We have a suggestion for the Liz Truss Growth Commission
Of course, at times like this everyone brings out their own bugbears for a good trot around the paddock.
Liz Truss will launch a new international task force to revive flagging economic growth in the West.
The former prime minister has convened the non-partisan group, which is being called The Growth Commission, to investigate the causes of sluggish growth.
The commission, which is to be chaired by Douglas McWilliams, the leading economist, will also analyse the impact different policy decisions have on GDP per capita.
Our particular bee in the bonnet is counting. It’s vital to recall that like so many economic numbers GDP is a proxy. And reifying proxies doesn’t work - because it loses sight of the fact that it is a proxy.
Yes, we all know the standard critiques of GDP, it doesn’t count household work, includes cleaning up pollution as growth and so on. But the real biggie is that it doesn’t include the consumer surplus. A useful definition of the consumer surplus (one to horrify actual economists but one that works all the same) is the amount we are richer that doesn’t get included in GDP.
If the relationship is stable - say, the consumer surplus is equal to 100% of GDP, always - then there’s no problem. GDP still works as a proxy. If that relationship changes, which we would insist it is doing, then GDP becomes an ever worse measure of societal income and wealth.
To construct a ludicrous example. Someone invents the black box which provides power at zero cost. OK, we’re all vastly richer because power is now free (to continue with the example being ludicrous, no distribution costs etc etc - power finally too cheap to meter). But at the same time GDP has fallen - fallen by the amount we used to pay for power but now don’t. The consumer surplus has soared - hey, free power! - and GDP has fallen.
Don’t reify the proxy.
This is, of course, also Hal Varian’s point, “GDP doesn’t deal well with free”.
Now to give a non-ludicrous example. WhatsApp (at least did at one point in time) carries no advertising, makes no charge. The output associated with WhatsApp is zero in GDP. The costs, the couple of hundred engineers at Facebook that work on it, they’re still there, counted properly. So, labour costs but no output, WhatsApp appears in the GDP accounts as a fall in productivity. Yet some billion people are gaining some or all of their telecoms, for free. The consumer surplus has soared. To the extent that folk use WhatsApp instead of metered phone calls GDP falls. And the whole is measured as lower productivity, us getting poorer per hour of labour put in.
Any real examination of growth needs to deal with this problem. Much of the growth in the modern economy is digital, is free at the point of use. The consumer surplus of all of this is very large, entirely out of proportion with the usual rule of thumb that the consumer surplus and GDP about equal each other. That is, we’re getting vastly richer and not counting the fact that we are doing so.
If we’re really going to examine the counting of growth then we need to really examine the counting of growth.
There is also an obvious corollary to this. If ever more of the growth is turning up not as GDP - where we measure the distribution - but as the consumer surplus - where we don’t measure the distribution - then all claims about the inequality of society are wrong.
Think on it. You, me, Granny, Zuckerberg and that peasant on the paddy in Pakistan all have exactly the same access to WhatsApp - and therefore telecoms - at exactly the same price of nothing. And yet there are people claiming that society is becoming more unequal, are there?