Does GDP Measure What Matters? Prof Diane Coyle delivers Donal Nevin lecture

Tonight Professor Diane Coyle from the University of Manchester delivered the annual Donal Nevin lecture.

Organised by the Nevin Economic Research Institute (NERI), the lecture is held in honour of the former General Secretary of the ICTU. He was a trade unionist and a historian committed to ending poverty and the promotion of social justice. The inaugural lecture was given by President Michael D. Higgins in 2013. This year the event was held at Queen’s University.

Speaking under the title of “Measuring What Matters” the economist challenged the dominant use of GDP to measure economic and societal progress, arguing that there is nothing inevitable or ‘natural’ about using GDP. The lecture touched on Northern Ireland’s own attempt to diversify how it measures economic progress and societal wellbeing in the recently published draft Programme for Government.

Diane Coyle began by explaining “why measuring matters”. It was not just about measuring in order to extract the maximum taxing; it was also about a democratic conversation between the government and the public. She noted that the same quarterly GDP figures led to two very different headlines in March 2015.

She sees an opportunity to improve how we measure the economy. Her recent book GDP: A Brief but Affectionate History has proved surprisingly successful. GDP has long been a “politically contested number” with periodic changes to how GDP is calculated: the UK recently added illegal marketed activities like drugs and prostitution to the GDP calculation since the illegality is irrelevant to the money involved in the services.

The Cold War arms race over weapons and warfare also extended into economic development, growth and welfare.

There are many irregularities with how GDP is measured. Work done at home – unpaid housework – is not included in the GDP calculation. (There’s also a lot more unpaid work done by women than men.) How should it be valued? GDP measures prostitution but not childcare. Government and firms can be productive, but not what happens in the home. By convention it has been left out – except for production of goods in homes (included to reflect small scale industry in developing economies).

A chart showed the variation over time of GDP per hour worked in the G7 economies. There was a noticeable slow down in the productivity trend in the mid-2000s.

The UK has gone from being like the US to a less satisfactory mirroring of Italy.

Innovation happens, disrupts economies and their measurement. The price per unit of light over hundreds of years shows a phenomenal decrease as the cost of raw materials to burn were reduced with the introduction of electricity and light bulbs. In the more recent past, the introduction of washing machines freed up women’s time and transformed lives and families. But what was the effect on GDP?

Another disruptive innovation is the accelerated introduction of smart phones (far faster than the uptake of PCs). We’re not buying watches, diaries, maps, etc because smart phones have cannibalised those markets. But GDP hasn’t been adjusted to account for this kind of change.

Production boundary issues – eg, unpaid housework – are significant. Voluntary production of digital services in homes (like contributions to open source software from bedrooms) may only be the tip of the iceberg when you consider car sharing, 3D printing of goods from resin, Amazon Cloud Services and sharing services like AirBnB. These all affect the GDP measure.

Diane Coyle questioned the large number of priorities and associated measures in the NI Executive’s Programme for Government’s Outcome Framework – “it’s a lot to look at” – while noting other countries’ and organisations’ multi-factorial measurement frameworks and the need to look at changes over time rather than being content with traffic lights showing the current situation.

There are many different forces questioning the use of GDP as it is currently defined. On top of economic authors, there’s also climate change, populism, innovative multi-national services like AirBnB (which skip under the radar of the ONS up until now) and political demand (eg, Charles Bean’s Independent Review of
UK Economic Statistics commissioned by thoughtful George Osborne).

The lecture finished by suggesting that the biggest question is what we move to? Diane Coyle suggested what a very small dashboard might include:

  • Distribution of income and wealth – geographic and social/demography
  • Access to work and access to income
  • Sustainability, looking at the future – financial, social and environmental stability – as well as current situation.

Self-described “marxist lentilist” Prof (Cllr) John Barry responded to Diane Coyle’s lecture, describing it as an early Christmas present with its de- and re-construction GDP. He asked why we judge economies on a single measure of GDP? While Diane Coyle was critical of the many measured PfG Outcome Framework, John Barry spoke positively about its bespoke nature and the manner in which it recognised the post-conflict state of Northern Ireland: “more accurate if messier”.

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