Wednesday, 12 March 2014

MEASURING WHAT MATTERS


Photo: Bill Brooks, Creative Commons
When it comes to wealth, there are some things that matter, and some that don't. If you've got enough, knowing how much more than enough is not all that important. If you're short, knowing how short is very important. Mr Micawber had something to say about the consequences of getting this wrong.

In Britain, some people have got plenty, and some people are short, but you wouldn't know it from the headlines blaring out the "good news" of economic growth. The measure of that growth is GDP, which, as a new report from the Fabian Society makes clear, is a useless way of telling how people are really getting on.

Reforming GDP is a key part of the Reimagine message, for at least two reasons. In the first place, it's a sweeping generalisation, which says nothing about where (i.e. to whom) the wealth is actually going. GDP may be rising but many people could be forgiven for not noticing as their living standards lag way behind. In the second place, it doesn't measure real wealth, but only the financial transactions in the economy. It's called Gross Domestic Product, but actually it's Gross Domestic Financial Activity, most of which is not productive at all.

The Fabian Society report suggests replacing the old, generalised measures, like GDP, inflation and unemployment with as many as 20 new measures of shared prosperity based on median household incomes. So far, so good, but there's a whole other realm of prosperity that financial incomes won't measure. At present, if you pay someone to do a job (such as paint your house or look after your children) it counts as wealth production, but if you do it yourself it does not. This means that some of the most efficient and productive (i.e. transaction-free) work in the economy is not being counted.

If its's not counted, it's not valued; and if it's not valued, the government has no incentive to help people to do more of it. Until that changes, we'll still be working harder and harder, generating more and more transactions, and wondering why it's always so hard to make ends meet.