Friday, November 13, 2015

Beyond the statistical fog

GDP may have worked despite its fallibility till now, but it is unlikely to serve henceforth as the economy gets driven more by innovation, services, and intangible goods.

It is a ‘made up entity’ that has become the rallying point for governments to reflect their economic prowess. Usually expressed in single digit, it needs sustained nurturing, lest governments can be toppled and fresh elections enforced. Since it was formally coined in the 1940s, GDP has continued to engage best of economic brains to develop a standard measure of a country’s economy. Yet, this familiar piece of jargon means little to most people because the health of the country’s economy often has little bearing on peoples’ lives. 

No wonder, it can decide elections but can't make people happy and it can make news but can't erase income inequality. GDP is a powerful teaser that has thus far remained artificial, abstract and complex. Providing a much-needed historical perspective on this elusive bit of static, Harvard Economist Diane Coyle argues that GDP has remained a piece of ‘static’ in the hands of the ‘state’, and must not be confused with social welfare. At best, it creates a self deceptive image of contributing to overall welfare. In reality, much of the welfare activities, for lack of mathematical expression, do not get counted in it. Ms. Coyle has been grateful to Cabbage, her dog, who may not have contributed to GDP but greatly to her welfare! 

Since the making of physical commodities count toward national income, green forests holds zero value whereas chopped trees add to the GDP. Environmentalists therefore believe that GDP leads to an overemphasis on growth at the expense of the planet, obscuring the wrongs of the capitalist market economy. Such assertion is not without reason, as spending on pollution-abatement equipment adds to GDP but the negative effect of pollution doesn’t pull GDP down. GDP may have worked despite its fallibility till now, but it is unlikely to serve its purpose henceforth as the economy gets driven more by innovation, services, and intangible goods.

While the author remains ‘affectionate’ towards GDP, as the title suggests, she nonetheless argues that it is flawed and search for its alternative has been ongoing. However, alternatives ranging from the Measure of Economic Welfare (MEW) to the Better Life Index (BLI) haven’t evoked enough confidence in replacing the ubiquitous piece of static. Welfare has been the leitmotif of the proposed change, but counting intangibles has remained a challenge. Even more challenging is to count value of zero-priced goods like online music, search engines, crowd sourcing, and so on. These do contribute to productivity, and even loss of jobs, in many ways without being captured in GDP statistics.  

Wading through the murky world of number crunching, Coyle presents a fascinating biography of GDP which, despite its inherent fallacies, continues to remain the greatest innovation of the 20th century. Yet, as the Greek tragedy unfolds, the so-called irrational exuberance has led to self-delusions and inadequacies of regulatory bodies, leading to financial crises. Since market-led global capitalism is sweeping the whole world, GDP need to be sanitized from overt influence of market manipulation. The financial crisis has pressed the urgency button to rethink economic valuation of products’ quality, zero-priced goods and services’ efficiency. 

As the economy is driven more by innovation and services, accounting activities operating outside the tax net and production matrix has become imperative. With boundary between growth and progress, and between leisure and work going through significant transformation, GDP will lose relevance if it doesn’t translate into increased happiness. For GDP to remain relevant it must resolve the well-known paradox of a widower who marries his house maid. His marriage leads to reducing GDP as he longer pays her the wages, but should the happiness both gain be left unaccounted for? In this engaging and witty book, Coyle leaves the reader with the challenging optimism of life beyond the prevailing statistical fog. 

GDP: A Brief but Affectionate History
by Diane Coyle
Princeton University Press, UK
Extent: 160, Price: US$19.95  

This review was published in The Hindustan Times dated Nov 21, 2015.           

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