This blog has now closed. Please visit my new blog, Stepreo.

Archive: externalities

The value of GDP

10 September 2009 13:32

Categories: Books, Current affairs, Economics, Politics, Work

There was an interesting blog post over at the Telegraph by Geoffrey Lean over the weekend. He asked if GDP is “past its sell by date”, noting that “the EU is due to publish a paper which will conclude that GDP is too limited a measurement.”

I agree with the view that GDP doesn’t tell you the whole picture. I have written before about the obsession that the media and others have with what this or that will “cost the economy”. These stories normally come along with some kind of figure of the effect some trend or other will have on GDP.

GDP is quite a useful measurement in a lot of ways. As a barometer of how things are ticking along, it isn’t bad. When GDP rises steadily things are ticking along quite nicely. When it decreases people generally feel it. In truth, no-one needed to wait for the GDP figures to come round to work out that things were bad. But GDP does give us a vaguely useful way to quantify how things are going.

However, it omits a lot of useful information that might help us to measure our quality of life. Perhaps most strikingly of all, it takes very little account of leisure — surely the best part of life.

You can be fairly certain that the economy is producing more between 8am and 8pm than it is between 8pm and 8am. The economy goes into recession every night! But in which part of the day is your quality of life higher? The part where you’re slaving away in a stuffy office, or the part where you’re relaxing with a cold beer?

Enjoying yourself and relaxing, whether it’s having your nightly kip or spending an afternoon in the park, often means removing yourself from economic activity. This in turn leads to a reduction in GDP. That is “the cost to the economy”. This is despite the fact that sleeping and having a stroll in the park are both very valuable activities.

I am currently reading The Armchair Economist by Steven E. Landsburg (I’m only 15 years late to the party). This book points out that GDP is also unable to account for the value of housework. If you pay someone to do your dishes, the value is counted in GDP figures. If you do them yourself, GDP is unaffected. But in both cases you have a rack of clean dishes of equal value.

Geoffrey Lean also points out that GDP fails to take the environment into consideration. An economist would say you need to internalise the externalities. But the question is how? (Pigovian taxes are a nice idea.) Some extreme environmentalists go further and advocate zero growth, an idea rightly lambasted by Adopted Domain.

I guess it all depends on what you want an indicator to tell you. GDP has become the one everyone talks about as a proxy for our standard of living, but clearly has deficiencies in that it leaves out important elements that contribute to our standard of living.

Unemployment figures are a possible alternative. On one level, it can be said that unemployment is the main thing that worries people. Despite the often-made point that unemployment is a lagging indicator, for many it is the bottom line.

But this has many of the same problems as using GDP. We look forward to our weekends, our holidays, and ultimately our retirement. Not working is actually a good thing. Few people want to work. They only want the money they earn from working. That brings us right back to GDP.

In recent years there has been a bit of hype about happiness economics (which I have previously written about). This field likes to measure Gross National Happiness. But this too is fraught with difficulties, not least the fact that it relies on shaky survey data based on people’s varying interpretations of what “happiness” is.

Perhaps you could stop paying attention to aggregate statistics in general. On one level, what really concerns me is my own personal well-being. How much I earn, how much disposable income I have, whether I have a job and how happy I am all concern me greatly. I am less concerned about other people’s well-being.

But that’s not quite right either. Even though I, like most people, am primarily worried about myself, I do care about the general well-being of other people.

It looks like we have to make do with GDP as the main measure to be concerned with. However, it does seem that it is creaking a bit with old age. No doubt there will be plenty of criticisms of GDP to come in the future, particularly from environmentalists.

Beware of the alternatives people advocate though. They will probably all be biased one way or another. Any proposed new measurements will probably be put forward by some interest group trying to manipulate the terms of the debate in its favour. Were that scenario to arise, I would rate myself 3 out of 10 happy.

Comments closed

The problem with liberalism

13 December 2007 00:57

Categories: Blogging, Current affairs, Economics, Politics, Technology

Update: This post has been published over at Liberal Conspiracy here. To keep the discussion in one place, I will close the comments on this post. If you have any comments please post them here.

What do you think the word ‘liberal’ means?

Perhaps if you are American, you are thinking of what Europeans call social democrats. Maybe some Europeans think of it as some kind of wishy-washy centrism that can’t decide between left and right. In certain countries it may have something to do with a pro-business approach. If you’re Australian it probably means the same as conservative.

A pre condition of liberalism might be the existence of free markets. Or maybe liberalism is to do with equality of some kind or another. Animal rights? Environmentalism? [insert trendy cause here]? Smith, Mill or Kant? Etc, etc. It seems to me that the word ‘liberal’ is about as useful as words like ‘that’ and ‘thingy’.

As such, it wasn’t really a surprise that the name of Sunny Hundal’s new ‘superblog’, Liberal Conspiracy, provoked some debate about the nature of liberalism when it was launched a month or so back. “My liberalism is more liberal than yours” and that type of thing.

I would agree that, looking at the list of contributors, ‘Socialist Conspiracy’ might have been a more apt title. For instance, Jonathan Calder noted the lack of Liberal Democrats involved.

It looks like a conspiracy against Liberals.

In fairness, apart from the title (which I actually find quite amusing — it makes a good point), the site is describing itself as liberal-left rather than just liberal. Fair enough I guess, although I always thought that people describing themselves as ‘liberal-left’ were really just socialists trying to duck jibes about the Judean People’s Front.

Even the design of the website looks rather more socialist than liberal. The dark maroon colour scheme, Impact font and spatter marks make it look like some kind of SWP-affiliated website.

Anyway, liberalism. The thing that vexes me about this is the fact that — you guessed it — I describe myself as a liberal. This is mostly because I don’t know of a better term. (If you don’t know about my political views, take a look at my position on the political compass.)

When I describe myself as a liberal that means I am talking about limited government. It can’t be no government. Liberalism can’t be the same as anarchism. The question becomes “how big can a government acceptably be?” And even the most hardcore libertarians (as in the free market kind, lest there be any confusion) see the need for a government in order to protect property rights and prevent force and fraud.

A liberal (excuse the pun) interpretation of that could still leave quite a wide scope for government intervention. It might not be too controversial, for instance, for a government to step in when an activity causes a clear and unambiguous negative externality.

The classic example of a negative externality is pollution. A factory may dump pollution into a river that runs into land owned by another person. The government is duty bound to protect this property, so it would have to step in. Incidentally, I don’t think this approach is too far removed from Mill’s “harm principle”.

Liberalism “doctorvee style” goes a bit further than this. This is why you would tend not to find me using the word ‘libertarian’ to describe my political views. In my view, the government should also step in to prevent certain kinds of market failure. For instance, public goods will be under-supplied by the market.

I find it difficult to imagine how, for instance, street lights would be paid for in a strictly free market system. I can be a (critical) supporter of the BBC and still describe myself as a liberal without flinching because the BBC is a non-rival, non-excludable public good.

But for me, the bottom line is to be suspicious of any extension of government power, and to resist it unless there is overwhelming evidence of the need for it. If you take civil liberties and economic efficiency seriously, there can be no other way. History tells us to treat governments with contempt. When did you ever hear of a riot happening because the government was too small?

Given that most left-wing solutions to any problem usually involve a liberal (sorry) dose of extra government intervention, it shouldn’t be a surprise that Liberal Conspiracy found itself at the receiving end of some jibes about the term ‘liberal-left’ being an oxymoron. I think this is a tad unfair. It is possible to be left-wing / collectivist and anti-government at the same time (all I can say is, good luck solving the free rider problem).

However, it is not difficult to find instances of the Liberal Conspiracy being distinctly illiberal. One of the first posts on the blog was defending the government’s idea of forcibly keeping children in education until the age of 18. Not only that, but the writer, Mike Ion, said:

I struggle to understand why anyone on the Left of British politics could oppose Gordon Brown’s moves

It’s quite funny how I decided that my version of liberalism should keep the ‘liberal’ name. Has anybody got any better ideas?

For what it’s worth, I think the ‘liberal-left’ should just drop the pretence and call themselves socialists.

As for the (free market) libertarians? David Farrer grappled with this a few weeks back, and lamented the fact that both the ‘liberal’ and ‘libertarian’ tags have been stolen by leftists. I like his suggestion of using the unstealable “Real Fascist Bastard” tag.

But perhaps they could take inspiration from one of Hayek’s favoured terms. How about calling themselves catallactists? It would be a bit difficult for a socialist to use that one with a straight face!

1 comment