Analysis: Why do we measure the economy the way we do?

The way we measure the economy is socially constructed.

TakeGDP, the most popular measure to assess economic performance.

This is a measure of the sum total of household spending, government spending, investment, and the trade balance (exports minus imports) at the level of the “nation-state”.

If it goes up, politicians tell us that everything is going well. If it goes down, we tend to worry.

Public policy is almost entirely dependent on this number going up, despite the fact that very few people actually understand what it measures.

Using the “nation-state” as a unit of analysis to measure growth is a product of the 19th century.

It tells us nothing about the difference between Dublin and Longford, London and Sheffield, or San Francisco and Michigan.

We continue to use the statistical measure of the “nation” despite the fact thatmost economic growth is concentrated in metropolitan cities.

National averages are important proxies for social health but they can be deeply misleading.

It should be no surprise that electorates increasingly distrust these statistics

The same problems arise with the way we measure inflation. The most standard indicator is the consumer price index (CPI).

This is designed to measure the change in the national average level of prices in a society.

Statisticians socially construct a hypothetical basket of consumer goods and services, and then average the price changes of the basket.

But what’s in the basket? Does the basket reflect the reality of lifestyle choices in 2016?

The Irish CPI released today, for example, does not nearly appropriatelyweight the increase in housing-rental prices.

The ability to adequately account for the millions of price changes in society through a single averaged indicator is no easy task.

CPI is a uni-dimensional indicator that simply cannot capture the complexity of a multi-dimensional society.

It’s an average measure of price changes, not the cost of living.

And it’s the cost of living that really matters.

Remarkably, the CPI does not include the price of childcare, primarily because it was a statistical measure designed for a labour market where most women did not work.

Perhaps the best way to think about the problems with measuring inflation is to compare the CPI to asset-price inflation.

When the price of petrol increases we consider this “bad inflation” (even though it might incentivise people to cycle rather than drive).

But if house prices increase, we think of this as “good inflation”.

The CPI does not include rising house prices.

When house prices were skyrocketing during the Irish housing bubble, the CPI maintained that Ireland had “low and stable inflation”.

This is despite the fact that wages had shifted to chasing house prices not consumer inflation.

Economic indicators are socially constructed, which is why they are imperfect.

But if we are going to use national statistics to inform public policy, we need to radically reform how we measure the economy to adequately reflect the changing reality of our societies.

Aidan Regan is an Assistant Professor at the School of Politics and International Relations at University College Dublin. His research is focused on comparative and international political economy.

You can follow him@aidan_regan