Wee Wully Hutton on the Stiglitz Commission

Quite fun to start off a column with an error of fact, don\’t you think?

The Soviet Union used to judge itself on how much iron and how many tractors it produced.

The Soviet Union used to measure the weight, the tonnage, of tractors it produced. It\’s one of the interesting little stories that Richard Layard (one of Hutton\’s buddies) brought back from his time advising Yeltsin\’s Russian Government. The number of tractors could be useful information: the weight of them not so much. For it meant that a reduction in the weight of each individual tractor (say, a clever new chassis requiring less steel) would not be, as we would think, an increase in value added (ie, more tractors for the same steel, or the same number for less) but a decrease in production.

As weird and wonderful as that sounds it did in fact happen at one of the Moscow car plants. Engineers suggested a change to the  chassis which would have saved a couple of kilos on each car: they were threatened with being fired for their attempt to reduce production rather than praised for attempting to increase the efficiency of production.

What\’s amusing about this is that by hashing up what the Soviets actually did Hutton is entirely missing the point about why GDP is actually a pretty good measure of the economy. The use of less steel would increase GDP, reflecting the fact that we were now using fewer resources to make the same things….that is, adding more value (and added value is what GDP measures) to the resources we do use. Plus, of course, we can use our aggregated couples of kilos of steel to make something else.

Well done Willy.

People choose a life they have reason to value, as famous Indian economist Amartya Sen once put it.

Quite, which is why we should value the maximisation of freedom and liberty to choose exactly that life which is valued by the person doing the valuing: the person living it.

And over my lifetime, more people – although not enough – have been doing just that.

And not maximising the power of people like Will Hutton to determine what is such a life worth valuing. Nor the number who are choosing as Willy would have it.

Today, western societies measure the growth of their GDP, because such material advance is what we believe counts.But western societies have been changing again as their peoples move beyond valuing themselves in terms of cars, fridges and TVs…….We spend more than half our disposable income on services – adventure holidays, pedicures and garden design, to name but a few.

Quite, which is why we include services in our calculation of GDP.

But as a nation, we carry on measuring the growth of goods and services that are sold in the marketplace – the gross domestic product – as if it were the only thing that matters.

No, we are not measuring solely the volume: we are measuring the value added. The value of course being determined by those who are doing the consuming in what they are willing to pay for the goods and services: living the life that they value by valuing their consumption as it were.

Now it is of course true that GDP is not a perfect measure.

A car produced in 2009 is very different from one in 1979, so why compare them?

Indeed, that\’s why we attempt to adjust inflation rates (and thus real GDP) by \”hedonic adjustments\”. The improvement in quality. It\’s something of a lick the thumb and see which way the wind is blowing adjustment, to be sure, but it is already incorporated into the GDP numbers.

GDP does not reflect the world because it cannot reflect inequality.

True.

And of course GDP gives no guide as to whether the environment has got better or worse over the measured period, nor whether we are so depleting natural resources as to menace our children\’s futures.

There are a number of variations of Gross Domestic Product. Gross National Income, Net National Income and so on. NDP does try to take account of that depreciation however, the reason we don\’t use it as a front line number is because it\’s bloody difficult to calculate. There are also numbers which look at depletion of natural resources.

Fun fact about looking at those numbers though: Norway, often pointed to as being the sort of society we should emulate, is depleting its capital endowment of natural resources at an astonishing rate, whereas the more Anglo Saxon economies are not. That\’s the fun thing about these alternative measures: they mark up things which rather do against current lefty orthodoxy.

Then education; if people are to be authors of their own lives, they have to be educated and not just to regurgitate facts and figures by rote. They need to be able to think.

Interesting: so, are we now to have international league tables of which nation\’s schoolchildren can actually think? Anyone think that\’s going to reflect well on Good Old Blighty?

Surveys could and should consistently capture what we want to do with our time, whether we do it and how much we enjoy it.

What Willy does say here is less important than the part that he doesn\’t mention. The Stiglitz Report is very keen on, insistent even, that we have to measure both household production hours and market production hours. What matters are the net leisure hours that contribute to the work/life balance, not whether the working hours are done in the home or an office. And as I\’ve pointed out a number of times that\’s a set of comparisons that do not work well for the more European economies. The German housefrau, for example, works 90 minutes longer a week than the American housewife. Despite the latter doing more market working hours.

As above, if we actually take the Stiglitz Report seriously then there\’s going to be an awful lot of pissed off lefty campaigners as they find that their pet peeves have just been shown not to exist: for example, the more marketized US economy would appear to be better for the work/life balance than the more social democratic German one.

In Britain, for example, we would not be discussing spending cuts and deficit reduction in such bald, terrifying and self-harming terms. We would be worrying about the impact on our well-being because that is what we would be measuring, and the discussion would be how to get what we need in health, education, personal security and social connectedness within given cash limits.

And that\’s the biggest thing that Willy\’s missed from the Report. Something which really does threaten his worldview. Stiglitz et al point out that as far as Government provided goods and services are concerned we do not in fact measure the output. We measure solely the inputs and count that as part of GDP. So, we assume, a priori, that if the government spends £10 billion on something then we get £10 billion of value from that spending.

The Report insists that this must change, that we must measure the outputs, not the inputs, in this part of the economy. Now that is indeed a serious threat to a lefty vision of the universe, that all government expenditure must be measured by its efficiency, the value added for the resources committed.

No wonder Willy didn\’t mention it.

6 comments on “Wee Wully Hutton on the Stiglitz Commission

  1. so, are we now to have international league tables of which nation’s schoolchildren can actually think? Anyone think that’s going to reflect well on Good Old Blighty?

    I’m entirely sure that it would… or at least, that on that measure, North America and Western Europe (including the UK) would be way ahead of the Asian countries that beat us at rote-learning.

  2. There’s a lot to be said for rote learning.

    You can’t make sense of things until you actually know things. Sure, understanding and learning have to go hand in hand, but you tend to remember facts or anecdotes over explanations.

    However, if you can remember the anecdotes and facts you can usually work backward to the explanation or see a pattern emerging.

  3. “Norway, often pointed to as being the sort of society we should emulate, is depleting its capital endowment of natural resources at an astonishing rate”.

    This might be true, but its also saving an enormous amount of the receipts, so I don’t think it is true when you add in all the relevant factors (which essentially is the key argument of the Stiglitz Report).

    “The German housefrau, for example, works 90 minutes longer a week than the American housewife. ”

    The report doesn’t find this. Germans do less overall work and have higher leisure time.

    Tim adds: That result was something I found at the LIS.

    Page 4 here.

    ftp://repec.iza.org/RePEc/Discussionpaper/dp697.pdf

  4. Rote learnhing is surely vital. You cannot learn human anatomy by just thinking about it. Or how to speakl russian for that matter.

Leave a Reply

Name and email are required. Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.