Towards a new economy

It is pretty much a cliche of measuring performance, that by setting indicators you end up distorting activity to produce the desired results in your chosen indicators, with the associated risks. For example there are perverse incentives, if you are paid to complete tasks, then you are encouraging people to complete the straightforward tasks that they know they can do quickly.

Inevitably it is very difficult to choose good indicators, or metrics.

You might measure Inputs - that is the amount that you are putting into the system, the amount of spending, work, effort. But there is no guarantee that measuring Inputs will actually tell you anything about how effective any of these inputs actually are. There is no merit in being busy if none of it is achieving anything.

Alternatively you might measure Outputs - that is the amount of things that you are generating. This sounds better, if you are producing lots of widgets, then that must be a good thing. But if they are defective widgets, or widgets that no one wants to buy. But what about services, are you answering lots of phone calls, but doing it very badly. Is it really better to be sending out lots and lots of emails. Should my boss pay me more because I am actually sending him millions of emails?

Alternatively you might measure Outcomes - that is some sort of measure of the change that you are seeking to effect. In business terms it is easy enough, it is profit or market share. In government or a service within a business it is less easy. Obviously the Ministry of Defence wants to win battles, but how can you disaggregate that down to individual contributions. Perhaps there are underlying trends that mean that you will never achieve the high level outcomes, but you still need to direct energy towards them.

Intuitively we can tell when people are working well, it is about commitment, innovation, quality of service, reliability, adaptability, resilience. It is just that a simple set of indicators are very bad at capturing this. They make us think that we can understand something without really understanding it, a shortcut avoiding the effort of doing some thinking and research.

The economy has changed a lot recently. Perhaps part of the problem was that we did not really understand it, but we thought that a few indicators would tell us all we needed to know. But the nature of indicators is that they skew activity.

So we thought that rising house prices were good, and sure enough they went up. We thought that low inflation/interest rates were good, and they stayed low. We thought that low unemployment was good, and it stayed low.

But we were not really thinking about more structural issues like the balance of payments, like the affordability of credit, like the resilience of the economy.

Economics is unscientific in that it tends to assume that all other things being equal doing X will lead to Y. When in real life all other things do not remain equal.

Although we are entering a new era, economic policy has not. It still seems to be fixed on making things go back to the way they used to be, but perhaps we might learn a few lessons, so we don't need to change much, just iron out a few wrinkles and things can just go back to the way that they were.

Why not look at some different indicators, our streets are full of litter, generations of families are disengaged from work, most people have minimal engagement with nature or a wider society, we are slowing killing off other species, and ultimately our planet, we are re-enacting the tragedy of the commons on a global scale.

When we are tackling these issues with all our strength, then perhaps we should worry about house prices and dinner parties. Common sense tells us that the economic progress was destroying our planet. We need to adopt some better perspective, and let that inform what we do.