Why economists worry about the wrong things | David Pilling | TEDxSouthampton
Summary
TLDRThis engaging talk delves into the intricacies of Gross Domestic Product (GDP), highlighting its role as a measure of economic activity. The speaker humorously recounts the story of including prostitution and drug sales in the UK's GDP, emphasizing GDP's arbitrary nature and its limitations in capturing well-being or innovation. The talk advocates for a shift in focus from GDP to more meaningful indicators like sustainability, median household income, and life expectancy, urging a reevaluation of our economic priorities in the 'spaceman economy'.
Takeaways
- đ GDP is an estimate, not a precise calculation, and is influenced by surveys, questionnaires, and estimates.
- đ The inclusion of illegal activities in GDP varies by country, affecting the comparability of economic sizes across nations.
- đ· The valuation of services like prostitution and the cost of illegal drugs contribute to a country's GDP, highlighting its complexity.
- đșđž Differences in GDP accounting practices, such as including crime, exist between countries, affecting economic measurements.
- đ GDP has become a key metric in politics and policy-making, despite its limitations and arbitrary nature.
- đ GDP's growth is often equated with national success, even though it doesn't account for well-being or distribution of wealth.
- đ GDP measures both positive and negative aspects of an economy, including pollution and innovation, which it may not accurately reflect.
- đ GDP does not account for non-monetary transactions, such as housework, which means it overlooks significant contributions to society.
- đ Median household income and life expectancy are more reflective of an individual's well-being than GDP, suggesting a need for broader economic measures.
- đł The concept of wealth in nations, including natural and human capital, is missing from GDP but is crucial for understanding a nation's true economic health.
- đ We live in a 'spaceman economy' where the goal is to improve quality of life, not just maximize output, yet we continue to rely heavily on GDP as a measure of success.
Q & A
What is the main topic of the speech?
-The main topic of the speech is the concept and implications of Gross Domestic Product (GDP), its measurement, and its impact on society and economy.
Why did the UK start counting prostitutes' contributions to GDP?
-The UK started counting prostitutes' contributions to GDP to standardize the measurement of the economy across Europe, where in some countries prostitution was legal and counted, while in others it was not.
How did Joshua Abramski and Steve Drew estimate the number of prostitutes in Britain?
-They found a study with an estimate for the number of prostitutes working in London in 2004 and extrapolated this figure for the entire nation, arriving at approximately 60,000 to 87,000 prostitutes.
What was the average cost of a personal service found by Abramski and Drew?
-The average cost of a personal service was found to be 67 pounds and 17 pence.
Which drugs were included in the calculation of the UK's GDP?
-Heroin, cocaine, crack cocaine, amphetamines, ecstasy, and marijuana were included in the GDP calculation.
What was the contribution of prostitution and drugs to the British economy according to the speech?
-Prostitution and drugs were found to be contributing 9.7 billion pounds to the British economy.
Why is GDP considered an estimate rather than an exact measure?
-GDP is considered an estimate because it is compiled through surveys, questionnaires, and estimates, which can be influenced by various factors and may not always accurately represent the true state of the economy.
What does the speaker suggest about the relationship between GDP and well-being?
-The speaker suggests that GDP should not be confused with well-being, as it measures everything, including negative aspects like pollution and armaments, and does not account for non-monetary contributions to society.
How does the speaker describe the difference between the 'Cowboy Economy' and the 'Spaceman Economy'?
-The 'Cowboy Economy' is characterized by ample resources and few people, where maximizing output is the goal. The 'Spaceman Economy', on the other hand, focuses on raising the quality of life with limited resources, aiming not to maximize but potentially minimize output.
What alternative measures does the speaker propose to complement GDP?
-The speaker proposes measures such as CO2 emissions for sustainability, median household income to reflect the economy's impact on ordinary people, and healthy life expectancy as simple and understandable targets for politicians.
What did Simon Kuznets want to subtract from GDP, and why?
-Simon Kuznets wanted to subtract armaments and financial speculation from GDP because he believed they did not contribute to human welfare and were not genuine economic activities.
How does the speaker illustrate the difference between wealth and income using the example of Bill and Ben?
-The speaker uses Bill, a banker with a high income but poor financial decisions, and Ben, a gardener with a lower income but significant inherited wealth, to illustrate that wealth provides a more accurate picture of financial security and well-being than income alone.
Outlines
đ The GDP and the Inclusion of Illicit Activities
The speaker begins by humorously setting the stage for a rapid discussion on GDP, noting the usual length of their talk is condensed for the audience. They delve into the complexities of GDP as an economic measure, using the example of the UK's Office for National Statistics' decision to include prostitution and drug sales in the country's GDP to align with Eurostat's standards. The process of estimating these contributions involved extrapolating data from a 2004 study and researching online, leading to the inclusion of ÂŁ9.7 billion from these sectors in the economy. The speaker uses this anecdote to highlight the arbitrary and estimated nature of GDP, contrasting different countries' approaches to what is counted, and emphasizing the importance of GDP in political and economic discussions despite its limitations.
đ The Evolution and Critique of GDP Measurement
This paragraph explores the origins of GDP as an economic metric, starting with its invention by Simon Kuznets in response to President Roosevelt's need for a way to measure the U.S. economy during the Great Depression. The speaker discusses Kuznets' reservations about including certain elements like armaments and financial speculation in GDP, which were ultimately included due to political circumstances. The critique continues with the argument that GDP conflates well-being with economic activity, failing to account for distribution, and not distinguishing between productive and destructive activities. The paragraph also points out GDP's inadequacy in measuring services and innovation, using the example of how the value of antibiotics is underrepresented in GDP due to their decreasing cost over time.
đ° Wealth vs. Income: A Tale of Two Individuals
The speaker contrasts the stories of two individuals, Bill the banker and Ben the gardener, to illustrate the difference between wealth and income. While Bill earns significantly more in terms of GDP (income), Ben has substantial inherited wealth, which will allow him to live comfortably without financial stress. This narrative is used to critique the focus on GDP as a sole measure of economic success, suggesting that wealth accumulation and sustainability are equally, if not more, important. The speaker advocates for a broader understanding of national wealth that includes natural and human capital, referencing a World Bank study that proposes a methodology for such an assessment.
đ± Rethinking Economic Measurement for Quality of Life
In the final paragraph, the speaker calls for a reevaluation of how we measure economic success, moving away from the outdated 'cowboy economy' mindset of maximizing output, which GDP reflects, to a 'spaceman economy' approach that prioritizes quality of life and sustainability. They argue that GDP is ill-suited for measuring the modern economy, which is characterized by service industries and intangible goods like knowledge. The speaker suggests downgrading the importance of GDP and elevating other metrics such as CO2 emissions, median household income, and healthy life expectancy to create a more holistic and meaningful assessment of economic health and societal well-being.
Mindmap
Keywords
đĄGDP
đĄProductivity miracle
đĄEurostat
đĄProstitution
đĄIllicit drugs
đĄEconomy
đĄSimon Kuznets
đĄWell-being
đĄDistribution
đĄInnovation
đĄWealth
Highlights
The speaker humorously warns the audience that their 15-minute speech on GDP will be a 'productivity miracle', as it usually takes 40 minutes.
GDP is a complex and technical subject, often requiring charts for explanation, as the speaker works for the Financial Times.
A historical anecdote is shared about the UK's Office for National Statistics beginning to count prostitution as part of GDP to standardize economic measurements across Europe.
The method used to estimate the economic contribution of prostitution involved extrapolating data from a 2004 study and researching average charges online.
Drugs, including heroin and marijuana, were also included in the GDP calculation, emphasizing the arbitrary nature of what is counted in an economy's value.
The GDP's role as a standard economic measure is critiqued, highlighting differences in what is counted in various countries, such as crime in the UK and not in the US.
The speaker points out that GDP is an estimate, compiled through surveys and estimates, rather than a precise calculation.
GDP's significance in politics and policy-making is discussed, noting its frequent use in political manifestos and its impact on national priorities.
The origins of GDP as an economic measure are traced back to the Great Depression, with the US President FDR seeking a way to understand and stimulate the economy.
Simon Kuznets, the statistician who helped develop GDP, had reservations about its use, wanting to exclude armaments and financial speculation.
The speaker argues that GDP is often confused with well-being, despite its limitations in measuring aspects like pollution, housework, and distribution of wealth.
GDP's inability to accurately measure services, innovation, and the value of certain goods like antibiotics over time is critiqued.
A hypothetical scenario comparing the financial situations of two individuals, Bill and Ben, illustrates the limitations of GDP in reflecting true wealth and well-being.
The World Bank's initiative to create a balance sheet for nations, considering natural and human capital, is mentioned as a potential alternative to GDP.
The importance of relative income for happiness, as demonstrated by the 'monkey experiment', is discussed, suggesting that economic growth does not necessarily equate to societal contentment.
The speaker advocates for a shift in focus from GDP to other indicators of societal well-being, such as sustainability, median household income, and healthy life expectancy.
A call to action is made to downgrade the importance of GDP and elevate other metrics that better reflect the quality of life in what the speaker calls the 'spaceman economy'.
Transcripts
[Music]
thank you everybody
so I'm gonna spend the next 15 minutes
talking about GDP so if any of you wants
to leave now's your chance and I'm gonna
do this 15 minute speech so I'm gonna do
yeah this 15 minute speech and what
normally takes me 40 minutes so what
you're about to witness ladies and
gentlemen is a Productivity miracle now
GDP is a complex technical subject I
work for the Financial Times so you
would expect some charts so bear with me
the first chart that I'm going to show
you is a chart of the partial
composition of British GDP so in 2012
joshua Abramski and steve drew who both
were working for the office for national
statistics received an order the order
was they were to start counting
prostitutes now this may seem rather
bizarre but there was a rationale for
this so Eurostat wanted to measure GDP
the size of the economy equally across
Europe but in some countries like
Holland prostitution was legal and
therefore was counted as part of the
economy and in other countries it wasn't
legal and therefore wasn't so they
wanted to standardize this so Bram
skiing drew set about their tasks being
satisfies they headed for the library
and they found a study and that that had
an estimate for the number of
prostitutes working in London in 2004
they extrapolated this for the entire
nation and they worked out that there
were 60,000 879 such exactness
prostitutes working in in Britain they
then had to work out what they were
charging and so they started surfing the
internet
they found themselves on punter net and
I'm actually not making this up
and they found out that that the average
cost of a personal service was 67 pounds
and 17 pence
I imagine the punter like counting the
fight you know final pennies mmm
they've ended exactly the same routine
the same exercise M for drugs they
counted heroin cocaine crack cocaine
amphetamines ecstasy and marijuana so if
your drug of choice is not on that list
you're really not doing your part for
the British economy they found that
prostitution and drugs were contributing
nine point seven billion pounds to the
British economy so the more of these
activities the better why do I go into
this sort of rather bizarre story um
well the first is there is no computer
in the sky working out all our
transactions mmm
GDP gross domestic product is an
estimate it's compiled through surveys
questionnaires estimates the second
thing is that it's rather arbitrary
that's why again in the in the in the UK
we count em crime as part of the economy
in America they don't so in America all
that cocaine they're snorting from
Colombia is not counted as part of the
economy in Colombia it is pants counted
as part of the economy I mean after all
if they didn't count it there wouldn't
be much of an economy to count that's a
joke I think why is this so important
it's important because we live on planet
GDP GDP is how we measure the economy
and the economy is you know how fast the
economy is growing is a sort of a
national obsession you know whether it
grew last quarter whether it grew last
year and we measure the economy with
this thing called a GDP now no
politician in Britain or anywhere else
would knowingly damage the economy they
would never stand up and say I'm going
to do policy X but that might damage the
economy and yet until 1950 the word
economy with
modern meaning was never used in a
political manifesto in Britain in the
2015 Tory Party manifesto it was used
nearly 80 times GDP has become the
denominator of choice we look at GDP for
example debt to GDP determines how much
a country can borrow and at what
interest rates and there was a
discussion in Britain a few years ago
about whether we should cut defense
spending to below 2 percent of GDP and
the Financial Times received a letter I
happen to have it in my pocket and the
letter I imagined it came from I like to
imagine it came from a sort of retired
colonel in Chipping Norton and he said
sir the 2% of GDP NATO benchmark to
which you refer it's solely a very
strange way in which to calculate a
country's defence budget applying this
criterion to the UK has meant that the
targeted expenditure figure has recently
risen as a result of prostitutes
earnings and the composition of illegal
drugs being included in the composition
of GDP which seems mildly ridiculous
if only prostitutes worked a bit harder
the army could have a few more guns
growth is a modern invention when FDR
was elected US president here in 1933 he
wanted a measure of the economy because
he wanted to spend money to get the
American economy out of depression but
hard as it is to believe today there was
no such measure he had things like
freight car loadings the stock market
was in the tank unemployment so he said
this man this brilliant statistician
called Simon Kuznets who went around the
country with a small team and they came
out with a document in 1934 which was to
change the face of economics buried in
this document was a startling revelation
that revelation was that the American
economy had halved in three years this
gave Roosevelt the sort of empirical
evidence he needed to double down on the
New Deal but even in his moment of
triumph Kuznets
had various misgivings serious
misgivings a
his invention first of all he wanted to
subtract some things from GDP he wanted
to take away armaments because he
figured these were not contributing to
human welfare unfortunately for him GDP
became very important in the run-up to
the Second World War and he lost that
battle he wanted to take away financial
speculation because he figured that
shuffling bits of paper around should
not be counted as true genuine economic
activity he also lost that battle and if
we think about the run-up to the 2008
financial crisis more's the pity
um couldn't it's above all thought that
GDP should never ever be confused with
well-being but I would argue that in our
public discourse that is exactly what we
do we use it as a proxy for what for the
success of our societies and our
nation's GDP measures everything the
good the bad and the ugly it marries
measures elements it measures heroine
and it measures pollution in fact
pollution is doubly good for GDP because
we measure it when we make it and we
measure it when we clean it up so the
more plastic we can produce and chuck in
the oceans the better a GDP does not
like housework here at last I found
something something that I can agree
with and GDP does not count anything for
which money doesn't change hands so if
you're looking after an agent relative
at home you are not contributing to the
economy
however form that agent relative out to
an old people's home and when money
changes hands then suddenly you're a
productive member of society
and GDP is an aggregate it tells you
nothing at all about distribution
there's an economists joke being an
economist joke is not very funny but I'm
gonna tell it anyway
and so Bill Gates walks into a bar
everyone on average is a billionaire
average is a very misleading and so the
American economy has grown on average
for year after year after year after
year but median household income in the
US has got stuck in the 1970s in the
last nine years GDP has grown
successively in the US economy every
single year in the last two years
life expectancy actually fell ah that
one shouldn't be there and GDP is very
poor at measuring haircuts why should
that matter because eighty percent of
our economies are haircuts services GDP
was invented in the manufacturing age
it's good at measuring chairs and it's
good at counting steel things that you
can drop on your foot but it's very bad
at health care and at banking landscape
gardening and at least GDP ought to be
good at measuring innovation well I
would argue that GDP is lousy at
measuring innovation let's take for
example antibiotics a hundred years ago
a billionaire would have given half his
fortune for a course of antibiotics
could it could have saved his life and
today those antibiotics are worth
pennies they've dropped out of GDP and
yet of course every bit as valuable this
becomes even more preponderance in the
Internet age so take Wikipedia all human
knowledge practically for free to
anybody with access to the Internet
its contribution to the global economy
zero so I've told you a lot about what's
wrong with GDP let's think about this in
a different way and let me tell a bit
about Bill and Ben so Bill is a banker
he owns 500,000 pounds so he's a very
poorly paid bank banker but you know
bear with me mmm Ben's a gardener he has
25,000 pounds who is richer well of
course you'd say Bill is richer but I've
only told you about the GDP of Bill and
Ben I've only told you about the income
I've told you nothing about their wealth
I may have forgotten to mention that Ben
inherited from his great aunt edna and
his state last year worth a hundred
million pounds and he works in the
garden on weekends just as a bit of a
hobby pays himself a nominal salary and
next year he's going to move into a flat
in Mayfair you know modest five million
pounds and live off the remaining ninety
five million pounds for the rest of his
life and Bill meanwhile has this
unfortunate cocaine habit
terrible overdraft behind in his
mortgage payments he doesn't know it but
he's pretty washed up he's gonna be out
of a job next year when his bank moves
the derivatives trading unit to
Frankfurt brexit and you know and he's
54 who looks better off now bill or Ben
and yet we have no so what I've just
told you there is is the wealth of Bill
and Ben but we have no equivalent
measure for nations you wouldn't dream
of investing in a company based on its
profits last year you'd want to know
about its plant its machinery its
workforce so that we know how many how
much profit it may make next year but we
do not do that with nations there's no
balance sheet of you know natural
capital infrastructure human capital the
World Bank in fact has just come out
with a study and of precisely that and a
methodology for precisely that and we
can't we can now do that and I would
argue that that that the wealth of
nations is something that we should be
paying much more attention to and
there's an experiment you're a TED
audience you probably know this
experiment to monkeys put side by side
and they hand over a pebble and they're
given a reward of a cucumber and they're
happy as Larry then one of the monkeys
is given a grape a much sweeter tastier
grape at which point all hell breaks
loose because the other monkey is
suddenly enraged it starts shaking the
cage it flings the cucumber and back at
the trainer so why does this matter
because it tells us and all studies of
happiness tell us that happiness is not
about how much income you have but your
income relative to others so once basic
human needs are met we are happier or
sadder and relative to how we're doing
next to our natan you know compared to
our neighbors now that in a sense is a
is a very depressing finding because it
would suggest that all this growth that
we're talking about is really sort of
one-upmanship and it would also suggest
and that we shouldn't take this so
seriously that we see this as a route to
happiness but in fact we're working hard
and harder for more and more but really
feeling no more fulfilled now ten years
ago um Sarkozy the former president of
France said that if we do not see
ourselves our own lives reflected in the
official statistics we become angry and
that nothing can be more dangerous for
democracy in the age of Donald Trump ten
years later and brexit ten years later I
would argue and that those are quite
prescient words so how could we do this
differently well I'm not advocating
getting rid of GDP though some people do
nor am I ever
advocating replacing it with kind of
complex indices though again some people
do but what I'm advocating is something
far simpler
I would like to downgrade GDP a bit and
to elevate some other numbers that we
can think about and put political weight
behind so I already mentioned
sustainability we have a measure a proxy
it may be a rough proxy but we have one
co2 emissions imagine what our policies
would look like if we took co2 emissions
as seriously as GDP wouldn't mean the
end of GDP by any means and what about
another measure how about median
household income how the economy is
working for the ordinary person not how
the ordinary person is working for the
economy and how about a healthy life
expectancy it's very simple we can all
understand it imagine if that were a
target that politicians were held to as
much as they were helped to you know
this increasing this arbitrary GDP
measure you could argue that you know
they'd have done a much better job at
sorting out some of the problems in the
National Health Service
Kenneth Golding an economist divided the
world into the cowboy economy and the
spaceman economy the cowboy economy was
ample resources for everybody and very
few people you could go around you could
chop down trees you could kill Buffalo
as much as you wanted without making any
effect that is the world of GDP but we
don't live in the cowboy
I mean we live in this basement economy
there the objective is not to maximize
output it might even be to minimize
output the objective is to raise the
quality of life but GDP is terrible at
measuring quality it's good at counting
things we live in the spaceman economy
but we're treating we're measuring it as
though we're living in the cowboy
economy we're measuring modern societies
and we're using a 10-gallon hat thank
you very much
[Applause]
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