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Monday, 27 March 2017

What [supposedly] Grows when an Economy is reported to have 'Grown'?

Perhaps the biggest support for the delusion that the British is a healthy economy is the government's ability to claim that the 'rate of growth' is one of the highest among the formerly-advanced economies.

The same set of data are deployed [statically and comparatively] to establish the assertion that the British is the sixth-, or maybe the fifth-largest, in the world.

Similar data are deployed to derive a 'rate of inflation'. The rate of price inflation can notionally be deducted from the rate of growth of the total economy, and what remains can be asserted to be the 'real' rate of growth of transactions in the system.

These numbers are derived by making an estimate of the money-prices expended on transactions [acts of buying and selling] in the system [in this case, the British economy] in a set period. The most commonly-used periods are one month, or a three-month period, or a year.

The state statistical service announces a percentage change in the tally of turnover and in the rate of inflation in the economy in each period. These numbers are derived by comparing the data for the latest period with a preceding period: so comparisons can be made with the immediately preceding period, or with the same period [e.g. July 1 to September 30] in a previous year. The growth figure can be discounted by the rate of inflation, so that the growth is said to be 'real', "at constant prices".

If the published inflation figure is within the range that the government have decided is acceptable, they can claim 'success' in 'controlling' inflation: if not, this is seen as a problem and the press and the political opposition and government-party MPs in marginal seats all demand corrective action; even though this may have the effect of diminishing 'growth' in future periods.

If the economy can be said to be 'growing' at a rate that is comparable with those of similar countries, the government can claim that this demonstrates that their overall economic policy is successful; as George Osborne so often did during his tenure of the offices at 11, Downing Street.

There is a massive literature available on how the British government's statisticians [and those employed in a range of private think-tanks] define the activities and the data sets that they take into account, with what degree of modification and interpretation, in deriving the headline economic statistics. The statisticians make honest attempts to ensure that - as far as is possible to humans using significant analytical and computer power - the published data are 'true and fair'. The statisticians' professional bodies, The Royal Statistical Society and the Faculty and Institute of Actuaries, monitor the performance of their members and set professional standards for them to obey. The accounting standards bodies also do their poor best to ensure that the data that are issued by firms and trade associations are honestly and accurately assembled. But this huge endeavour is largely vitiated when the 'Econocracy'  then begin to apply and adapt these data into their economic models and projections.

Several generations ago, mainstream Economists moved away from observing material industry and physical trade; and focused on aggregate statistics. In the nineteen-fifties, the bowdlerising 'Keynesians' [who had no real appreciation or comprehension of Keynes's own thinking] established growth and inflation 'targets' that have been the curse of governments and of their people, especially in the most susceptible countries, ever since then. Though pseudo-Keynesian economic policies lost their credibility in the inflationary maelstrom of the nineteen-seventies, the growth and inflation data continued to be used, and to be the basis for targets that governments still use.

The validity of both data sets can easily be challenged by reference to what has actually happened in the economy in this millennium. Between the 'big bang' by which the finance sector was allowed unparalleled freedom to develop in the mid nineteen-eighties to the almost-total economic crash that the evolution of the finance sector brought on the world economy in 2007-8, the volume and value of transactions in the finance sector grew by many thousands of percentage points, whether it was measured on a daily, monthly, quarterly or annual basis. But trade in the finance sector [in options, swaps, derivatives, and a host of other 'instruments' and transactions involving such 'products', which were mostly bets] was not counted in the basic economic data: that whole universe of trade was left outside the published figures. So the many thousands of per cent by which the immaterial economy declined in 2008 was also unrecorded. The facts that underlie the recession of 2008-12, and which explain why the British people's average living standard is lower than it was in 2006, and which will not get back to the 2006 for several more years, if ever, thus remain largely unexplained; because they have not been accounted for openly or properly.

House prices are another area where the mainstream statistical output on the economy provides no real illumination. However, there has been a very recent attempt to include the lettable 'value' of housing as a factor in a new index of inflation; thus the possible benefit from that move will be evaluated in this blog in the future.

This has been a hard read [if anyone has struggled to the end] and I'll leave it there for the day.

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