Opinion Editorial | |
| Wednesday, April 7, 1999 | |
Economists Have Problems Measuring Intangibles |
One of the biggest problems with economics is that economists focus their attention almost entirely on things that can be measured. And those things that can be measured most easily and accurately tend to get more attention than those more difficult and less precisely measured. Thus we have good data on steel and auto production because these are tangible things that are easy to see and add up. But our data on services, which now constitute two-thirds of the economy, are very poor because they are intangible.
The problem of measuring services just touches the tip of the iceberg, however. There are many other things of great economic importance that economists do not even attempt to measure at all. As a consequence, they are completely ignored in economic analysis. In a recent speech to the American Economic Association, Robert Fogel of the University of Chicago called attention to some of these neglected areas of the economy and showed what they mean for growth and well-being.
First, Fogel looks at the problem of technology. Although economists talk a lot about technology, it is one of those things that is difficult to quantify and analyze scientifically. Yet all economists know that technological advancement largely determines the long-run rate of real economic growth.
Fogel examines technology in terms of human history. When one goes back 10,000 years it becomes clear that the pace of technological change moved sharply higher around 1700 and has been accelerating ever since. But this acceleration in technology has been missed by most economists because they tend to take a relatively short-run view. Few economic analyses bother to go back before World War II, for example. Thus they have missed the big picture and failed to grasp the importance of what is happening.
Fogel believes that economic growth is substantially understated owing to our failure to fully incorporate technological change into our economic data. In this respect he notes that economists have utterly failed to find any meaningful impact from computers on labor productivity. Yet obviously computers have enormously affected productivity. But just because they haven't quite figured out how to measure that impact, economists tend to ignore it.
Fogel also believes economists are guilty of failing to measure or account for the vast growth of nonmarket economic activity. In particular, he notes that there has been huge growth in voluntarism, meaning work that people do not to make money but because it gives them pleasure. But since economists tend to concern themselves only with earnings, this whole sector of the economy also tends to be ignored.
Finally, Fogel faults economists for ignoring spiritual, meaning non-material, factors in individual well-being, by limiting themselves solely to material consumption. Yet spiritual factors are becoming increasingly important to human happiness. That is because economic growth has caused material wants increasingly to disappear. In this respect he notes that 100 years ago only 10 percent of Americans had an income above today's poverty threshold.
Today, more and more Americans are able to satisfy their basic human needs by working less and less. With those needs satisfied and increasing amounts of leisure time available, Fogel believes that improvement of our spiritual well-being is the key to happiness for most people. Fogel thinks that half our real consumption may consist of spiritual goods that are totally ignored by economists.
Taking all this into account leads Fogel to believe that growth is much higher and people much better off than economists think. But they will have to break out of their traditional analytical framework if they are ever to see it.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, April 7, 1999.
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