Economic growth figures are widely reported and have pervasive impact on how we view the world. They also have strong impact on our material and mental well-being, even though we learn at school that the bean-counting underlying GDP is full of flaws. Our happiness does not really grow, but reading about growth still makes us happy. In the opinion article below, Martin de Jong examines why economic growth as currently measured boosts false consciousness, but why it has not been dismantled and what role economists and accounting systems play in this game.
-4% as good news
I am not sure how such feelings work inside you, dear reader, but I generally sense that my mood improves considerably when I read that economic growth figures are positive once again, or when the damage that the Corona crisis has done to our economy proves to be as low as -4% in 2020 after the extensive malaise we have been through. Such good tides can easily send me into a day-long psychological wave of optimism. I have known since my core secondary school classes in macroeconomics that Gross Domestic Product is measured in ways that any critical observer might characterize as ‘severely biased’. Somehow this never seems to have bothered me much. Life is good and people always presume it’s getting better, so why bother?
But times are changing. Because of my affiliation with the Erasmus Initiative for the Dynamics of Inclusive Prosperity I have picked up an old habit of reading on the subject of establishing and measuring economic value. Over the past two years I have grown far more attuned to stories of the remarkable mismatch between the endlessly growing wealth that most societies claim to be enjoying in toto, and the rising numbers of middle and lower class members pro parte who go about their daily struggle with job impermanence and gradually shrinking purchasing power. It has been common knowledge for decades among the well-informed that GDP is not just an inappropriate measure for establishing broader forms of societal well-being beyond material wealth alone, but that it also legitimates arbitrary choices in which some economic functions count as ‘productive’ and others do not. While the former can be readily observed in the apparent irrelevance of human, social and biological existence to the extent that these cannot be expressed in monetary form, the latter has enormous impact in that government expenditures, even to economically crucial sectors such as health and education, are counted as costs. Financial transactions, on the other hand, including highly speculative ones that severely destabilize our financial and real economies are seen as highly productive. Moreover, the higher the market value of the speculatively traded assets, the higher their contribution to national GDP. But who thinks of that undercurrent when looking at ‘-4%’?
The rise of the empirical economist
For one reason or another, the imperfections in national book-keeping and their pervasive consequences for people, planet and profit seem not to overly disturb us. In the end we are all happy when our ‘economies are recovering’ again, and what else could happiness really be? We strongly encourage our governments to take adequate and powerful measures to restore ‘growth’ whenever it appears to be negative or unduly low. The fact that classical book-keeping at the level of individual households, corporations and nations apparently does not measure what most of us would really like to know or achieve in life and yet persists in its dominance is certainly not for lack of alternatives. Pleas to adopt accounting practices such as a green GDP, a broader conception of societal well-being and its indicators, measures of social development or a happiness index have long been in existence, but have never obtained the political clout to really make a difference or oust good old financial book-keeping. Neither is it fair to say that this is only because of malicious intent on the part of private sector lobbies or conservative governments, because public pressure for their adoption or movements towards the measurement of prosperity and its progress have always been simply too weak to bring about these changes. Our happiness does not grow, but reading about growth makes us happy. Ignorance is bliss.
Recently, however, a selection of progressively inclined economists has documented how the global disparity in wealth and income actually decreased between the Second World War and the late 1970s, before steeply rising once more. Leading economic figures such as Joseph Stiglitz, Thomas Piketty, Mariana Mazzucato and Paul Collier have dug up their left-wing axes and demonstrated that the way orthodox models establish marginal productivity is tautological; argued that value of products or services does not automatically equal market value; made credible that shareholders and top executives are involved in systematic collusion to funnel company profits into their own pockets, rather than reinvesting it in the companies they hold responsibility for; claimed that many financial transactions harm rather than benefit the real economy; narrated that outsourcing public services to the private sector has often significantly raised transaction costs and decreased customer satisfaction; and shown through role-play exercises that when students are taught that people are selfish utility maximizers, the result is to make them worse human beings.
While the authors referred to above focus primarily on analyzing the nature of rising social inequality and environmental degradation, other unorthodox economists like Kate Raworth, Colin Mayer, Tim Jackson and Katherine Gibson have dissected key assumptions in neoclassical and Keynesian economics while pointing out the adjustments required to ‘take back the economy’ and make it a more humane, sustainable and pleasant system of production and consumption, allocation and distribution to live in. Their purview includes questions like what would it take to lift the bottom billion up to a decent living? How can a meaningful sense of purpose for corporations be defined? Is it feasible to realize a zero-carbon existence combined with a service-based economy? How can we reinterpret work, business, market, property and finance in such ways that we generate positive outcomes for ourselves and others? And the broader question: can economics become a utility for common people?
"Our happiness does not grow, but reading about growth makes us happy. Ignorance is bliss."
The virtuous death of elegance
The real-life economists mentioned above are increasingly seen as rising stars in the media (when Piketty arrived to lecture the Members of Dutch Second Chamber of Parliament he was even characterized as a ‘rock star’) and have become respected scholars in their field outside orthodoxy, but nonetheless mainstream economists still discard their views and approaches as merely ‘political economy’ rather than ‘true’ economics. After all, true economics has been comfortable for so long to dwell in mathematical dreams instead of textual understanding of causal mechanisms. It was so uplifting to apply ceteris paribus clauses whenever things became too complex to understand. It had remained so pleasant throughout the years to publish top-notch papers and make scholarly and professional careers in the science of abstract modelling while disparaging the art of looking around at the practice of humans toiling at the work-floor as ‘sociology’. Indeed, for decades there was little reason for the neoclassical or other orthodox economists to fear for the dominance of their natural science approach to the social sciences: policy-makers tended to appreciate the ostensible clarity and precision of model-derived numbers more highly than the messiness of tentative causal understandings of historical events. Erroneous predictions and policy failures were to be handled by future generations ready for new economic challenges; and when push came to shove the economic advisors at fault could always point to the limited tenability of the assumptions underlying their elegant models: “We told you, did we not? We are scientists, remember, not politicians”.
But if appearances do not deceive this time, this convenient state of affairs is likely to end in the not too distant future. In the face of continuously disappointing growth figures, rampant desertification and deforestation, by now (we may hope) truly undeniable climate change, working and service classes turning to demagogic leadership for salvation and global poverty once again on the rise after a financial and epidemiological crisis, it appears that change is in the air. Let us chase numerical chimeras grounded on debased axioms from our heads and replace them with new, but decidedly less harmful illusions: economics based on sounder psychology and a more considered valuation of public values that may indeed help us build a more sustainable society.
The arrival of responsible accountancy
One need not be a left-wing activist to plead that the time has come for economics to operate as an empirical social science discipline and to contribute to the modernization and adoption of fairer accounting systems. However, the phenomenon that once drove Karl Marx to his global fame has actually reared its ugly head again: corporate benefits are systematically creamed off by the modern upper classes through purposely complicated arrangements for derivatives, options and buybacks which only they sufficiently understand. The share of the pie which regular employees and workers receive in the breakdown of company profits has shriveled over time. Even reinvestments in the corporations themselves have been tremendously reduced, sometimes to the point of putting their long-term survival on the line. In the face of chronic underperformance and widespread dissatisfaction, the traditional claim that economics is only about allocation, not distribution is probably the first one to be dismissed as inconsequential if not intentionally dissimulative. But clearly what is really needed to unravel the monomaniacal focus on GDP growth and replace it with something more appropriate is to dispel the institutional foundations that undergird current book-keeping practices that have taken us where we are now. If there is much in the functioning of modern economies likely to make a new brand of neo-Marxists lick their lips, perhaps it is worthwhile making an ultimate attempt to forestall revolutionary activity and redevelop it into something that has the carrying capacity to harmonize relations between government, business and society.
It is here that economic historian Jacob Soll can lend us a hand. In his highly readable The Reckoning; Financial Accountability and the Making and Breaking of Nations, he offers a detailed account of how double entry book-keeping was first introduced in late medieval Florence by diligent, god-fearing merchants. Getting it widely adopted proved to be a far harder nut to crack than one might think in current times where conventional accountancy and auditing have become common practice and no less than a legal requirement. Not only did it exceed the analytical skills of most clerks in those days to flesh out a decent and reliable financial administration, some of the municipal and monarchic overlords they served also wished to preserve full sovereignty over their capital and used their power to frustrate book-keepers keen to bring unsavory spending patterns out into the open. In the following centuries, book-keeping was further perfected, disseminated and linked to stock market operations by Dutch and British traders and utilized by Spanish and French Kings to monitor the financial misdemeanors of their courtiers. Revenue derived from royal dominions and taxes collected around the country were vast and the amounts of dissipated funds occasionally beyond imagination. Through the ages, book-keeping evolved into a reliable approach to comprehend and control incoming and outgoing streams of money, monitor the value of assets, discipline spending behavior and mitigate corruption. Since the positive effects of such accountancy systems outweighed their analytical limitations, they became increasingly sophisticated and gradually incorporated new features in response to the social and administrative needs of the times. It was by roughly the middle of the 20th century that the core nature of today’s corporate and national book-keeping systems became institutionalized.
A capitalism without false consciousness
As we all know only too well, there are no performance measurement systems without weaknesses and even fewer that can fully stand the test of time. Specific indicators become canonized and deified, growing complexity makes abuse easier for the initiated and social requirements that matter to their functioning fail to be incorporated. Without regular updates, systems grow obsolete and users fail to see the forest for the trees. Anno 2020, all of the objectionable phenomena discussed above come out into the open. National accountancy no longer records what we need to know about our prosperity and well-being. Large accountancy firms have merged with even larger consultancy firms, thus compromising their independence in reporting on large energy and banking corporations. In spite of a flurry of different types of corporate sustainability reports promoted by the reporting industry that actually benefits the most from producing them, it remains just the financial reports that make the power brokers tick. De-institutionalizing outdated national and corporate accounting systems and re-institutionalizing enhanced versions fit for new purposes is demanding: this can only come about with fits and starts and definitely necessitates political wrestling activity. Some of the ones built into the current system were actually promoted by financial lobby groups that got their points home when the rest of the world was not watching or failed to see the fatal importance of their intervention. But a long march in the right direction always begins with a first step, and it would be my claim that kicking the harmful habit of being enthralled by deceptive economic growth figures is exactly that. I learn, you learn, we learn that saving capitalism will be a matter of breaking through false consciousness and interpreting ‘capital’ as a much broader concept than finance alone. There exists enough conceptual baggage to make that claim authoritatively and enough societal urgency to put the deed into action. Economists have extensive expertise to turn these broader concepts of capital into measurement systems and propose their wide adoption. Let us hope they choose political allies that have the broader public interest in mind this time. Only when they do so will we believe them and can they feel free to toy with their models and numbers again. Realizing positive social impact comes before riding hobby horses.