Last modified: 08 July 2017
Today in the FT, Tim Harford argues that the simplest innovations often create the most value . It’s a familiar and beautiful story and it doesn’t take much thinking to agree that toilets probably matter more than a web-connected thermostat.
Yesterday in The London Evening Standard, The Indigo Prize explains why a better measure of progress than GDP is worth £100,000. And again, it doesn’t take much thinking to agree that what matters in our lives is family, friends, health, purpose, and happiness, and not the numbers of pounds in the GDP measure that makes the headlines every quarter.
There’s an important link between these two pieces. Here, in under a fifth of the 5000 words that I’m allowed to win the big prize, I’ll explain it.
Add up every hair cut, glass of water, pint of beer, bicycle tyre, bank account fee, pet insurance policy, bus journey, electricity bill, contact lens, tank of petrol, dentist appointment, pay packet, business investment, rent bill, and much much more, and you get a country’s GDP. If you want to compare one country with another you adjust for how much things cost, that’s called PPP or PPS. If you want to compare a country today with itself in the past, you also adjust for how much things cost, that’s called real terms or constant prices. If you make some adjustments for how well the GDP is shared within a country you get inequality-adjusted GDP. Well you would, if someone had invented it. I’m sure that The Indigo Prize will get many such suggestions.
But an inequality-adjusted GDP, or a sustainable GDP, or a fair-trade GDP are web-connected thermostats. Complicated, exciting, new, fresh, and just not very important.
GDP is a simple idea. The details are hard, but we’ve got good at them in the past 70 years or so. And most importantly, it works. Famously, the human development index correlates almost perfectly with it . And when you think about it, the correlation shouldn’t be a surprise. People and societies prioritise the things that really matter to them. The more money they have, the more they can do. So GDP is a great measure of what really matters, as long as we trust people to spend their money on what matters to them.
What’s really lacking from our current measures of GDP is the same as what’s lacking with our current toilets. There are too many places where you can’t find a good one.
Today two-thirds of people have access to a toilet . It’s a remarkable achievement, but it’s not good enough. The unglamorous task of getting toilets to the remaining third of humanity matters more than almost anything else. Try Rose George's book Adventures in the World of Human Waste if you need convincing.
It’s the same with GDP. Today, the majority of people in the world have access to a national GDP measure. But far too few know how their local economy, and thus their wider community’s wellbeing, is changing.
For years I’ve built free tools that give people a slightly better idea of how their economy is doing. People in Wales can see how their economy came to perform as well as Estonia’s. People in Greater Manchester can see how their economy came to perform as well as Spain’s. People in South Yorkshire can see how their economy performs about as well as Portugal's .
And yet we know that these numbers aren’t good enough. We don’t collect enough data on consumption and production locally, we don’t look hard enough at what things people buy, and we don’t measure how much those things cost in different places. The ONS know this, they’re trying to fix it, but it needs to be our top priority.
Fixing GDP is like fixing toilets. We need more of the same, not something new and fancy.
If Iceland can measure GDP for its 330,000 people, and if Estonia can measure GDP for its 1.3 million people, then it’s not good enough that much larger parts of the UK have much worse data.
I’ll end with just one of the many reasons why I think that this is important. Scotland calculates its own GDP figures and debates them vigorously. My home region of Yorkshire, with an equal population, doesn’t calculate its own GDP and is barely interested in the proxies that are available.
This matters enormously. GDP, the favourite measure of economists, isn’t relevant to the people of Yorkshire. Similarly, it's not relevant to most of the UK. People can feel it, and it influences the trust that they have in economists and politicians who rely on economists' arguments.
The UK has had two extremely important referendums in recent years. In the first, Scotland took the option recommended by most economists, to remain in the UK. In the second, Scotland again took the option recommended by most economists, to remain in the EU. But England, especially areas like mine in Yorkshire, those areas most poorly informed by the data collected by our national economists, took the option that most economists did not recommend. We voted to leave the EU.
If economists want people to listen to them again, they should dump plans for a new measure of well-being. They should use the methods that we already have to make GDP relevant to more of the people of Britain. If the goal of economic measures is to inform people better about their current situation, then providing them with local GDPs will achieve much more than providing with a national inequality-adjusted GDP, a national sustainable GDP, or a national fair-trade GDP. But as a suggestion, it’s not likely to win any prizes.