Philobiblon

A short and worthwhile one-sitting read – she can’t help in the end being an economist of her time and place, but she’s at least a critical one…

p. 13-14 Simon Kuznets in the US during the Depression was trying to calculate national income – his figures in January 1934 showed it had halved 1929 to 1932. But he saw his task as trying to measure welfare rather than just output. Quoting him “It would be of great value to have national income estimates that would remove from the total elements which, from the standpoint of a more enlightened social philosophy than that of an acquisitive society represent dis-service rather than service. Such estimates would subtract from the present national income totals all expenses on armaments, most of the outlays on advertising, a great many of the expenses involved in financial and speculative activities, and what is perhaps more important, the outlays that have been made necessary in order to overcome difficulties that are, properly speaking, costs implicit in our economic civilization. All the gigantic outlays in our urban civilisation, subways, expensive housing etc,… do not really represent net services to the individual comprising the nation but are, from their viewpoint, an evil necessary in order to be able to make a living.”

But of course there was a war coming …

P45
“It is startling to look back over the decades and realise how recent consumerism is. … it wasn’t until 1950 that 75% of US households had a washing machine, and the same benchmark wasn’t reached in Europe until 1970. Cars did not reach three-quarters of the US population until the 1970s but the European countries didn’t catch up until the late 1990s.”

p51
Many of the critics of PPP [purchasing power parity] conversions also argue there is an ideological bias, although usually entirely unconscious, in the process. taking the PPP-based GDP comparisons on this basis at face value makes the trends in world poverty levels and income distribution look more encouraging than they really are. And if poverty has been declining rapidly and inequality between countries not getting wider but rather possibly diminishing, as the comparisons suggest, then there is no reason to worry about the process of globalization of international trade and investment that characterised the 1990s and 2000s. This is obviously a pretty fundamental question … To some extent the answer is obvious from the way everyday life in Chinese cities has visibly changed: there has certainly been a big increase in living standards for a large proportion of China’s urban population, and that’s enough to affect the global picture. Beyond that, though, the answer does depend on how the GDP of different countries is converted on the same basis.”

p. 62
“By 1968 there had been a quarter century of absolutely extraordinary growth. … Western living standards had approximately trebled since 1950… There was a job for everyone who wanted one… A man could act as a breadwinner for the whole family, reasonably secure in his job and well paid with a secure pension.’

p. 78
“Until relatively recently, there was very little evidence on which economists could base their views about how economics grow. The number of countries for which GDP data were available increased slowly, and only reach 60 as late as 1985. For many of these, the data were of poor quality. … Even those who had been gathering some kind of national income statistics for a long period did not have data series that were consistent over time … the empirical work … was augmented by historical studies using data on GDP for a range of countries going back to the year 1000. Angus Maddison … extraordinary International Comparison Project undertook the immense task of finding from a wide range of historical sources all the raw statistics needed to construct GDP, on its modern definition, backwards through history .. now an essential resource…(but) economists now use Maddison’s statistics blithely, without the due caution required… involved a lot of assumptions and clever guesswork.

p. 82 “Wal-Mart is the leading example of how a business can transform its productivity using their technologies. McKinsey estimated that Wal-Mart on its own accounted for a substantial proportion of the pickup of American productivity in the late 1990s. To achieve this, the company developed a model of sourcing goods from China and other low-cost countries, through an extremely sophisticated logistics operation, and retailing the goods in massive out-of-town stores.” [To which of course I’d add, massive external costs not accounted for, from the health care of their workers, met by the government, to the emissions from transport and pollution from production of those goods…. and more…]

p. 85 public sector productivity “If there is no private-sector comparator, or the market is not truly competitive, the only alternative is to measure the values of these services in terms of the wages paid to the public-sector employees providing them. … particular services by constructions can never show any improvement in the amount of output per government employee. Many governments worry about poor productivity performance in public services, but in some cases they may be overlooking this statistical factor… AND the main input in a service business is time spent by the employees on their job. What is the output of a teacher, though? Number of children processed through the school? The average grade they attain on leaving? … Or even the quality of life the children subsequently enjoy, having been equipped at school for meaningful work and a fulfilling family life, along with an enjoyment of music or sport?… is the hairdresser’s productivity just the number of haircuts, or the premium he can charge because of the quality of the cuts or ambience of his salon?… The concept doesn’t really fit. Yet services account for more than two-thirds of GDP of OECD economies.”

p. 91 “GDP is not, and was never intended to be, a measure of welfare. I measures production… If the aim instead is to develop a measure of national economic welfare, we shouldn’t be starting with GDP.”

p. 95 “It is widely known now, as it was not before 2008, that the financial markets were characterized not just by irrational exuberance but also by widespread fraud, deception (including self-deception), and market manipulation. Not to mention in the financial and corporate worlds alike a loss of ethical moorings, resulting in distasteful manifestations of greed. Even now, most members of the financial and business elite do not seem to have appreciated the extent to which they entered a separate moral universe; many seem to feel aggrieved, perceiving themselves as unfairly scapegoat when it comes to assigning blame for the financial and economic crisis. This too, is part of the arrogance, this belief that there were a few bad apples but nothing systemic had gone wrong in the way the financial industry and big business were being run.”

p. 98 “the financial crisis has raised some profound questions about what finance is for and specifically how it is counted in GDP. Lifting the veil on its activities, ranging from the foolhardy to the fraudulent, has made it hard to understand how the financial sector has made a positive contribution to the economy at all. .. The estimated cost of the crisis, including economic output forgone because of the resulting recession, is between one and five times the whole world’s annual GDP…. Do is finance being properly accounted for in the economic statistics? No. In the UK national accounts, the financial sector appears to have grown twice as fast as the economy as a whole since 1850. Most of its growth has been concentrated in two periods, the episodes of globalisation between the late 19th century and World War I and between the 1970s and 2007. Real GDP doubled between 1980 and 2008, but the measured real value added of the financial sector trebled. Similar trends are evident in the United States … This was, in Andrew Haldane’s phrase, more mirage than miracle…. The reason is the way financial output is measured. Most services charge customers a fee, and the fee revenues give statisticians the handle they need to measure output. Relatively few financial services involve direct fees or commissions … A large proportion of their profits comes instead from the gap between the interest rates at which they can borrow (or pay depositors) and lend, or from trading activity. As the OECD GDP statistic manual puts it: “Measurement using the general formula [for constructing GDP] would result in their value added being very small, if not negative …” Unable to imagine when this was written that banking could be subtracting value from the economy, statisticians sought to find a way of measuring these earnings from financial intermediation … the 1993 update of the UN system of National Accounts introduced the concept of “financial intermediation services indirectly measured” or FISM. The current measure compared banks’ borrowing and lending rates on their loans and deposit portfolios to a risk-free ‘reference rate’ such as a the central banks policy rate, and multiplies the difference by the stock of outstanding balances in each case. The practical difficulties are enormous … but in principle it makes sense as a way of measuring the service provided by banks in taking on risk. One consequence, however, is that increased risk-taking is recorded as increased real growth in financial services…. Taking risks is not a valuable service to the rest of the economy, although managing risk is. Haldane goes on to note that banks’ reported profits have been flattered in the same way by ignoring the statistical effect of the banks simply taking greater risks by leveraging their equity. The profits are ‘illusory’, although of course the bonuses were not. The statistical mirage affects all countries’ GDP.” One US study says official methods overestimates contribution by 21%, Eurozone would cut output by 25-40%. In UK suggests financial sector 6-7.5% of economy in 2008, not the claimed 9%.

p. 102 “During the financial crisis, the industry’s lobbying has had a substantial impact on political decisions about regulatory reform, not just because investment banks make donations to political parties, but also because politicians genuinely believe the industry to be fundamentally important to jobs and economic growth. ‘Our economy needs the industry’ wrote Alastair Darling, the UK chancellor of the exchequer, in his memoir of the crisis, despite having experienced the height of the crisis when the industry had, on the contrary, nearly torpedoed the economy.”

p. 105 Richard Stone, one of the founding fathers of national accounts, was perfectly up=front about the arbitrariness of what was included and how: “This treatment, whereby commercial products are valued at market price, government services are valued at cost and unpaid household activities are simply ignored, is not a matter of principle but of practical convenience. It can be defended, therefore, on practical grounds.”

p. 109 “What economists call ‘own-production’ or ‘household production’ This means all the work done within a family for its own use … All of this can be bought, outsourced outside the household, but most of it isn’t … Even in good times, the scale of this informal, unpaid work, is significant. It accounts for more than half of all the time people spend working. If this is valued at money wages paid for similar work, it is equivalent to 1.85 times the size of the conventional national product figure for the United Kingdom in 2001. Although the figure will vary among countries, the importance of this activity, conventionally but arbitrarily excluded from official GDP statistics, is universal.”

p. 118
“One alternative approach to measuring the economy’s progress has had some influence, and that is the idea of a ‘dashboard’ of indicators. France’s former president Nicholas Sarkozy asked … Joseph Stiglitz and Amartya Sen to join the French economist Jean-Paul Fitoussi in a thorough assessment of economic statics. … They concluded that .. rather than trying to combine different kinds of figures together in one indicator, would be to collect and public statistics on a range of indicators we can be confident contribute to social welfare… The most sophisticated at present is the OECD’s Better Life Index, which is a visualisation fo countries’ relative rankings depending on 11 components, ranging from income to work-life balance, housing to the environment… This is an important step in enabling a public debate about economic policy that is not wholly geared towards short-term growth … unfortunately, though, there is no evidence yet of dashboards displacing the prime status of GDP growth in political debate.”

p. 131. “Official statisticians need o start thinking about how to measure better the production and consumption of ‘information’ or digital products that clearly deliver value to consumers … the new ‘free’ business models are not being well measured and neither are the new types of activity costing no money but of great value to consumers. There have always been free but valuable activities, from public libraries or walks in the countryside; the difference now is that non-monetary activities are extensively intertwined with business, making the concept o the production boundary within which GDP is defined inherently blurred.”

p. 132 “the term sustainability refers to the extent to which GDP growth from yer to year depletes natural resources or harms the environment in other ways. The most important amendment needed to the existing national account statistics is to take account of the balance between investment in new assets and the depletion or depreciation of existing assets… In 2012, the UN Statistical Commission adopted a new international statistical standard with equal status to the System of National Accounts, the System of Environmental Economic Accounting. Some countries have been publishing what are known as ‘satellite accounts’ on the environment for a number of years, although it is hard to identify any direct influence they have had on economic policy debates. As long as political contests focus on economic growth, as I think they always will, a set of statistics labeled ‘satellite’ is unlikely to be influential.” [Now that’s what you call a counsel of despair…]

But I won’t finish there – have to love an author who finishes with an acknowledgement of her dog, named Cabbage, “who contributes not at all to GDP but greatly to welfare” (with a picture…!)