just another measure of inequality, Because that will be relative poverty rates. Less than 60% of median income after housing costs adjusted for household size is the usual measure there. Again, we’ll be saying that even a very much richer society which also has rising inequality will be a worse one. That’s a very strong leaning towards inequality rather than economic wealth being our measure, isn’t it?

Wellbeing? Pretty vapid sorta thing to measure really. What, we’re going to run the economy based upon happiness surveys?

Regional income gaps? That’s just encoding inequality again, isn’t it? And carbon? When half the country doesn’t agree that there even is a problem? Also, who gets to define cost-effective? I’d come up with a very different answer to the IPPR I’m sure. For I would be using the Stern Review and they would be using some cod measure they’ve cooked up.

But note what the really big problem is here. Sure, we’d like to do better than GDP in measuring how fantabulous we’re making the world. But GDP does have an advantage, in that it’s objective – within its limitations – not subjective. And any replacement is going to be like the one above. Three of their five measures are really about inequality and how’s that for encoding your own prejudices into the measurement of the world? And our problem is that absolutely any move beyond GDP is going to end up being the same thing.

As with the redefinition of poverty in fact, when it moved from being an absolute measure of destitution to a relative one of inequality. That encoded equality into our measure of the good life. All and any new measures are going to do the same thing, encode into our measurement system the prejudices of whoever complies the measurement. Which, given modern academia, isn’t going to mean prejudices about freedom, liberty and the merits of good ale, is it?

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6 years ago

And those proposals aren’t even measuring anything GDP-ish at all, they’re measuring societal policy choices. It’s like measuring the colour of umberellas instead of the amount of rainfall.

Hallowed Be
Hallowed Be
6 years ago

Catherine seems a bit contradictory on what she’s looking to meausure. If we accept her happiness criteria then surely what you’d want to measure is how each molecule of carbon dioxide emitted contributes to net human happiness?

bloke in spain
bloke in spain
6 years ago

” the outcomes the public wants the economy to deliver – broadly shared prosperity, justice and sustainability. Revealed preferences would seem to indicate the public don’t give a toss about any of those. They’d like to have more wealth than the other bloke, be treated better than the other bloke & if the resources pie is indeed limited, someone else reduces consumption so they don’t have to. We’d all have a little more faith in GDP if the amount the State spends of our money wasn’t turning up as pound for pound productivity. It’s like a company putting what it… Read more »

6 years ago

Much as I’d prefer Cowperthwaite’s measure, the one that will get adopted is the one that creates most jobs for civil servants and makes politicians seem most important.

6 years ago

“Prosperity” seems to mean they are going to measure Income Inequality. “Justice,” I do not know what it means relative to production and distribution of goods. And “Sustainability” is a leftie worship word, as no one knows what activities are sustainable, given future innovations. The resulting index will be exactly as useful as the sporadic news releases giving my state a letter-grade or a ranking relative to other US states: It will merely be number-driven part of a sales pitch for renewed leftism.

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