Time for a “Brave New Math”?

Channeling some of the logic in our “Health of Nations” podcast, Peter Marber argues in World Policy Journal that it’s time for a “brave new math.” Marber takes issue with economists’ ongoing reliance on old measures of economic health — GDP, inflation, and unemployment:

Traditional measures point to an American economy that’s up even when Americans are feeling down. Across Europe and in Japan, there is also a sense of confusion over current economic directions—a universal sense that the numbers that have been our staples are increasingly meaningless to everyday people.

Newspapers, radio, and television routinely spout headlines about key statistics on GDP, inflation, and employment—astonishingly influential indicators computed in the United States by the government’s Bureau of Labor Statistics and in capitals around the world. Most seem to have little correlation with the realities on the street. Yet, governments, businesses, and individuals still use these yardsticks in their decision-making worldwide, and minor revisions in the data can have major ramifications. Inflation measurements help determine mortgage and savings rates, stock market prices, interest payments on the national debt, and cost-of-living increases for wages, pensions, and Social Security benefits. Despite dramatic shifts in the world over the last few decades, we are still using the same old gauges, nomenclature, and policies of the past.

Marber cites the emergence of so-called wellbeing indexes as a positive development; and he suggests replacing our focus on GDP with an emphasis on the development of human capital.

(HT: Marginal Revolution)

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COMMENTS: 11


  1. rationalrevolution says:

    Umm… people have been saying this for decades…

    I mean, for example: http://www.theatlantic.com/past/politics/ecbig/gdp.htm

    Tons of work has been put into alternatives to GDP as well…. for at least 40 years…

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  2. KJ says:

    As a small business owner, I have long questioned the numbers touted by the media. It’s my experience that there are a lot of people living well through barter of goods and services, “under the table” cash transactions, and many one-person businesses that are not counted by the government. Oftentimes the panhandler on the corner is making more in a day than the union worker, but the panhandler doesn’t report his income, so the government falls back to the low-hanging- fruit numbers.

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  3. Micke says:

    What ratioanlrevolution said. An alternative take: has it ever happened that “the man in the street” has said that things are great, but economists have said that things are awful? If not, what does this tell us about the reliability of asking people about economic conditions?

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  4. Dr JAH says:

    In defence macro-indicators do at least force us to think, and ask why. They are simple. Decision-makers like simple. An aggregated measure of wellbeing will probably only tell us (from whom the data is sourced) what we already know, and can always be challenged by decision-makers who have an interest to do so, as some pseudo-touchy-feely-mumbo-jumbo measure.

    We often find, however, that macro-economic indicators rarely mean anything directly to us, because they are precisely that – macro. They are often seem out of date by the time they are published – which of course they are. Some of them we designed for a specific purpose in response to a particular crisis e.g. GDP. In business we don’t learn much from the actual high-level measures e.g. Key Performance Indicators, particularly but more from the process of putting it together, the subtle changes in it’s components and relationships, and of course the trends and patterns of those items – whether they be hard measurable numbers or softer indicators, strategies and behaviours, and yes, even wellbeing. Many of the worlds national statistics agencies have this data.

    It is from these that we can look forward and use to drive an business or economy, BUT providing we have some understanding of their interrationships and system dynamics. More often than not we don’t.

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  5. Barbara Duck says:

    You are right, time for new math and I said not too long ago that the economists would do well to pair up with mathematicians. I too get tired of the stats that I see on the web, so much to the point where I started this series of posts called “The Attack of the Killer Algorithms” which almost sounds like a title that belongs here:)

    At any rate at my blog, The Medical Quack I gave the topic it’s own section and how everything is context and put a nice video on there from an NYU mathematician that gets this.

    Software is nothing but a group of algorithms that work together in the words of Bill Gates.

    If one is an economist today I think they also need to look at what is creating what we see in the news today as well. Here’s a link to the series that contains a bunch of other links on every day examples that we read about in the news every day, and again the same video and link is on my front page. You will never think about stats in the same way or be as naive once you watch the video, which was done at Google in NY.

    http://ducknetweb.blogspot.com/2012/02/attack-of-killer-algorithmsdigest-links.html

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  6. MeanOnSunday says:

    The trouble with all these measures is that people are never happy with what they have. A 65-year old retiree in perfect health and with a nice pension will have all kinds of complaints and worries. Fifty years ago a life that would have been paradise; at that age my grandfather didn’t have any pension and had to go out and get a job doing hard physical labor, his health was terrible and he died at 68 after botched surgery.

    To me someone’s opinion of their wellbeing is meaningless. Tell me how long the live, how much money they have, what kind of house they have. Can they drive a car. Do they have TV, go to movies, read books. Society can provide everything to give people a good life, but if they choose not to enjoy it because they wish they had more then that’s a mental disease.

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  7. Dan says:

    Please see http://www.shadowstats.com/primers-and-reports to learn why the stats no longer make sense to main street. GDP, especially, is so massaged that it is a useless stat (yes, debt is worse than we think it is).

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  8. Joe Dokes says:

    I think there can be some tweaking of economic numbers. For example, GDP. We should not only use total GDP but we should also use MEAN AND MEDIAN per captia GDP. The problem with Total and Mean GDP is that if the growth of gdp is distributed to the top couple of percent, it appears as though the society is becoming wealthier. If you look at Median GDP and all the growth in GDP is concentrated in the top 1% or 5% then Median GDP would probably remain the same, or it might even drop.

    Since wages, and thus gdp for the botom 50% of wage earners has been stagnant at best or dropping at worst, it is reasonable to believe that Median GDP has dropped over the past thirty years.

    The reason this might be important is that in an economy like ours which realies so heavily on consumer spending, if Mean GDP is actually dropping, this could mean that long term growth in total GDP may be in danger.

    Regards,

    Joe Dokes

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    • Dan says:

      The Great Averagers! (didn’t we learn anything from the USSR???)

      GNP is ( GDP – ( net interest and dividend transfers ) ) which should equal GDI so you would be interested in Median Income. See

      http://www.ssa.gov/cgi-bin/netcomp.cgi?year=2010 You can change the ‘year= value’ in the url.

      Next release is 11/2012. America switched from GNP to reporting GDP in 1991 when the politicians did not want to make it so obvious that America was mortgaging its future for the elites at the expense of main street.

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  9. Zach says:

    GDP=C+I+G+(X-M)
    The G is government spending.

    Starting in the mid-70s, the accepted definition of recession was two consecutive quarters of negative growth. Since then, any politician who wanted to stay elected has tried to make sure that the economic barometer never dipped below that magic mark. Both parties have pretty much set government spending to be whatever it needed to be so that they could claim a recession didn’t happen on their watch.

    The economic thinking that arrived on GDP being such a useful measure was sound, but we’ve had rigged numbers since it became accepted. The next theory will also be useful only until they can figure out how to rig it.

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  10. Travis Idol says:

    Bhutan’s “gross national happiness”, anyone?
    Quality of life indicators have been around for a while, and I agree they are clearly better than GNP and similar indicators at getting more at the feeling of life on the street. Then again, why should we think that macroeconomic indicators have a strong correlation with general happiness and well-being? Corporations are tossing their pension plans onto the PBGC, slashing retiree health care, outsourcing manufacturing and service operations, and state governments are slashing basic services because they are almost universally required to have a balanced budget. Any wonder people don’t feel “good” about the economy or life in general these days?
    It’s the general problem of thinking that “It’s the economy, stupid” is an axiomatic truth. China is a testament to the fact that a roaring economy doesn’t promote democracy, income equality, environmental health, or social well-being in general. It’s been shown pretty convincingly that the income-happiness correlation is really about having enough to meet basic needs; beyond that, more money only helps to secure your basic needs and those of your loved ones.
    The value of switching to a focus on QLI’s is that our perspective on what is important also changes, which has tremendous social and political implications. I’m not sure why Democratic presidents and governors haven’t pushed for such changes in “economic” reporting.

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