Economists have been rewarded all too well for fetishing numbers and mathematics. The self-conscious effort within the discipline to turn it into a science (a goal most real scientists would deem to be impossible, given the fickle nature of human behavior), which meant making it more mathematical, has resulted in economists being better paid than other social scientists and having a seat at the policy table.
The result is that this methodological bias (which we discuss at some length in ECONNED), has had the unfortunate effect of blinkering the discipline. Economists have exhibited a great disinclination towards considering the idea that markets and economies could be unstable, first, because the mathematics that can characterize instability are fairly daunting and second, economists would have much less to say about them (as in the range of possible outcomes quickly becomes large). And this love of quantification has been taken up with even more enthusiasm by businessmen, with equally questionable outcomes (some of the most important aspects of business performance may note be readily quantified, but the obsession with measurement means those behaviors will be overemphasiszed).
Some within the academy have started to question the biases that result from focusing on what can be easily measured versus richer, more nuanced appraisals. For instance, Joseph Stiglitz and Amartya Sen have argued that GDP is a poor metric of economic progress, and are working to develop better measures.
John Kay at the Financial Times has some musings along these lines. He offers a defense of the value of the arts (in a UK context, where it is often subsidized) which might strike some flat notes with US readers, but his underlying reasoning has merit.
From the Financial Times:
Many people underestimate the contribution disease makes to the economy. In Britain…. [i]llness contributes about 10 per cent of the UK’s economy: the government does not do enough to promote disease.
Such reasoning is identical to that of studies sitting on my desk that purport to measure the economic contribution of sport, tourism and the arts. These studies point to the number of jobs created, and the ancillary activities needed to make the activities possible. They add up the incomes that result….to persuade us….that they contribute to something called “the economy”.
The analogy illustrates the obvious fallacy. What the exercises measure is not the benefits of the activities they applaud, but their cost; and the value of an activity is not what it costs, but the amount by which its benefit exceeds its costs. The economic contribution of sport is in the pleasure participants and spectators derive, and the resulting gains in health and longevity…..Similarly, the economic value of the arts is in the commercial and cultural value of the performance, not the costs of cleaning the theatre… Good economics here, as so often, is a matter of giving precision to our common sense. Bad economics here, as so often, involves inventing bogus numbers to answer badly formulated questions.
But good economics is often harder to do than bad economics. It is difficult to measure the value of a Shakespeare play…..The relevant economic questions are whether the cultural and commercial value of the performance offsets these costs and whether these benefits can be translated into a combination of box office receipts, sponsorship and public subsidy. The appropriate economic criterion, everywhere and always, is the value of the output.
But bad economics has been allowed to drive out good. I am sympathetic to the well-intentioned people who commission studies of economic benefit, though not to those who take money for carrying them out. They are responding to a climate in which philistine businessmen assert that the private sector company that manufactures pills is a wealth creator, but the public sector doctor who prescribes them is not. Extolling the virtues of manufacturing, they value the popcorn sold in the interval, but not the performance of the play, arguing that the vendor of consumer goods creates resources, which the subsidised theatre uses up. People who work in the theatre, hospitals or education are often forced to listen to this nonsense. It should be no surprise that so many of them despise business and the values such business espouses. If these values were truly the values of business they would be right to despise them….
We need to put out of our minds this widely held notion that there is such a thing as “the economy”, a monster outside the door that needs to be fed and propitiated and whose values conflict with things – such as sports, tourism and the arts – that make our lives agreeable and worthwhile. Activities that are good in themselves are good for the economy, and activities that are bad in themselves are bad for the economy. The only intelligible meaning of “benefit to the economy” is the contribution – direct or indirect – the activity makes to the welfare of ordinary citizens.
Yves here. If you don’t like the arts example, consider childrearing. If you were to adopt a purely GDP perspective, unpaid child care (mothers staying at home to raise their kids) has no value (save maybe in a discounted NPV of child’s future earnings, but discounting cash flows that don’t begin for 20 more years produces a surprisingly low number).
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Future of Arts Councils in GB doesn’t look promising.
http://www.nytimes.com/2010/08/10/world/europe/10britain.html?_r=1&ref=europe
Bullish! In order to fool the Quant Spider Bots (QSB’s) , I would please ask everyone to put the word Bullish! into the the first word of every comment they make on every blog.
Gross Domestic *Product* is a measure of how hard everybody is working (and how many people there are to do the work). Working hard and having more neighbors should not be goals in life, so who is driving this?
It’s the small minority of the population who benefit from other people’s hard work who always want more workers, and want them to work more hours doing more things for less pay. The rest of us should be in favor of less productivity and more time to enjoy ourselves.
“Gross Domestic *Product* is a measure of how hard everybody is working (and how many people there are to do the work).”
And, crucially, how efficiently people can work. We have a vastly higher real GDP/capita today than 100 years ago because of technological improvements, not because people are working harder or longer.
“The rest of us should be in favor of less productivity and more time to enjoy ourselves.”
No to the first and a qualified yes to the second. We should ask for a more equitable split of the pie. Whether that means less time working or greater material prosperity should ideally be a matter of personal choice, though in practice each person is heavily influenced by the prevailing norms of current society.
I agree. Just to provide some context: The textbooks tell us that increases in productivity lead to better living standards. i.e. As a worker’s productivity increases, the value of his work increases and that leads to better wages and/or more leisure time.
The textbooks/mainstream economic theory used to be right on this point. For the last 10 years or so though productivity increases have translated to corporate profits (and better living standards for corporate masters) but have not translated into higher wages for the lowly worker.
Part of this is explained by the difference between real productivity (technological innovation, etc.) and phony productivity (unpaid overtime) but that’s only part…
Higher technological efficiency just means that the shareholder earns more, not that the worker earns more (you don’t even need to go to Marx for that, it’s all in Ricardo). Workers earning more is due purely to the social campaigns of the nineteenth and twentieth centuries. There is an argument to be made that technology “allowed” that to happen, but it still wasn’t a natural unforced response of employers.
“There is an argument to be made that technology “allowed” that to happen …”
You sound skeptical. Do you have a refutation of that argument?
“Higher technological efficiency just means that the shareholder earns more, not that the worker earns more …”
If we as a society choose to let it mean that.
“Workers earning more is due purely to the social campaigns of the nineteenth and twentieth centuries.”
That, some revolutions, some failed but still scary to the powers-that-be revolutions (e.g. 1848), stuff like that.
“it still wasn’t a natural unforced response of employers”
Nor was allowing the benefits to accrue solely to employers natural or unforced. Economics is about the societies we create far more than about any natural principles.
It is not clear how useful or meaningful it would be to develop QOL metrics beyond something like HDI. One would either have to come up with external definitions of happiness in terms of measurable quantities (as the HDI does, but going further) or rely on subjective empirical evidence (poll results). It is unlikely that either of these two approaches could be useful in practice — the former, because of its inevitable arrogance in deciding what makes people happy; the latter, because it is virtually impossible to correlate actual life satisfaction with with objective variables that could influence policy decisions. Not to mention that among the most important determinants of life satisfaction are probably things like weather and culture, which vary a lot from place to place but cannot or should not be messed with by economists or politicians to any great degree. Popular magazines come up with QOL rankings of cities (and countries) all the time, but to think that one could somehow elevate this sort of thing into a rigorous academic discipline is probably overly optimistic.
A pivotal false metric I was just reading about was the Chicago fraud which justified exorbitant CEO extractions by dogmatically claiming that the metric of a company’s value and productivity should be its stock price, and that the CEO’s extraction package should be based on this price, via stock options.
That’s quite an exercise in question-begging. By what reality-based measure does the stock price reflect value at all? (Why should the stock market even exist?) Yet once you enshrine it as not only a valid measure but the most important measure, control fraud becomes ideologically justifed. From there the next step is to gut the law itself. This organized crime becomes legalized.
So economists aren’t just deluded sociopaths (though many of them are that as well); they’re conscious criminal ideologues.
As for the arts example, he also mentioned sports. I haven’t had the opportunity to ask a sports fan how he feels justified in being a freeloader on the taxpayer via subsidized stadiums and subsidized pro sports at the “college” level (studies have consistently proven that the alleged “job creation” of a stadium is a fraud – new stadiums consistently destroy jobs and value in the locality; same for professional college sports, which are all subsidized out of general funds). But I imagine if pressed he’d try to justify it the same way, so the mentality isn’t alien to Americans; it’s just characteristically transposed to a more anti-intellectual, anti-cultural plane.
But if such subsidies constitute freeloading, then qualitatively the football fan is just as much a freeloader as the opera-goer. In magnitude of the subsidy, he’s far more of one.
Well being stock…were is it.
Our legal heritage is based on the belief that the material realm can be separated from the spiritual realm. As David Little wrote in “Religion and Civil Virtue in America”:
…Jefferson and Madison presupposed a crucial distinction of longstanding significance in the Western Christian tradition between what was called the “internal forum,” or conscience, and the “external forum,” or civil government. Accordingly, human beings were believed to be subject to “two laws” and “two governments”—-one an inner law of the spirit, enforced by reason and reflection of the mind and heart; and the other, an outer law, enforced, finally, by the magistrate’s sword.
[….]
Set apart from the outward moral sphere, according to the tradition on which Jefferson drew, is the inner sphere, the strictly religious sphere. If morality, at bottom, concerns the regulation of physical, or outward, injury by physical, or outward, means, religion concerns the regulation of the inner, or spiritual, life by inner, or spiritual, means. This implies that the life of the spirit may not be regulated by outward, or physical coercion. It must, that is, be left completely free to follow its own inner laws and dictates. Therefore, a much greater range of persona discretion and determination must be permitted in the “things of the spirit” than in the “things of the body.”
Kay is correct in that the rewards of the arts, sports and tourism are almost entirely spiritual. But what he doesn’t realize is that, at least in the American legal tradition, things spiritual fall outside the realm of civil government, including government establishment and subsidy.
It is for this reason that economists try to cook up these material (economic) parameters, which are measurable, to apply to sports and the arts. They do this in order to justify government intrusion (subsidy) into areas that have traditonally been off limits. But by placing sole emphasis on the material (economic) value, the spiritual value gets crowded out.
Jefferson and Madison never discounted the value of things spiritual as the modern-day economist does. In fact, they believed things spiritual are more important than things material. That is why they believed the spiritual realm should be as free of government control and subsidy as is possible.
Is part of the problem, that we need a new name for spiritualism.
Wow. My respects, DownSouth. You’ve nailed it.
Is the fact that I find Jeffersons’s and Madison’s views so reasonable and desirable a reflection of the fact that I’m an American? No complaints here – I wouldn’t change my view if I could, but it does show we’re all products of our society. No medievalism for me, thanks.
In Western scientistic society (physics being the gold standard) we believe the real is what can be measured, with the object being ultimate control. In large part our epistemology, hence our political and economic relationships, are defined by the will to power, as the mustachioed philologist put it.
We’ve relegated the rest of human experience (when we believe in it at all) to the fragments of the Church and the poets.
Exactly. This is why the government should provide a job guarantee. The social value of unemployment goes far beyond the metrics the market uses to measure the worth of a worker.
It was in the Himalayas, in the tiny country of Bhutan, that the king decided that there needed to be a new way to define prosperity, that would measure actual well being rather than consumption. He called this measure “Gross National Happiness”. An important point was that there should be an infusion of moral and cultural values into the core of the economic policy, something that has been clearly lacking in the US. In using instead the “Gross National Product” to define prosperity, we have clearly been following strategies that have left people with more material possessions, but less psychological well-being. In the New Economics Foundation (NEF) study of 2006 of world happiness the USA ranked at the 150th place.
In a white paper on Gross National Happiness, Med Yones of the International Institute of Management suggests that the role of government should shift from managing economic growth to socioeconomic development.
“American public policy should shift its focus from:
•The standard of living to the quality of life
•Material possessions to well-being (physical, mental, and material)
•Unsustainable economic development to sustainable environmental development
•Consumerism to investment
•Economic-driven education to socioeconomic-driven education
Government can also make substantial improvements by implementing the following recommendations:
•Simplify people’s lives through reformed civil laws and taxes.
•Establish new tax and budget policies in line with public mental, emotional and physical wellness goals. For example, provide funding for the promotion of positive psychology and cultural education in schools, workplaces and public media.
•Shift policy priority from waging wars – a major source of socioeconomic stress and long-term liability – to local socioeconomic development and foreign collaboration.”
So, as the flawed economies of mainstream western development model, based on capitalism and free-market enterprise, plunge over Himalayan scale cliffs, it could be just the opportunity we need to reconstruct our economy on a much improved model that is based on principles of life and well being.
If you don’t like sports or the arts, there is always the casino industry.
In the midwest, the gambling (sorry, “gaming”) industry regularly drums up local support by claiming that casino expansion will “bring jobs to our community.”
Of course, this entire industry generates little or nothing of value, being but a means of shifting money from the pockets of gamblers to the pockets of casino owners. Any jobs created are purely incidental; the money liost by gamblers would be invested or spent on other, presumably less useless, activities.
Actually, one could say the same about much of the entertainment industry, just that the results of the gambling (sorry, “gaming”) industry can’t even claim to produce a cultural monument like T.J. Hooker or a Super Bowl victory.
Price is not value, a very profound statement. And so I sallied forth into the thread. What do I find? A lot of stuff that chews at the edge of what could be a very constructive dialogue.
Prices can be recorded, tracked and manipulated by all manner of mathematical application. Value, however, is something that is highly individualized and ephemeral, it’s a concept that’s not particularly amenable to even the most rigourous mathematical applications.
I do not count myself as a devotee of the arts, but I do enjoy the theater, movies, music, museums and many forms of literature. What the arts give to me is a mirror of myself and the society in which I live. It’s not that I have the view that art imitates life that is my measure of what the value of art is to me; it is that art gives me an insight into what we individually value and how that value motivates our social structure. There is no monetary value to that apart to what it costs me in terms of tickets and time.
But then, there is the other aspect of this price versus value question that needs consideration. There is this element of motivation in the transaction that is the differential between a mathematically estimated price and the price of the exchange. That differential is neither constant nor predictable. What particularly misleads the practitioners of the arts of the black box and arcane mathematical applications is the fact that they seem to believe that they quantify that which has no quantity and which exists only as a whim of the moment.
Broken link:
GDP is a poor metric of economic progres
Yves Smith: “The self-conscious effort within the discipline to turn it into a science (a goal most real scientists would deem to be impossible, given the fickle nature of human behavior), which meant making it more mathematical …”
No, science is an approach to knowledge. The fact that economics is a less tractable problem than say physics, or that it largely lacks “natural principles” (as opposed to principles of our society) doesn’t mean that it can’t be approached scientifically. Of course that requires economists who are more interested in science than in ideology or mathematical masturbation, but there is no fundamental epistemological obstacle to a scientific approach to economics.
War and just plain killing people you don’t like or who look or act different than you do—solely because you can—is better than disease
it contributes far more to the economy
I am so keeping that quote in my archive “Pearls from the Web”.
The “problem” for economists and policy-makers with the arts is that their value is existential. In other words, they ask us to think, pose problems rather than solutions and question accepted values. To the quantitative thinker this presents a miasma of unknowns. To the policy-maker it reduces rather than increases uncertainty. A poster above cites British government cutting arts subsidies. This reflects the typical conservative attitude that the arts should survive in the marketplace without government support. Underlying this attitude is the puritanical notion that the arts are just a superfluous luxury and the paranoid suspicion that they are subversive. So are conservative economic policies.Too bad. But from even the narrow economic standpoint, just look at the power of the arts to stimulate urban economies in just one city, New York. Since the sixties, the arts economy has successively revived Soho, the Lower East Side, Chelsea and the Bowery. For an activity that has intangible value, I’d say that’s a pretty good collateral benefit.
Oops. I meant “reduces certainty, not uncertainty”.
In fact this differential monetization is one reason some of the developing countries show lower GDP but have quite decent life style.
the difference between monetary economy and real economy is problematic in the least. I discussed it in my book.
Am still waiting for my Econned copy Amazon by now a person could have walked from US to India with the book.
What is so amazing about the simplicity (and irrefutable nature) of the concept that price does not equal value is that you cannot get a week into an introductory micro course without hearing the words “consumer surplus” and “producer surplus” when looking at price-quantity graphs. It is close to impossible that price equals value. That occurs, almost by definition, in only a tiny, tiny fraction of all transactions. And that’s even assuming that transactions without consumer or producer surplus are accurately measuring value in the first place by attaching dollar values.
How it is that the “economists” seemingly ignore the obvious tenets that (1) price does not equal value and (2) negative externalities exist, I cannot fathom. These are two of the first things they teach in their discipline!
Bravo to Mr. Kay. Econned has clarified a methodology for viewing the economy and “valuations” specifically that is both amusing and stunning. It often becomes a case that to learn the truth you should, as the psychologist Adler said, “trust only motion.” Or as the detectives like to say “follow the money.” In this case who do the valuations serve and who determines them ? Most items sold from shirts to bonds are “banded” and floor prices set by sellers and not the market. can you have a market without price flexibility and competition? I am not sure, but since I am at war with a medical insurance company at the moemnt, I would love to see some doctors and lab fees made a bit more competitive.
Anyway,the thinking is math ability=smart people who should be paid more. However why more than an engineer or a tool maker for that matter? It is because approximation to money is a shared fetish, and as such is of higher value since they are the priesthood that knows the magic incantations that can entice the ‘god’ to move.Economists have become like the Hindu religion, fragmanting into a number of cults of many models er…..”gods”.
The application of basic valuations thus becomes the most remunerative social function and needs to thus be transparant to well positioned generalists. So, effective economics is like Jazz. Smooth jazz is easier than be bop and pays better.
Once again, this is the fallacy of mistaking the map for the world. GDP is a _measure_ of economic value, not a value in and of itself. As a measurement, it is itself an artifact, like a map. But it is not the terrain it purports to represent.
As anyone who’s ever used maps knows, if you go to sleep mentally while attempting to use one, you have a good chance of ending up lost. Maps are only one tool among many, and they are emphatically no substitute for what you see and feel and hear with your own senses. Any measure of value will have its strengths and weaknesses, and is itself no substitute for human judgment.
Price is the inevitably failed attempt to measure a quality which cannot be measured. We’re still quite frozen, culturally, by the legacy of the progression away from religious dogma towards the ‘objective’ pursuit of scientific fact, in which, after Galileo and Bentham, if a phenomenon cannot be measured, it does not really exist, is at best an epiphenomenon. Economics will remain frustrated while it tries to measure ‘objectively’ something that exists, like beauty, in the eye of the beholder, just as culture/society will continue to breakdown until it learns how to re-embrace uncertainty, and change course away from obsessive top-down control towards a looser and more adaptive egalitarianism.
This urge to pin value down, and then to have a medium of exchange store it, arises ultimately from the post-farming urge to control nature, to defeat the irritants of the wild that interfere with a hoped-for easy life. We’ve been at it for millennia and it’s reached its maximum, has become in fact life-threatening. We are controlling ourselves to death, bringing about a sixth extinction event in our fear-filled, scarcity-based struggle to survive. I know it seems like a leap to go from ‘price does not equal value’ to existential crisis, but I see a clear relationship. That some within economics orthodoxy have decoupled price and value is one of the many signs of thawing that hopefully will add up to a very needed radical change of direction.
“Price is the inevitably failed attempt to measure a quality which cannot be measured.”
No, using price (money) as a proxy for value is where the error lies. Money is just a system of accounting. How much M are you willing to fork over in exchange for X, or vica versa.
“We’re still quite frozen, culturally, by the legacy of the progression away from religious dogma towards the ‘objective’ pursuit of scientific fact”
We were pretty frozen in the religious dogma period too. Will we ever thaw out?
“after Galileo and Bentham, if a phenomenon cannot be measured, it does not really exist, is at best an epiphenomenon.”
A pretty quantitatively oriented fellow named A. Einstein once said “everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.”
I’m a strong believer in quantitatively evaluating anything that can be reasonably and intelligently quantified. The error lies in ignoring Einstein’s caveat.
“This urge to pin value down, and then to have a medium of exchange store it, arises ultimately from the post-farming urge to control nature …”
Post-farming? Farming is a way of controlling nature. Even the organic garden tended by hand is anything but natural.
“to defeat the irritants of the wild that interfere with a hoped-for easy life”
Cave men tried (and succeeded to a large extent) in defeating the irritants of the wild by building a fire to keep warm or cook food. Same with making stone tools or wearing animal skins.
“We are controlling ourselves to death, bringing about a sixth extinction event in our fear-filled, scarcity-based struggle to survive.”
Because we use money as a medium of exchange? What currency did the Easter Islanders use when they destroyed their environment?
I find prose to be more adept at portraying complexity than numbers, or at least the type economists’ present us with all to often.
That is one the chief reason the arts exist in human social life; reality is damn complex.
But…but…but the markets are infallible, so the prices they set MUST be value. We have an entire system based on Wildean cynicism: It knows the price of everything and the value of nothing.