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Work & Prosperity (Deep End)

The growth of GDP may be the important measure of economic success, but it’s also one of the least understood. John Kay argues that the very notion is surrounded by misconceptions:

“One is the idea that economic growth puts increasing strain on resources by demanding more stuff.”

This overlooks how most growth actually happens – which is by achieving more with less. By way of an example, Kay cites the technological evolution of lighting:

“Two decades ago, the Yale economist Bill Nordhaus described how humans have always sought to illuminate darkness but have done so in very different ways. People once drew cave paintings by the light of a wood fire. Jane Austen wrote novels by candlelight and William Gladstone walked streets lit by gas. Thomas Edison switched on incandescent electric bulbs. Today we use low-energy fittings that emit almost no heat.”

Taking the longview, it is impossible to imagine economic growth without technological progress. The one clearly flows from the other.  And yet there is a real question as to whether conventional measures of GDP capture the full value of the improvements thus made to our lives:

“When we measure price and output we look not at the price and output of light but the price and output of items we use to create light. These are very different things. While the prices of wood, candle wax, gas and electricity have tended to increase, the price of light has fallen. Our statistics not only fail to reflect the trend, they mistake the direction.”

To take another example, the internet may be full of rubbish, but it also provides widespread access to an unprecedented range of genuinely valuable information and communication services. Because the technologies involved massively reduce the resources required to provide these services – often to the extent that they can be provided without charge – GDP measurements do not reflect their full value.

Even if we leave aside the special case of information technology, we can look at a broad range of consumer products and conclude that they are, for the most part, more reliable and efficient than the models available to previous generations – thus providing additional utility at no extra cost.

For this reason, some economists believe that we’re much richer than conventional economic indicators might lead us to believe:

“Prof Nordhaus went on to suggest that measures of real wages, real incomes and, of course, prices might therefore be in error by a large margin. Yet despite a brief flicker of interest when some politicians hoped that this kind of analysis might be used to curb increases in state pensions, the methodology behind official economic statistics has barely changed.”

Of course, it’s much easier to calculate GDP from the prices we pay for goods and services than trying to quantify the benefits these products actually deliver. Consider two houses in a street: one is drafty, the other well-insulated. An identical quantity of heating fuel purchased at the same price by each household will produce more benefit in the well-insulated home than in its drafty neighbour. While this can be measured objectively in terms of room temperature, it isn’t practical to do so on anything but the most local scale.

The other big problem with measuring benefit instead of cost is that for different products – say heating fuel and transport fuel – the units in which their respective benefits would be measured aren’t comparable. They can’t be combined into one overall indicator of wealth, which is why we’re stuck with GDP.

Still, there’s no reason not to count our blessings – especially as the Chancellor can’t do it for us.

6 comments for: Hooray! We’re all much richer than we think we are

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