Edward Hadas

An American, a Frenchman and a physicist were talking about some unusual weather. “It was twice as hot this afternoon as this morning”, said the American, “the temperature went up from 40 to 80 degrees.” The Frenchman interjected: “That’s in Fahrenheit. In Celsius, it was six times hotter.” The physicist was scornful. “On the only really scientific measure, the Kelvin scale, the increase was a piffling 5 percent.”

Who’s right? Well, all the measures are accurate and it certainly was hotter. But no single ratio – whether twice, six times or 5 percent – captures just how much hotter it actually felt. The feeling of hotness, like the feelings of pain or anger, cannot be measured with genuine precision.

It is the same for the feeling of prosperity – any measure will be arbitrary and quite possibly misleading. Consider gross domestic product, the most common index of economic success. GDP is the sum of spending on everything in the economy, from shoes to shoe-shines, from cars to child care. In comparing countries with each other or over time, GDP is usually adjusted for inflation to calculate what is ambitiously called “real GDP”. It is then often divided by the population, creating “real GDP per person”. This is usually measured in “constant dollars” and, for 2011 in the United States, becomes $43,149 of 2005 dollars.

Economists recognise that GDP is far from perfect. In 2009, a French government commission suggested that it should be augmented by measures of the distribution of wealth, environmental sustainability and “quality of life”. The Human Development Index, which is widely used by the United Nations, combines GDP with life expectancy and years of schooling.

These modifications are welcome, but they fail to correct GDP’s main weakness – that is what might be called the fallacy of precision. The human meaning of prosperity simply cannot be reduced to numbers. Supposedly exact measures generally confuse more than they illuminate.

My rejection of quantification is anathema to most economists, who fancy themselves to be hard scientists. It also goes against utilitarianism, economists’ favourite philosophy, which claims all decisions can be reduced to numerical comparisons.

But consider an example: real GDP per person in the United States is up 103 percent since 1971. That sounds basically right: overall, Americans are substantially richer than they were four decades ago. The improvements include a 12 percent increase in life expectancy at birth, the shift from clunky black-and-white to sleek colour television and the introduction of the Internet into more than 70 percent of households. The gains far outweigh the losses, such as a 26 percent fall in the number of highway miles per resident.

The exact number, though, is a fiction. There is no way to assign a weight to each of the gains and losses, and no reason to assume that GDP, which measures the inflation-adjusted price of the various goods and services, is a particularly meaningful summation.

Happiness economists try to dodge the problem by looking for a measurable and meaningful number in people’s feelings. They claim subjective satisfaction can be counted up, simply by asking people to rate their happiness on a scale of, say, 1 to 5. The approach has many problems, one of which is that it doesn’t make any sense to say happiness has increased by, say, 12 percent.

Emotions just don’t work that way. George may love his current girlfriend more than his ex, but it’s only a figure of speech to say he loves her twice as much. Similarly, it makes no sense to say we are twice as happy as our parents or 12 percent happier than we were a half a decade ago.

GDP and similar measures can be quite helpful rough indicators, especially for poor countries. For example, the Chinese government aims at 8 percent annual real GDP increase – that rate creates jobs without putting excessive strain on society. But the authorities in Beijing should be careful, for the precision is spurious. Sometime soon, the right GDP growth number will be lower. And when China gets rich enough, no measure of wealth will provide much insight.

Look at the International Monetary Fund’s calculation that GDP per person was 27 percent lower in France than in the United States in 2011. The exactitude is ridiculous and the basic conclusion, that Americans are substantially richer than French people, is silly. The countries are both rich and modern, just in somewhat different, incommensurate ways. France has cheaper medical care, longer holidays and better mass transit and bakeries. The United States has bigger houses and more cars per person.

Numbers are seductive, so economists, politicians and pundits tend to fret over every tenth of a percentage point of GDP. But it is easy to exaggerate the importance of incremental changes in measures of this sort. It would be better to stop striving for precision. Or at least to cut back by 92.4 percent.

Another recession could be about to arrive, or even be here already. Some people fear it will be as bad as the last one, which reduced output in the U.S., euro zone and Japan by 5.1, 5.5 and 8.9 percent respectively. Those GDP declines are often described in cataclysmic terms: staggering, disastrous or traumatic. Such words are vast – and dangerous – exaggerations.

Even at the trough of the last recession in 2009, real GDP in most rich countries was as high as it had been five or six years earlier – when economic conditions were not considered particularly bad. And that comparison is too harsh on the 2009 consumer experience, which included iPhones and the Airbus A380 super jumbo jets, both better than the comparably valued goods available in 2003.

Americans and Europeans have little enough reason to moan about their recessions; citizens of the world have much less. For mankind as a whole, the small travails of the wealthy are much less important than the entry of the truly poor into the modern economy. Industrial production in emerging economies, a good measure of that development, has increased at a heartening 6 percent annual rate over the last decade, according to the most recent data from Dutch consultants CPB. The recession reversed two years’ progress, but only briefly.

Of course, production is only one part of the economy. The recession has been harder on other parts. It led to both increased unemployment and a decline in the relative position of the poor, especially in the U.S. Neither of those bad trends has been fully reversed. But the former was caused mostly by the end of an unsustainable excess of construction activity while the latter only amplified a decades’ old pattern.

The last decline is often compared to the Great Depression, but was nothing like the economic pains experienced during the two decades after the First World War. Then a series of crises, including a 25 percent reduction in U.S. GDP, helped lead the world into the most destructive war in history. The desire not to repeat the inter-War experience spurred on the potent official response to the 2008 financial crisis.

That response basically worked, but the scary headlines and wild assertions continue, as if fascist governments were once again coming into power and hungry mobs were breaking into food stores. In fact, the few rioters have had less noble objectives: the defense of unaffordable pensions in Greece and the acquisition of branded consumer goods in the UK.

What causes the wide gap between perception and reality? I have two suggestions.

First, too many people look at the economic world largely through financial glasses. The recession made only a slight dent in industrial prosperity but the financial crisis which preceded it really was cataclysmic. Several major institutions almost failed, central banks lent and governments borrowed as never before, and the cult of free financial markets was discredited. And unlike the economy, the financial system has not really recovered. If anything, the crisis has broadened – from banks to governments.

Still, financial insecurity cannot really explain the prevalence of tragic rhetoric. The fear and trembling reflects a more profound error – a mistaken understanding of the economic good. Many people judge economic success only by the pace of expansion. For them, it is not enough to have adequate or even abundant quantities of necessities, comforts and luxuries. They say that an economy is only good if it consistently provides more of all these things, and that the faster the pace of increase, the better the economy.

That approach to life has bad consequences, even ignoring the limited satisfaction provided by material things. For individuals, it is a recipe for discontent. Those who always covet more wealth will inevitably spend much of their life feeling that they do not have enough, with or without recessions. The irrational craving for GDP growth also distorts economic policy. It makes small, temporary and otherwise trivial setbacks in consumption – a few less days of holiday or a few more months with the old car – look like, yes, staggering disasters.

It is right for policymakers to respond strongly to genuine or possible disasters. But when economic times are good, financial conditions should be something like normal. That is not happening right now. Despite three years of stability in rich countries and strong growth in poor ones, monetary and fiscal conditions remain extreme and policymakers, worried about another recession, are reluctant to make big changes.

The combination of financial extremism and fear of any decline in GDP could lead to a truly painful decline in output, if the already weakened global financial system becomes totally dysfunctional. The irony would be painful. The foolish desire for constant and fast economic growth would have made those scary headlines – otherwise completely unmerited – come true.