Why economists worry about the wrong things | David Pilling | TEDxSouthampton

Summary

This 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

• 📈 GDP is an estimate, not a precise calculation, and is influenced by surveys, questionnaires, and estimates.
• 🌍 The inclusion of illegal activities in GDP varies by country, affecting the comparability of economic sizes across nations.
• 💷 The valuation of services like prostitution and the cost of illegal drugs contribute to a country's GDP, highlighting its complexity.
• 🇺🇸 Differences in GDP accounting practices, such as including crime, exist between countries, affecting economic measurements.
• 🔑 GDP has become a key metric in politics and policy-making, despite its limitations and arbitrary nature.
• 📊 GDP's growth is often equated with national success, even though it doesn't account for well-being or distribution of wealth.
• 💊 GDP measures both positive and negative aspects of an economy, including pollution and innovation, which it may not accurately reflect.
• 🏠 GDP does not account for non-monetary transactions, such as housework, which means it overlooks significant contributions to society.
• 📊 Median household income and life expectancy are more reflective of an individual's well-being than GDP, suggesting a need for broader economic measures.
• 🌳 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.
• 🚀 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

00:00

📊 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 £9.7 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.

05:01

📈 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.

10:03

💰 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.

15:04

🌱 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.

Keywords

💡GDP

GDP, or Gross Domestic Product, is the total monetary or market value of all the finished goods and services made within a country in a specific time period. It is a key indicator of a country's economic health and size. In the video, the speaker discusses the complexities and limitations of using GDP as a measure of economic activity, including its inclusion of activities like prostitution and drug sales, which contribute to the economy in controversial ways.

💡Productivity miracle

The term 'Productivity miracle' is used by the speaker to humorously describe the challenge of condensing a typically lengthy lecture on GDP into a 15-minute speech. It alludes to the idea of accomplishing more in less time, which is a concept that could also be applied to economic productivity, where more output is generated with less input.

💡Eurostat

Eurostat is the statistical office of the European Union, responsible for providing statistical data to the EU institutions. In the context of the video, Eurostat is mentioned as the driving force behind the decision to include prostitution in GDP calculations to standardize economic measurements across Europe.

💡Prostitution

Prostitution is the act or practice of engaging in sexual activity in exchange for payment. In the video, the speaker uses the example of including prostitution's economic contribution in GDP calculations to highlight the arbitrary nature of what is included in economic measurements and the challenges of standardizing these across different countries.

💡Illicit drugs

Illicit drugs refer to substances that are forbidden by law and are subject to legal penalties if manufactured, bought, sold, transported, or used. The video discusses how the sale of drugs like heroin, cocaine, and marijuana is factored into GDP, illustrating the inclusion of morally and legally complex activities in economic measurements.

💡Economy

The economy encompasses all of the production, distribution, and consumption activities of a particular area. The video emphasizes the importance of the economy as a concept that has become central to political and public discourse, with GDP being a primary metric for measuring economic health and growth.

💡Simon Kuznets

Simon Kuznets was a Nobel Prize-winning economist who is credited with developing the modern system of national income accounts, including the measurement of GDP. The video mentions Kuznets to highlight the origins of GDP as an economic indicator and to discuss his reservations about using GDP as a comprehensive measure of economic activity and well-being.

💡Well-being

Well-being refers to the state of being comfortable, healthy, and happy. The speaker argues that GDP should not be confused with well-being, as it measures economic activity but not the quality of life or happiness of individuals, which are important aspects of societal success.

💡Distribution

Distribution in economics refers to the way total payments are shared among the members of an economy. The video points out that GDP is an aggregate measure that does not provide information about the distribution of wealth or income within a population, which is crucial for understanding economic equality.

💡Innovation

Innovation is the process of translating an idea or invention into a good or service that creates value or for which customers will pay. The video suggests that GDP is not effective at measuring innovation, using the example of antibiotics, which have decreased in economic value over time but remain highly valuable in terms of their impact on health and well-being.

💡Wealth

Wealth refers to the assets and resources owned by an individual or a nation. The speaker contrasts the concept of wealth with GDP, suggesting that wealth, including natural and human capital, should be considered alongside or instead of GDP to provide a more comprehensive understanding of a nation's economic health.

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]