All to play for in measuring the economy

A surprising new genre of non-fiction has emerged in the past three years: books about gross domestic product (GDP) and national accounts. These range from popular explainers aimed at business page readers (such as Zachary Karabell’s (2014) The Leading Indications) to the scholarly. The Hegemony of Growth: The OECD and the Making of the Economic Growth Paradigm by Matthias Schmelzer is at the latter end.

The book starts with the historical territory covered by this literature: the early efforts by Simon Kuznets in the US and Colin Clark in the UK to develop aggregate measures of ‘the economy’; then the subsequent development of gross national product (and later GDP) during the Second World War. The pre-war and wartime approaches differed in two fundamental ways. First, Kuznets and Clark had wanted a measure of total economic welfare, rather than just activity, whereas John Maynard Keynes and US officials including Milton Gilbert needed the latter. Secondly, the wartime aggregate embedded Keynes’s new macroeconomic theory and was intended to provide the measure of the success of demand management policy. Schmelzer writes:

The emergence of macroeconomic policies based on such theoretical constructs as consumption, demand, savings, investment, expenditure and their relationships made the rigorous measurement of these aggregates a public necessity, reaching far beyond the mere interest in the comparative wealth of a country and the different production factors. (p. 91)

The book goes on to explain that by the early 1960s, the policy focus had switched to the growth rate of GDP rather than its level. This was the result of Cold War politics. As sociologist Daniel Hirschman has documented elsewhere (2016), the Kennedy Administration was responding to the Soviet challenge, in particular Krushchev’s claim that: ‘The growth of industrial and agricultural production is the battering ram with which we shall smash the capitalist system.’ The US was able to use Marshall Aid, embodied in the new Paris-based Organisation for European Economic Co-operation (later the Organisation for Economic Co-operation and Development or OECD), to align all the Western economies around targets for economic growth, measured by the rate of increase in GDP.

The major part of The Hegemony of Growth explores in detail the OECD’s internal organisation and debates in making operational the imperative of growth. Schmelzer argues that the growth target expanded the OECD’s remit beyond macroeconomic management into areas of policy such as research and education, as well as ‘structural reforms’, often economists’ code for politically unpopular policies affecting the labour market or competition in other markets.

The intrusion of economic growth as they key rationale into science and education policies – and many other policy areas as well – opened these to economic rationalities and institutionalized the right of economic authorities and economists to get involved in non-economic realms; it even made it a necessity, he states. (p. 212)

Schmelzer sees the OECD as a key organisation in shaping the ‘growth paradigm’ that still guides economic policies in most countries, not just Western ones. The performance of governments, or claims of opposition politicians, or any policy proposals, are almost always assessed in terms of the resulting GDP growth, and its potential contribution to growth is often used to justify contentious measures, whether lower minimum wages for young workers, more competition in public services, or the licensing of ‘fracking’.

The book goes on to argue that the growth obsession will soon come to an end, however, as the economy, and the earth, finally hits the environmental buffers. Schmelzer sees ‘growthmanship’ as part of the paradigm of ‘high modernism’ so brilliantly analysed in James Scott’s Seeing Like a State (1998) – noting also the paradox that the OECD produced the earliest and still one of the most influential critiques of economic growth policies, the 1972 Club of Rome report. However, this book is not the first to seek to dethrone GDP on the grounds of environmental priorities. It was the subject of the landmark 1993 Nature study by Robert Costanza and his colleagues (1997). Another recent book to make the green case is Ehsan Masood’s The Great Invention (2016), while Tim Jackson’s Prosperity Without Growth has been particularly influential (2009).

Given 40 years of environmental critique, why should the ‘hegemony of growth’ end now? After all, as Schmelzer notes, the centrality of GDP growth has many advantages: ‘The politics of growth have turned social conflicts into non-ideological and technical questions of output and efficiency, and by providing a social adhesive weakened societal tensions and class-based politics’ (p. 118). A more positive way to see this is offered by Benjamin Friedman in The Moral Consequences of Economic Growth (2005, p. 4): ‘Economic growth – meaning a rising standard of living for the clear majority of citizens – more often than not fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness and dedication to democracy,’ Friedman argues (although he would agree without hesitation that highly unequally distributed growth has none of these advantages). GDP growth is also strongly associated with greater longevity, improved health, lower infant mortality, better access to education, even – according to a number of recent studies – ‘happiness’ or life satisfaction measures. Without growth, there would be no innovation – imagine no smartphones, no genetic tailoring of cancer treatments, no ‘green energy’ revolution; critics often imagine that more GDP means more consumerism whereas growth is largely the product of either more efficient use of resources or innovations.

Yet it seems likely that the ‘hegemony of growth’ is at least evolving, if not eroding. The appearance of this debate in a growing shelf of popular books is perhaps one sign that it is reaching a critical point. The long-standing environmental critique is part of the explanation, gaining traction to the extent that evidence of the environmental cost of economic growth is becoming (for most people) unavoidable. China’s industrialisation could turn out to be a key here, given that its leadership faces an acute trade-off between terrible environmental catastrophes and the imperative to demonstrate that people are getting better off. However, other tensions are fuelling the ‘beyond GDP’ debate now. There is more awareness of the non-environmental costs of urban growth, such as the stress of commuting and congestion. Clearly, the inequality of incomes, access to housing and amenities, and straightforward power resonate widely among voters in the Western democracies – the middle- and low-income groups in OECD societies forming the 10% of the global income distribution that Branko Milanovic has memorably labelled ‘the decile of discontent’ (2016). They are well-off in global terms but as a whole have seen no increase in real incomes since about 1980.

Alongside these pressures, there is the fact that the economy has changed substantially since GDP was invented for a world where manufacturing still accounted for a large proportion of total activity, where supply chains were largely contained within national boundaries, and where goods were mass produced with little variation. Now the Western economies are largely intangible, with an immense variety of goods and services, and linked to each other and to other economies in complex cross-border networks. The definitions of GDP and the national accounts do a poor job in categorising and measuring this digital, globalised world (Coyle 2015). More to the point, the digital industry itself is complaining about this lag between reality and measurement and bringing its lobbying power to bear with demands for better statistics (Timothy 2016). For all the reasons to hesitate about doing what Google wants, this pressure will be useful if it also allows the development of a system of classification and measurement that incorporates the services of natural capital, takes account of externalities and the importance of public assets, and matches more closely with a meaningful definition of economic welfare.

How the end of the ‘hegemony of growth’ will come about is less clear. Statistics – ‘official’ and others – are essential to hold policy-makers to account for their extensive interventions in the economic decisions of millions of individuals. The alternative metrics to GDP have their own drawbacks. Increasingly popular ‘dashboards’ modelled on the way companies track their performance are proliferating, all containing so many (differing) indicators they cannot possibly gain any policy traction. Some consensus about what alternative framework of measurement to switch to will need to be reached, initially among economists and statisticians responding to, and sharing, the critiques of conventional growth metrics (Coyle forthcoming). The widely used Human Development Index combines GDP per capita with other desirables, such as access to education and life expectancy. Implicit in the way it is constructed is a trade-off between an extra dollar of income and an extra year of life, valuing the lives of those in rich countries many times more than the lives of people in poor countries (Ravallion 2010).

For all its many flaws (above all omitting the non-monetary environmental costs of economic growth, leaving out ‘home production’ such as cleaning and caring in the home, and ignoring distribution), GDP has an important advantage. This is that the trade-offs between its components are absolutely explicit because they are given by market prices. If all aggregates are unavoidably constructed on the basis of a host of assumptions, is it not better to stick with the known and explicit assumptions rather than the hidden or implicit ones involved in any alternative? Statisticians often insist that GDP is no more than the sum of the resources used by society in a given period of time, measured at the price at which they are exchanged in the market, so it is simply incorrect to use the figure to make normative judgements it cannot support. Still, while this is correct, it is hard to blame non-experts for taking the idea of ‘value’ to have its everyday meaning rather than the technically specific economic meaning.

Measurement is a key question of our times. A new wave of scholarship is exploring the history and sociology of our present system of economic measurement, and Matthias Schmelzer’s The Hegemony of Growth is a welcome addition to this literature. It demonstrates that the development of GDP and the enthronement of GDP growth as a policy imperative were contingent on and negotiated through political and historical processes. This is a reminder that there is all to play for in the current debate about what will eventually succeed the ‘hegemony of growth’.