Henry Haslam is the author of The Moral Mind and The Earth and Us.
We have heard a lot about growth recently. Conservatives are in favour of growth. So is Labour. They always are. But it’s time, now, to move on.
Not because the economy is unimportant – we have enjoyed a thriving economy for many years and we want to maintain it – but because there are other statistics that provide a better measure of the success of the economy and over which the Government can have more influence.
The record of GDP shows fairly steady growth over the years, regardless of changes in government and in economic policy. The most conspicuous discontinuities are the negative growth associated with the 2020 lockdown, the 2008 banking crisis, the inflation peaks of 1980 and 1990, and the 1973 Barber boom (also an inflation peak). There is also evidence of a recession associated with the current inflation peak.
The size of the GDP seems to depend less on government policy and more on the operation of the market. When the market has been able to run smoothly, there has been steady growth in GDP.
It may be claimed that bringing taxes down enables people to spend more, leading to growth. There is also the opposite theory: lower taxes enable people to maintain their living standards while working fewer hours or taking earlier retirement, reducing growth.
These are both quite plausible theories. Which is correct? Perhaps both are. Perhaps one predominated ten years ago and the other predominates today.
When thinking about economic theories that predict the consequences of specific economic policies, we should remember Richard Thaler’s distinction between ‘Econs’ and ‘Humans’. ‘Econs’ are imaginary types who behave in the way that economic theory tells them they should; ‘Humans’, however, may not understand economic theory and even if they do they may not comply with it.
This means that we should not take such economic theories too seriously unless they are backed up by evidence.
Such evidence as there is would suggest that the best thing government can do to maintain growth is to keep inflation down and build up resilience to enable the economy to withstand shocks like the banking crisis and lockdown.
It is claimed that GDP is the best available measure of the size of the economy, but it has numerous drawbacks. Some of these have been spelt out by Diane Coyle, an economist, and Ehsan Masood, a science writer. GDP is not a measure of well-being or quality of life. It can be boosted by acts of destruction, such as wars, but is not enhanced by voluntary work or unpaid housework.
Robert Kennedy in a 1968 speech summed up his assessment of the value of GNP (a precursor of GDP) thus: ‘it measures everything, in short, except that which makes life worthwhile’.
Instead of targeting GDP and growth, the Government should focus on outputs: what the economy and government economic policy can actually achieve. I would attach importance to inflation, unemployment, poverty, inequality, and the quality of public services. These, unlike growth, affect everyday lives.
I would add government debt and the state of the environment, which are the legacy we leave for those who come after us. Economists might include the balance of payments and the exchange rate. It is on these factors, not growth, that a government’s management of the economy should be judged.
Inflation and the environment merit further discussion. When inflation exceeds the acceptable, low level, it is not just that goods and services cost more. Inflation is the cause of much anxiety and uncertainty.
Uncertainty about the future means that pay settlements may be too low (putting livelihoods at risk) or too high (putting jobs at risk). People may spend less, putting more jobs at risk. The Bank of England, in order to bring inflation down, will put up interest rates, leading to higher mortgage payments, putting homes at risk.
Inflation is a significant disrupter of our personal and economic lives. It is not surprising that it tends to be followed by a rise in unemployment and negative growth. The Government’s emphasis on tackling inflation is to be welcomed.
Damage to the environment is an externality: that is to say, it is not the purpose of our economic activity but it is nonetheless a consequence of it. We gave little thought to this in the past, but in recent years we have become increasingly aware of the damage that we have thoughtlessly been inflicting on our planet. The damage includes pollution, soil degradation, destruction of natural habitats, biodiversity loss and depletion of the earth’s natural resources.
The burning of fossil fuels receives a great deal of attention, but it is part of a wider picture. As Margaret Thatcher said in a speech in 1988: “We have unwittingly begun a massive experiment with the system of this planet itself.”
Since the 1960s, people who cared about damage to the environment have expressed the fear that ever-increasing growth will do ever-increasing damage to the environment. More recently, the term ‘degrowth’ has been introduced into the vocabulary.
Here again, however, it is not the size of the economy that counts, it is what it does. Some kinds of economic activity do little or no damage, and we might let them grow: many service industries, for example, and a great deal of online activity. The list might include teaching, medical and social care, the law, entertainment, writing, artistic and scientific creativity and sport.
Other activities do more damage, and we should restrain their growth: manufacturing, construction, travel, and transport. Even with these, however, there are ways of reducing their impact.
Manufactured goods can be made to last and their life can be prolonged by repairing, sharing, reuse and, as a last resort, recycling (the circular economy); transport can be reduced by buying and selling locally. Existing buildings can be maintained, adapted if necessary for different use, and new buildings can be designed to last.
There are numerous ways, too, of reducing the damage associated with food production and land use.
GDP may be of interest to statisticians, but in the dialogue between politicians and the public, the spotlight should be on what the economy actually achieves, for good or ill. That is where government can make a difference; that is what the voters should be looking at.
Henry Haslam is the author of The Moral Mind and The Earth and Us.
We have heard a lot about growth recently. Conservatives are in favour of growth. So is Labour. They always are. But it’s time, now, to move on.
Not because the economy is unimportant – we have enjoyed a thriving economy for many years and we want to maintain it – but because there are other statistics that provide a better measure of the success of the economy and over which the Government can have more influence.
The record of GDP shows fairly steady growth over the years, regardless of changes in government and in economic policy. The most conspicuous discontinuities are the negative growth associated with the 2020 lockdown, the 2008 banking crisis, the inflation peaks of 1980 and 1990, and the 1973 Barber boom (also an inflation peak). There is also evidence of a recession associated with the current inflation peak.
The size of the GDP seems to depend less on government policy and more on the operation of the market. When the market has been able to run smoothly, there has been steady growth in GDP.
It may be claimed that bringing taxes down enables people to spend more, leading to growth. There is also the opposite theory: lower taxes enable people to maintain their living standards while working fewer hours or taking earlier retirement, reducing growth.
These are both quite plausible theories. Which is correct? Perhaps both are. Perhaps one predominated ten years ago and the other predominates today.
When thinking about economic theories that predict the consequences of specific economic policies, we should remember Richard Thaler’s distinction between ‘Econs’ and ‘Humans’. ‘Econs’ are imaginary types who behave in the way that economic theory tells them they should; ‘Humans’, however, may not understand economic theory and even if they do they may not comply with it.
This means that we should not take such economic theories too seriously unless they are backed up by evidence.
Such evidence as there is would suggest that the best thing government can do to maintain growth is to keep inflation down and build up resilience to enable the economy to withstand shocks like the banking crisis and lockdown.
It is claimed that GDP is the best available measure of the size of the economy, but it has numerous drawbacks. Some of these have been spelt out by Diane Coyle, an economist, and Ehsan Masood, a science writer. GDP is not a measure of well-being or quality of life. It can be boosted by acts of destruction, such as wars, but is not enhanced by voluntary work or unpaid housework.
Robert Kennedy in a 1968 speech summed up his assessment of the value of GNP (a precursor of GDP) thus: ‘it measures everything, in short, except that which makes life worthwhile’.
Instead of targeting GDP and growth, the Government should focus on outputs: what the economy and government economic policy can actually achieve. I would attach importance to inflation, unemployment, poverty, inequality, and the quality of public services. These, unlike growth, affect everyday lives.
I would add government debt and the state of the environment, which are the legacy we leave for those who come after us. Economists might include the balance of payments and the exchange rate. It is on these factors, not growth, that a government’s management of the economy should be judged.
Inflation and the environment merit further discussion. When inflation exceeds the acceptable, low level, it is not just that goods and services cost more. Inflation is the cause of much anxiety and uncertainty.
Uncertainty about the future means that pay settlements may be too low (putting livelihoods at risk) or too high (putting jobs at risk). People may spend less, putting more jobs at risk. The Bank of England, in order to bring inflation down, will put up interest rates, leading to higher mortgage payments, putting homes at risk.
Inflation is a significant disrupter of our personal and economic lives. It is not surprising that it tends to be followed by a rise in unemployment and negative growth. The Government’s emphasis on tackling inflation is to be welcomed.
Damage to the environment is an externality: that is to say, it is not the purpose of our economic activity but it is nonetheless a consequence of it. We gave little thought to this in the past, but in recent years we have become increasingly aware of the damage that we have thoughtlessly been inflicting on our planet. The damage includes pollution, soil degradation, destruction of natural habitats, biodiversity loss and depletion of the earth’s natural resources.
The burning of fossil fuels receives a great deal of attention, but it is part of a wider picture. As Margaret Thatcher said in a speech in 1988: “We have unwittingly begun a massive experiment with the system of this planet itself.”
Since the 1960s, people who cared about damage to the environment have expressed the fear that ever-increasing growth will do ever-increasing damage to the environment. More recently, the term ‘degrowth’ has been introduced into the vocabulary.
Here again, however, it is not the size of the economy that counts, it is what it does. Some kinds of economic activity do little or no damage, and we might let them grow: many service industries, for example, and a great deal of online activity. The list might include teaching, medical and social care, the law, entertainment, writing, artistic and scientific creativity and sport.
Other activities do more damage, and we should restrain their growth: manufacturing, construction, travel, and transport. Even with these, however, there are ways of reducing their impact.
Manufactured goods can be made to last and their life can be prolonged by repairing, sharing, reuse and, as a last resort, recycling (the circular economy); transport can be reduced by buying and selling locally. Existing buildings can be maintained, adapted if necessary for different use, and new buildings can be designed to last.
There are numerous ways, too, of reducing the damage associated with food production and land use.
GDP may be of interest to statisticians, but in the dialogue between politicians and the public, the spotlight should be on what the economy actually achieves, for good or ill. That is where government can make a difference; that is what the voters should be looking at.