Tag Archives: political economy

It’s all about GDP

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Who would have thought economic statistics would become such a hot topic? Certainly not me when I decided a couple of years ago to write a book about GDP for non-specialist readers. It isn’t as if GDP has lacked for critics. Over the decades there have been both environmentalist and feminist critiques, not to mention the blossoming interest in the direct measurement or targetting of happiness or subjective well-being. Still, there is a new wave, more focused on the political economy and historical context of the policy focus on GDP growth and rankings. There are (at least) two conferences on statistics over the next few months, following a joint RES/RSS/IFS conference earlier this month. Surely the scholarly debate, like the policy interest reflected in the Bean Review, is a precursor of change?

The latest book I’ve read is Matthias Schmelzer’s [amazon_link id=”1107130603″ target=”_blank” ]The Hegemony of Growth: The OECD and the Making of the Economic Growth Paradigm[/amazon_link]. The book begins with what has become familiar territory, the development of the forerunner of GDP and the system of national accounts in world war II, building on pioneering work by Colin Clark and Simon Kuznets. What became GNP (and GDP) differed crucially from these pioneers’ ideas, however, by moving away from a clear relationship with economic welfare, and embedding Keynesian macroeconomics. As 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.”

[amazon_image id=”1107130603″ link=”true” target=”_blank” size=”medium” ]The Hegemony of Growth: The OECD and the Making of the Economic Growth Paradigm[/amazon_image]

The book provides a distinctive focus by exploring in detail the role of the OECD in the spread and normalisation of the new accounting standards and, by the late 1950s or early 1960s, the adoption of GDP growth as a policy target. The organisation’s forerunner, the OEEC, had been the distributor and overseer of Marshall Aid throughout Europe. The American administration had, as it still does, great influence over its approach. The heating up of the Cold War led the Kennedy Administration to insist on the centrality of growth, making GDP as much a weapon of the Cold War as it had been of the Second World War. Schmelzer says: “The public acceptance of economic expansion as a political goal, as well as the active support of influential societal groups such as capital, labour or the press, had to be actively produced.”

He goes on to describe how orienting the OECD around the goal of growth took it steadily into areas of policy previously not linked to the economy at all, such as science policy and education. In addition, through the aid donors’ club at the OECD, the Development Assistance Committee, the idea became firmly embedded that economic growth and development were essentially the same. Through both geographical reach and policy expansionism, the book portrays the OECD as a key organisation in shaping the ‘growth paradigm’ – even though it also, paradoxically, also gave birth to the earliest, and influential, critique of ‘growthmanship’ in the shape of the Club of Rome report.

The book ends by speculating that the famous ‘hockey stick’ of exponential growth might be about to become an equally familiar S-curve because of ‘secular stagnation’, not least because of environmental limits. Schmelzer argues that GDP growth is part of the paradigm of ‘high modernism’ so brilliantly described in Seeing Like A State. The ‘hegemony of growth’ may be ending; it is certainly changing as the context has changed so dramatically. My money is on the idea of growth being transformed in order to measure better sustainability and economic welfare, but this is exactly what all the new wave of scholarship is investigating. The outcome will be just as contingent and negotiated through political and historical processes as the emphasis on GDP growth was in the first place.

This book provides an interesting perspective on the GDP debate; I hadn’t previously registered the importance of the OECD’s role in particular. The author has clearly dug deep into the archives and provides a lot of fascinating material, shedding new light on what is steadily becoming increasingly well explored territory. There are other new books for the non-specialist out on this subject. I have reviews on two out soonish, Ehsan Masood’s [amazon_link id=”B019G14YKK” target=”_blank” ]The Great Invention[/amazon_link] (in Nature) and Philipp Lepenies’ [amazon_link id=”0231175108″ target=”_blank” ]The Power of a Single Number[/amazon_link] (in the Journal of the History of Economic Thought).

[amazon_image id=”B01FKTBW3O” link=”true” target=”_blank” size=”medium” ]The Power of a Single Number: A Political History of GDP by Philipp Lepenies (2016-04-26)[/amazon_image] [amazon_image id=”B019G14YKK” link=”true” target=”_blank” size=”medium” ]The Great Invention: The Story of GDP and the Making and Unmaking of the Modern World[/amazon_image]

These titles join an older batch of general titles; not only my own [amazon_link id=”0691169853″ target=”_blank” ]GDP: A Brief but Affectionate History[/amazon_link] but also Zachary Karabell’s [amazon_link id=”1451651228″ target=”_blank” ]The Leading Indicators[/amazon_link], Dirk Philipsen’s [amazon_link id=”B01FEKF3UC” target=”_blank” ]The Little Big Number[/amazon_link], Lorenzo Fiaramonti’s [amazon_link id=”1780322720″ target=”_blank” ]Gross Domestic Problem[/amazon_link], Sen, Stiglitz and Fitoussi’s [amazon_link id=”1595585192″ target=”_blank” ]Mismeasuring Our Lives[/amazon_link].

[amazon_image id=”0691169853″ link=”true” target=”_blank” size=”medium” ]GDP: A Brief but Affectionate History[/amazon_image] [amazon_image id=”1451651228″ link=”true” target=”_blank” size=”medium” ]The Leading Indicators: A Short History of the Numbers That Rule Our World[/amazon_image] [amazon_image id=”0691166528″ link=”true” target=”_blank” size=”medium” ]The Little Big Number: How GDP Came to Rule the World and What to Do about It[/amazon_image] [amazon_image id=”1780322720″ link=”true” target=”_blank” size=”medium” ]Gross Domestic Problem: The Politics Behind the World’s Most Powerful Number (Economic Controversies)[/amazon_image] [amazon_image id=”1595585192″ link=”true” target=”_blank” size=”medium” ]Mis-Measuring Our Lives[/amazon_image]

And there are more. Morten Jerven looks at African economic statistics in [amazon_link id=”B00FKYOLGU” target=”_blank” ]Poor Numbers[/amazon_link]. Brett Christophers addresses the measurement of finance in [amazon_link id=”B00ZY8VFQ6″ target=”_blank” ]Banking Across Boundaries[/amazon_link]. Expect more to come!

[amazon_image id=”B00FKYOLGU” link=”true” target=”_blank” size=”medium” ]Poor Numbers: How We are Misled by African Development Statistics and What to Do About it (Cornell Studies in Political Economy (Paperback)) (Paperback) – Common[/amazon_image] [amazon_image id=”1444338285″ link=”true” target=”_blank” size=”medium” ]Banking Across Boundaries (Antipode Book Series)[/amazon_image]

Taxing the Rich (how to)

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Do you want to raise more taxes from rich people, dear Reader? I thought so. Then a read of [amazon_link id=”0691165459″ target=”_blank” ]Taxing the Rich: A History of Fiscal Fairness[/amazon_link] in the United States and Europe by Kenneth Scheve and David Stasavage is illuminating.

[amazon_image id=”0691165459″ link=”true” target=”_blank” size=”medium” ]Taxing the Rich: A History of Fiscal Fairness in the United States and Europe[/amazon_image]

Apart from anything else, the historical data on top tax rates is fascinating. There have really only been two big moves in top income (and inheritance) tax rates: up, a lot, from the 1920s to around 1950; down, by half of a lot, mainly in the 1980s but drifting down subsequently. It is also interesting to note the contrast between the US/UK top marginal rates and the rest of the developed world – about 40% vs about 60%. As in so many areas, the fact that data and economic research are heavily US-centric has a distorting effect on economic policy debates elsewhere. Extraordinarily, the burden of total taxation on the highest income bracket in the UK reached 90.7% during the second world war (compared to 19.1% for the bottom group). Talk about progressive.

The book discusses the forces driving the trends in taxation of the rich. The authors’ main point is that war has been the principal driver, with the sense of fairness the result of the calls the state made on citizens at those times. It was at times when the government demanded immense sacrifices from the majority of the population that the effective social contract ensured the wealthy paid: “War mobilization changed beliefs about tax fairness. It created an opportunity for new and compelling compensatory arguments that increased support for taxing the rich.” In other words, while the arguments for taxing the rich have always relied on fairness, the notion of fairness has changed at different times. The book demonstrates that as wars created opportunities for profit for capitalists, thanks to wartime production, the demand they should shoulder more of the tax burden gained great traction.

The book challenges the previous consensus that the consensus in favour of strongly redistributive taxation, to compensate for the sacrifice of ordinary people, lasted for any length of time after world war two. And to the extent there was, it anyway steadily crumbled. The book agrees that globalization, and a new emphasis on incentives for economic growth, played a part in reducing tax rates on the rich as the 20th century wore on. But they argue that a more important factor was the weakening of the kind of compenstory arguments that had been available in wartime. “Different compensatory arguments can be made today, but they have a smaller impact. In today’s debates about progressive taxation, observers often fail to appreciate this fact.”

The book reports a representative survey of over 2000 Americans showing that the top marginal tax rate they select is in fact below today’s rate of 39.6%. There appears to be little support from this for higher taxation. To put it another way, Americans don’t see why Silicon Valley should be taxed because Wall Street was bailed out – although they oppose the bailout. The lesson is: ‘fairness’ is not an abstract concept. You have to find a fairness argument with traction, and the compensatory arguments being used by the left today do not have that. Looking back to the 19th century, before the era of global war provided a strong compensatory argument, the principles that enabled increases in taxes on the rich concerned equal treatment for all within the tax system: as existing taxes were raised on land, new mercantile fortunes were untaxed. So taxation was extended in its coverage. The authors suggest looking to the thickets of exemptions and special privileges rather than the headline-grabbing top marginal rates. Interestingly, this is something Jo Maugham emphasised this week. Maybe he had read this very interesting book. David Stasavage also spoke at this recent LSE Conference on inequality.

 

Going beyond GDP: walking the talk

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Today I’m working on a talk for a conference organised by the Royal Economic Society, Royal Statistical Society and Institute for Fiscal Studies on the agenda for modernising economic statistics. The day’s programme covers a wide range of questions including regional statistics and measuring the digital. My contribution will be about ‘beyond GDP’. I was just reflecting that in the two years since my book, GDP: A Brief But Affectionate History was first published there have been enough other books on this issue to declare it a new genre.

Precursors were in 2009:

[amazon_link id=”B00E32LW1C” target=”_blank” ]Mismeasuring Our Lives[/amazon_link] by Sen, Stiglitz, Fitoussi (the report of the Commission set up by former President Sarkozy)

[amazon_image id=”B00E32LW1C” link=”true” target=”_blank” size=”medium” ]Mismeasuring Our Lives: Why GDP Doesn’t Add Up by Stiglitz, Joseph E., Sen, Amartya, Fitoussi, Jean-Paul published by New Press, The (2010)[/amazon_image]

and in 2013:

[amazon_link id=”019976719X” target=”_blank” ]Beyond GDP: Measuring Welfare and Assessing Sustainability [/amazon_link]by Marc Fleurbaey and Didier Blanchet

[amazon_image id=”019976719X” link=”true” target=”_blank” size=”medium” ]Beyond GDP: Measuring Welfare and Assessing Sustainability[/amazon_image]

Then:

[amazon_link id=”0691169853″ target=”_blank” ]GDP: A Brief But Affectionate History[/amazon_link] by Diane Coyle

[amazon_image id=”0691156794″ link=”true” target=”_blank” size=”medium” ]GDP: A Brief but Affectionate History[/amazon_image]

[amazon_link id=”1780322720″ target=”_blank” ]Gross Domestic Problem[/amazon_link] by Lorenzo Fioramonti

[amazon_image id=”1780322720″ link=”true” target=”_blank” size=”medium” ]Gross Domestic Problem: The Politics Behind the World’s Most Powerful Number (Economic Controversies)[/amazon_image]

[amazon_link id=”0801451639″ target=”_blank” ]Poor Numbers[/amazon_link] by Morten Jerven

[amazon_image id=”0801451639″ link=”true” target=”_blank” size=”medium” ]Poor Numbers: How We are Misled by African Development Statistics and What to Do About it (Cornell Studies in Political Economy)[/amazon_image]

Later:

[amazon_link id=”B015X37CI6″ target=”_blank” ]The Little Big Number[/amazon_link] by Dirk Philipsen

And new/forthcoming:

[amazon_link id=”1681771373″ target=”_blank” ]The Great Invention[/amazon_link] by Ehsan Masood

[amazon_image id=”1681771373″ link=”true” target=”_blank” size=”medium” ]The Great Invention: The Story of GDP and the Making (and Unmaking) of the Modern World[/amazon_image]

[amazon_link id=”B01EB74DFU” target=”_blank” ]The Power of A Single Number[/amazon_link] by Philipp Lepenies.

[amazon_image id=”0231175108″ link=”true” target=”_blank” size=”medium” ]The Power of a Single Number: A Political History of GDP[/amazon_image]

When this kind of thing happens, there is certainly change afoot.

Power and economics

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My esteemed colleague Adam Ozanne has written a very interesting, short book on the strange absence of the concept of power from mainstream modern economics. The book, [amazon_link id=”1137553723″ target=”_blank” ]Power and Neoclassical Economics[/amazon_link], argues that the fact that economics ignores power in social relations has also affected other social sciences, especially political science, as they have adopted techniques and approaches used in economics.

[amazon_image id=”1137553723″ link=”true” target=”_blank” size=”medium” ]Power and Neoclassical Economics: A Return to Political Economy in the Teaching of Economics[/amazon_image]

What explains the lacuna? Adam dates it to, first, the marginalist turn in economics in the 1870s, which started the process of abstracting from the particulars of reality into formalism; and then to the ordinalism of the 1930s and Lionel Robbins’ insistence that ‘positive’ and ‘normative’ economics could be separated. The new welfare economics of the 1950s finished the job. Indeed, Arrow’s famous impossibility theorem seemed to conclude that we can’t say anything practical about social choice. As the book puts it: “It must seem strange to non-economists that economic and social choice theorists have dug themselves into such a deep hole (though a very tidy, immaculately constructed hole) that they cannot even distinguish between rich and poor, but that appears to be the case.”

However, as Adam points out, an alternative interpretation of Arrow is that the actual social ordering that emerges is a function of the exercise of power (and in a way Sen has made the same point in saying other kinds of information apart from individual utilities can enter the story). The book goes on to argue that the fact that mainstream economics has nothing to say about the distribution of income and wealth is an important part of the explanation for cynicism about the subject – both among the general public and students like our university’s active and enthusiastic Post-Crash Economic Society.

The final chapters of the book discuss how power might be incorporated into economics. It notes that there are signs of stirrings in the ‘New Political Economy’ of economists such as Tim Besley and Torsten Persson and the institutional economics of others such as Daron Acemoglu and James Robinson. Adam suggests an interesting definition of power in economics as an analogy with force in physics, a dynamic that moves the social outcome in the direction of specific groups. He reinterprets classic social welfare functions as ‘political economy functions’ in a way that means they can be used in conventional general equilibrium approaches. His approach can be incorporated into co-operative game theory, a bit of the toolkit economists should feel comfortable with.

The book concludes: “Most economists are in denial about the relevance of power to economics and their own ability to fully address, let alone answer, the For Whom question so long as they neglect power. This is reflected in the textbooks they write and the teaching they offer students, and has not changed even though the sub-prime and eurozone crises of recent years provide clear evidence of the failure of many of their models, in particular dynamic stochastic general equilibrium (DSGE) models. ….. [T]here are grounds for believing that students and the wider public are increasingly disenchanted by what is on offer.” He continues that the normative and the positive need to be distinguished but that economists cannot and should not ignore the former.

I very much liked the book – ie. warmly agree with the general argument. Surely one of the longer-term outcomes of the crisis will be – must be – to turn economics back to political economy. I’ll be thinking more about the specific means of incorporating power in economics that the book suggests; it certainly looks promising.

My one (quite major) reservation about this book is its price (currently [amazon_link id=”1137553723″ target=”_blank” ]£34.45 on Amazon[/amazon_link]). The publicist explained to me that it’s a series intended to be read as e-books, but the Kindle price is still £30, and this for a 110 page book. Piketty’s 700-page [amazon_link id=”B00I2WNYJW” target=”_blank” ]Capital in the 21st Century[/amazon_link] is less than £20 in hardback! So come on Palgrave, do your bit for economics by reducing the price and testing the elasticity of demand. Meanwhile, everyone will have to order it from the library.

Better than (Karl) Polanyi

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There was some debate on Twitter yesterday about Karl Polanyi’s [amazon_link id=”080705643X” target=”_blank” ]The Great Transformation[/amazon_link]. Noah Smith linked to this post reporting some research (can’t say it sounds very rigorous) taken to indicate that economists don’t read this book. Summary finding:

“All in all, 66 persons responded (25 percent). This isn’t at all bad, considering that these were cold calls. Approximately 3 percent of economists at elite departments have read Polanyi (assuming that those that did not reply have not read him).”

Hmm. Not sure about that assumption. Anyway, Noah’s response was that economists tend to read new books. Dani Rodrik said: “Polanyi is a hard read and hard sell for economists. But he’s been incredibly influential for my own work.” I got some (very) mild Twitter stick for saying I had read it but wouldn’t set it for my students.

[amazon_image id=”080705643X” link=”true” target=”_blank” size=”medium” ]The Great Transformation: The Political and Economic Origins of Our Time[/amazon_image]

There are several reasons for this. Above all, the book is historically inaccurate – Deirdre McCloskey is the latest of many people to point this out in her new book, [amazon_link id=”022633399X” target=”_blank” ]Bourgeois Equality[/amazon_link]. So if one reads it, it needs to be from a history of thought perspective. Secondly, it’s about social relations and culture, so not central for economics students even though I wholeheartedly agree that economists in general need more hinterland in other areas of social science and history.

It’s also a dense read, and there are better books to recommend to students to introduce them to the social context of markets. I’d say the original Albert Hirschman books have aged better – [amazon_link id=”B00E31J3ZA” target=”_blank” ]Exit, Voice and Loyalty[/amazon_link] for one – and aren’t marred by inaccuracies like The Great Transformation. Of more recent vintage, I think John McMillan’s [amazon_link id=”0393323714″ target=”_blank” ]Reinventing the Bazaar,[/amazon_link] James Scott’s [amazon_link id=”B00D8JJYWA” target=”_blank” ]Seeing Like A State[/amazon_link] and Michael Sandel’s [amazon_link id=”0241954487″ target=”_blank” ]What Money Can’t Buy[/amazon_link] cover the territory better.

[amazon_image id=”0674276604″ link=”true” target=”_blank” size=”medium” ]Exit, Voice and Loyalty: Responses to Decline in Firms, Organizations and States[/amazon_image] [amazon_image id=”0393323714″ link=”true” target=”_blank” size=”medium” ]Reinventing the Bazaar: A Natural History of Markets[/amazon_image] [amazon_image id=”0241954487″ link=”true” target=”_blank” size=”medium” ]What Money Can’t Buy: The Moral Limits of Markets[/amazon_image] [amazon_image id=”B00DO8SACA” link=”true” target=”_blank” size=”medium” ]Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed (Yale Agrarian Studies) by Scott, James New Edition (1999)[/amazon_image]