The Political Element In Empirical Data?

September 16, 2009

by Mario Rizzo  

In a recent article in the Financial Times Joseph Stiglitz argues for a more comprehensive measure of social well-being than Gross Domestic Product (GDP).  

As all principles of economics students know, GDP leaves out many interesting things. When I was a student the prime example was: When a man marries his paid housekeeper GDP falls. I am not sure how to adjust this if the housekeeper is also a man and they move to a state with gay marriage. Humor aside, you get the point. GDP misses stuff.  

Nevertheless, Stiglitz has bigger fish to fry. This is just a sample:  

“What we measure affects what we do. If we have the wrong metrics, we will strive for the wrong things. In the quest to increase GDP, we may end up with a society in which most citizens have become worse off. We care, moreover, not just for how well off we are today but how well off we will be in the future. If we are borrowing unsustainably from this future, we should want to know.” 

Did I get all the “we’s”?  Yes, I know that decisions are made by the political system “we” have. But clearly this is an example of the tribal mentality. We is a weasel word for the common hierarchy of values that a free society does not have. Where do these values and tradeoffs come from? What do they represent? Recent research. 

“Advances in research across a number of disciplines enable us now to develop broader, more encompassing measures of well-being. Such measures recognise that unemployment has an effect that goes well beyond the loss of income to which it gives rise. Health, education, security and social connectedness all are important to quality of life – but are not adequately reflected in GDP.”  

So he wants government or international agencies to measure “social connectedness.”   

“Too often, we confuse ends with means. One of the criticisms of our economies in the years prior to the crisis is that they did exactly that – a financial sector is a means to a more productive economy, not an end in itself. Even worse is to confuse an improvement in a measurement of well-being with an improvement in well-being itself. Our economy is supposed to increase our well-being. It, too, is not an end in itself. Hopefully, the work of our commission will have increased the impetus to align the metrics of well-being with what really contributes to quality of life – and, in so doing, help us direct our efforts at those things that really matter.”  

Of course, the confusions of means with ends, measures with reality, and trivial ends with ultimate ends that “really matter” are bad in general. But I would rather give this as a piece of valuable advice to individuals pursuing their own goals.  

Let’s clarify: (1) the “virtues” – should there be any – of a traditional GDP measure is that it uses the metric of market prices. If economics teaches us anything, it is the problem of measuring value without markets. (2) Outside of markets there must be a reliable mechanism that can reveal the value of things to individuals – what is it? And how can economists test its accuracy? (3) There is no value to Society but just to the individuals that compose it (even Jeremy Bentham said as much). Does Stiglitz have some metaphysical entity in mind? 

If a measure of social welfare were to be constructed that would trade off reductions in carbon emissions, increases in social connectedness, increases in “security” against losses in GDP what would the rates of tradeoff be? Where would they come from? Does Stiglitz have a real appreciation of the difficulties of doing this scientifically? What are the chances of politicization? Excellent.

15 Responses to “The Political Element In Empirical Data?”

  1. Greg Ransom Says:

    More embarrassment from the Mainstream rocket scientists.

  2. Bob Murphy Says:

    “I am not sure how to adjust this if the housekeeper is also a man and they move to a state with gay marriage.”

    To keep Stiglitz happy, you would also need to include the negative externality inflicted upon poor Miss California.

  3. Adolfo Laurenti Says:

    While I share the skepticism in regard of Stiglitz’s goals and conclusions, I am more sympathetic toward the problem he raises. There are all sorts of distortions that are created by policies straitjacketed in the aggregative GDP framework. Many economists prefer government spending over tax cut on empirical grounds based on GDP multipliers (the “bang for the buck” vs. “trickle-down” debate.) GDP offers no room for truly intertemporal considerations (except for some awkward accounting of inventories.) GDP emphasizes flows over stocks and income over capital. Social waste (like bridges to nowhere) enters in GDP once as a positive item, and then disappears. In a perverse way, money spent on maintenance for those wasteful bridges will also add to GDP. Money individuals spend on education is accounted in GDP as “consumption” (it is the exact opposite: investment in human capital.) And so on. Aggregate measures of “social well-being” are surely a much worse idea than GDP: but GDP is a pretty awful measure to begin with. I would make very clear that a critique of Stiglitz should NOT turn into a defense of our archaic system of national accounts.

  4. Marcelo Ballardini Says:

    Nicolás Cachanosky has a great paper on the limits of GDP as an economic indicator and suggests the Economic Value Added (EVA®) approach. Here is the Link:

    http://www.escuelaaustriaca.org/Docs/Papers/EA2008/Cachanosky%20Ponencia.pdf

  5. Mario Rizzo Says:

    Mr. Laurenti makes some very good points. I did not mean my post to be an endorsement of GDP in the sense that I would consider it a good policy standard across the board. It is simply that there can be worse standards.

  6. Austin Says:

    I agree, it can definitely be worse. As much as I believe GDP is flawed for practical (prosperity) purposes, let us pray that our angelic social architects don’t get any funny ideas to incorporate “social connectedness” in measuring the economy. American history demonstrates that whenever mainstream economists or politicians mess with anything political economy, it becomes much worse.

  7. Drewfus Says:

    Mario,
    Stiglitz use of ‘we’ is the royal we – he really means ‘I’.

    “What I measure affects what I do. If I have the wrong metrics, I will strive for the wrong things. In the quest to increase GDP, I may end up with a society in which most citizens have become worse off. I care, moreover, not just for how well off I am today but how well off I will be in the future. If I am borrowing unsustainably from this future, I should want to know.”

    An open letter from Kenneth Rogoff to Stiglitz.
    http://imf.org/external/np/vc/2002/070202.htm

  8. Zach C Says:

    Dr. Rizzo

    I’ve been told that Rothbard postulated somewhere in an appendix of Man Economy and State a measure called ‘Private Product Remaining.’

    Would you consider this superior to GDP, since it ‘adjusts’ somewhat for government interference in the market and, as far as I know, makes no pretensions as to quantitatively measuring ‘social well-being?’

  9. Mario Rizzo Says:

    Zach,

    This could be quite interesting. But to really adjust for government intervention of the various kinds would be mind-boggling. Perhaps one could simply take GDP and subtract all government expenditures.

  10. Zach C Says:

    I believe that is how he constructs it: subtracting taxes, transaction costs of programs etc.

    But I guess that still doesn’t take into account the distortions in prices through government activity which would automatically shift the measures of production in a metric.

    Thanks for your response!


  11. I believe that the state actually exists, as an identifiable organization distinct from the individuals whose choices contribute to the creation and maintenance of the state. The state exists just as much as any firm exists, just as much as any multicellular organism composed of nothing but individual cells exists. When someone says “we”, as Joseph Stiglitz does, I believe he means: We working through government (through the state). His choice to talk in that way signals his membership in the state and contributes, I believe, to the perpetuation and growth of the state.

    “We” is indeed a slippery word. I realize that I have used it in the slippery way. When I was recruiting for the Free Nation Foundation, I advertised: “We who want liberty should build our own nation.” I was trying to draw in new people and define a new organization. “We” is often used that way.

  12. Mario Rizzo Says:

    The problem is that the metaphor or analogy is misleading. A single mind has priorities, tradeoffs, etc. What is the meaning of that which comes out of a political process? We as individuals may well disagree with those outcomes. There is a big literature on this which Stiglitz can pay no mind if he wants to get own with his project of making a “better” world. My points are as ants at his feet. Or so he will doubtless believe.


  13. I believe that a state exists and acts, just as much as any individual human exists and acts. I propose this as a fact, not a metaphor.

    Isn’t it a metaphor to suggest that an individual human has a “single mind”? I agree that an individual human has a single voice, but this one voice expresses the outcome of a complex and usually unpredictable clash of many interior interests. Similarly, the US has one chief executive whose actions express the outcome of a complex and usually unpredictable clash of interior interests.

    An individual human, participating in a debate about state policy, says “we” in a way that expresses one of those interior-to-the-state interests.

    I try to keep my head straight about this by recognizing any “we” in which I do not feel membership. I recognize and point out that Joseph Stiglitz speaks of behalf of an organization he is helping to build and maintain, his state.

  14. Keir Says:

    A better index to look at would be the Distress Index:

    http://www.feeblog.org/economics-101/the-distress-index/


  15. […] סטיגליץ, חתן פרס נובל בכלכלה, סבור שיש להחליף את המדד, ומאריו ריזו, כלכלן מאוניברסיטת ניו-יורק, מצביע על הסיבו…, גם אם הוא מסכים עם הצורך במדדים […]


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: