The Indigo Prize was created to find a better way of measuring the economy than the traditional GDP. In his entry, Tom Forth explained why the competition was asking the wrong question.
On 7 July, in the Financial Times, Tim Harford argued that the simplest innovations often create the most value. It’s a familiar and beautiful story, and it doesn’t take much thinking to agree that toilets probably matter more than a web-connected thermostat.
On 8 July, in the London Evening Standard, some of the the creators of the Indigo Prize explained why a better measure of progress than GDP is worth £100,000. And again, it doesn’t take much thinking to agree that what matters in our lives is family, friends, health, purpose, and happiness. They certainly matter more than the number of pounds in the national GDP measure that makes the headlines every quarter, and fills discussions in between.
There’s an important link between these two pieces. Here, in just over a fifth of the 5000 words that I’m allowed to win the big prize, I’ll explain it.
Add up every hair cut, glass of water, pint of beer, bicycle tyre, bank account fee, pet insurance policy, bus journey, electricity bill, contact lens, tank of petrol, dentist appointment, pay packet, business investment, rent bill, and much much more, and you get a country’s GDP.
If you want to compare one country with another you adjust for the difference in how much things cost in each: that’s called PPP (“purchasing power parity”) or PPS (“purchasing power standards”). If you want to compare a country today with itself in the past, you also adjust for the difference in how much things cost: that’s called real terms or constant prices.
And if you make some adjustments for how well the GDP is shared within a country, you get inequality-adjusted GDP. Well, you would, if someone had invented it: I’m sure that The Indigo Prize will get many such suggestions.
But an inequality-adjusted GDP, or a sustainable GDP, or a fair-trade GDP are like the web-connected thermostats that many of us mock. They are complicated, exciting, new, fresh, and just not very important. They are what you get if you try and solve a problem with technology without asking the right people what the problem was.
GDP is a simple idea. The details are hard, but we’ve got good at them in the past 70 years or so. Most importantly, it works. Famously, the human development index correlates almost perfectly with it.
And when you think about it, the correlation shouldn’t be a surprise. People and societies prioritise the things that really matter to them. The more money they have, the more that they can do, and the further down their list of priorities they can get.
So GDP is a great measure of what really matters – as long as we trust people to spend their money on what matters to them. I do.
GDP is like toilets
What’s really lacking from our current measures of GDP is the same as what’s lacking with our current toilets. There are too many places where you can’t find a good one.
Today two-thirds of people have access to a toilet. It’s a remarkable achievement, but it’s not good enough. The unglamorous task of getting toilets to the remaining third of humanity matters more than almost anything else. Try Rose George’s book Adventures in the World of Human Waste if you need convincing. You’ll be convinced in the first chapter.
It’s the same with GDP. Today, the majority of people in the world have access to a national GDP measure. But far too few know how their local economy, and thus their wider community’s wellbeing, is changing.
For years I’ve built free tools that give people a slightly better idea of how their economy is doing. People in Wales can see how their economy came to perform as well as Estonia’s. People in Greater Manchester can see how their economy came to perform as well as Spain’s. People in South Yorkshire can see how their economy performs about as well as Portugal’s.
And yet we know that these numbers aren’t good enough. They are available far too slowly; the best data we have for South Yorkshire’s GDP today is from 2015. We will get 2016’s estimates in December 2017. We also don’t collect enough data on consumption and production locally, we don’t look hard enough at what things people buy, and we don’t measure how much those things cost in different places. So our local measures of GDP don’t take into account local inflation.
The ONS know this: its RSTI (Regional Short Term Indicators) project is trying to fix it, and in December 2018 England will get its first ever timely estimates of regional GVA. Still not quite GDP, but closer.
We need to go further, in more places, and all over the world. We need to make this a priority, because we have seen what happens when we cannot produce measurements that are relevant to the communities that people live in: they stop listening.
Fixing GDP is like fixing toilets. We need more of the same, not something new and fancy.
If Iceland can measure real GDP for its 330,000 people every quarter, and if Estonia can measure real GDP for its 1.3m people every quarter, then it’s not good enough that much larger parts of the UK, and many other parts of the world, have much worse data.
I’ll end with just one of the many reasons why I think that this is important.
Scotland calculates its own GDP figures and debates them vigorously. My home region of Yorkshire, with an equal population, doesn’t calculate its own GDP, and is rightly uninterested in the weak proxies that are available.
This matters enormously. GDP, the favourite measure of economists, isn’t relevant to the people of Yorkshire. It is certainly not relevant to the people of Bradford or Barnsley. And so, since everyone lives in a place not a country, UK GDP figures are not relevant to most of the UK.
People can feel this. They correctly feel that their lives are not reflected in public debates. This influences the trust that they have in economists, and in those politicians that rely on economists’ arguments and data.
The UK has had two extremely important referendums in recent years. In the first, Scotland took the option recommended by most economists, to remain in the UK. In the second, Scotland again took the option recommended by most economists, to remain in the EU. But England, especially areas like mine in Yorkshire – those areas most poorly informed by the data collected by our national economists – took the option that most economists did not recommend. We voted to leave the EU.
If economists want people to listen to them again, they should dump plans for a new measure of well-being. To return to my analogy, they should stop dreaming about internet-connected thermostats and get on with building more toilets. They should make sure that never again do they talk about economic collapse in Greece while celebrating the UK’s success, unaware that South Yorkshire’s economy was collapsing nearly as quickly.
Economists should use the methods that we already have to make GDP relevant to more of the people of Britain, and then spread this to more of the world. If the goal of economic measures is to inform people better about their current situation, then providing them with local GDPs will achieve much more than providing them with a national inequality-adjusted GDP, a national sustainable GDP, or a national fair-trade GDP. But as a suggestion, it’s not likely to win any prizes.
Sadly, this essay did not win the Indigo Prize.