What happens when increasingly, not all that counts is being counted.
The desire to measure all things is deeply ingrained in human beings. It is an essential mechanism for comparison, which supports our earliest cognitive development. In time, we learn to put specific yardsticks to these such as rulers, scales and thermometers.
The most important measurement of all, and one which drives most of us and completely dominates our lives is that which defines value. It is that measure that is vital to all of transaction, in turn supporting the social construct we call economics. Yet, for all of its paramount importance, it is the one measure that is severely flawed.
The first flaw lies in the dual nature of value. It has both an objective and subjective nature; a tangible and intangible; a quantitative and qualitative. And while we rely on the quantitative to guide and shape economic forces, policies, supply, demand, trade, measures and regulations; it is the qualitative, the immeasurable, that in the end trumps the measureable and is far more important to individual experiences. The quantitative measurement we call price, is merely a reflection of a transactional moment. The way that object or service behaves, is the ultimate determinant of value.
The second major flaw is in the quantitative measure of value itself – the price. Text book economists may argue that price is the balancing fulcrum between supply and demand, and therefore represents true value. But there is no market that is truly free or pure. The only virtue in the price argument is that for all of their flaws, market informed prices are still far better than regulated or fixed prices. That argument becomes increasingly difficult to defend when markets are contaminated by inappropriate behaviour and when speculative derivatives distort prices. Unrestricted markets certainly cannot claim to reflect true value accurately.
In addition, the unit of measure, money, or specifically the currency, is flawed. For one thing inflation ensures that measured values can change irrespective of supply and demand. Effectively it means that unlike a meter which is a unit of length of absolute constant accuracy, the unit in which we measure value is not constant. In addition, the relative value of one currency to another is even more volatile and can change dramatically on all kinds of whims, as we in South Africa well know. On top of that globally we have delinked money from intrinsic value such as gold or to tangible value in the production of goods and services. Money is now linked to debt creation, which has expanded unprecedentedly and threatens money’s future as a means of exchange and unit of measure.
We have nonchalantly learned to live with these shortcomings in our daily lives, routinely adjusting to these forces and mostly oblivious to the cracks they may be creating in our economic environment. That may be well and good, but when these contaminants filter through and form the base of macro-measurements that have a profound influence and give direction to far reaching policies and decision making, then they surely must create a vicious circle that entrench and widen those cracks. We tolerate these things simply because we know nothing else, and despite all the advances in information gathering and processing, there is no serious move towards doing things differently.
The most important of the macro metrics are GDP and inflation. The first measures the value of goods and services produced in a country in a given year, and the second the movement of consumer prices. Apart from resting on the above flawed measure of value, they suffer from severe defects in the way they are compiled and often interpreted. That’s when the quantitative can also distort the qualitative, changing daily routines and important features of social life.
The inflation measure is always a bone of contention. (See previous article here.) As an extrapolation to an average, it has as much chance of fitting the price experience of the “average” person as winning the lotto. Yet it is routinely used to determine important decisions such as wages and interest rates. One aspect that is often missed is that it excludes important household costs such as income tax, which have a profound impact on the middle and upper income classes. Other taxes, such as VAT, customs duties and the fuel levy push up inflation but have nothing to do with supply and demand. Increasingly too, the practice of shrinkflation is distorting the picture.
GDP (yes, here we go again!) creates an even deeper anomaly. It has a bigger influence in determining decisions that affect our daily lives than any other macro measurement. Interpretations of underlying forces can differ widely with forecasts of economic growth this year varying from +1.2% to -0.9%. The GDP measurement stands on three very wobbly legs: the impurity of the unit of measure outlined earlier; the potential for various interpretations; and the third, probably the most important -- its constituents: what does it count and what does it leave out.
The omission of qualitative values was lamented decades ago by American Senator Bobby Kennedy in his famous conclusion that it “measures everything, except that which is worthwhile.” It’s a lament that has been carried forward for decades, the latest from Nobel Laureate, Michael Spence. But even selection of the tangible, or measurable, is sometimes arbitrary to say the least: like Nigeria’s huge leap in GDP after a reshuffling of the GDP constituents and Egypt overtaking South Africa in size based on an exchange rate. Or the U.K.’s including proceeds from sex and drugs to boost its GDP and overtake France in economic size.
And now a new dimension has been added to the debate. What happens when something of value keeps that value but loses its price? In effect, it moves from the quantitative to the qualitative. When something does not have a price, it can no longer be measured. And if it was included in the metrics before, it simply falls away, losing its impact on both GDP and CPI, amongst others. One could argue that it partly moves from product to advertising and is simply recovered differently. But will it have the same impact?
It is an intriguing question raised by independent economist, Cees Bruggemans, in a recent edition of Economic Insights. Sir Charles Bean, Professor at the London School of Economics, went further in a recent WEF publication to suggest a rethink of how we measure economic activity. Bean points out that in a number of areas, technology has disrupted pricing, processes, and even the way companies operate. These include music, entertainment, communication, internet services, information gathering, banking, travel agents and insurance agents.
The relevance and reliability of some of our key measurements is increasingly becoming a more critical issue. I’m waiting for the day when Pravin Gordhan has one of his media briefings and emphasises the importance of increasing GDP, and when some junior maverick reporter questions the relevance and reliability of the measurement itself. His answer is predictable: “What else is there?”
That, indeed is the challenge.