Transcription of interview with Diane Colye interview on March 17, 2013.
Douglas Goldstein, CFP®, Financial Planner & Investment Advisor
Diane Coyle is an economist and is a professor of economics at the University of Manchester.
She just came out with two new books which are called GDP: A Brief but Affectionate History
and the Economics of Enough: How to run the Economy as if the Future Matters.
Douglas Goldstein, financial planner & investment advisor, interviewed Colye on Arutz Sheva
Radio.
Douglas Goldstein: GDP is a phrase that people hear all the time on the news and it sounds
like it must be terribly important.
In your book actually, you argue that GDP may not be the most important thing.
Give us a background of where it came from and why bother to write a book about it?
Diane Colye: It isn’t really important in practice because we all know that when the
figures come out each quarter, all that media commentators and the politicians [inaudible
00:01:24] whether it has gone up by 0.1% or 0.3% and it seems profoundly important.
And I quite actually realize that it was perhaps not the best guide to what we want our policy
makers to be thinking about.
Apart from anything else, it is a very abstract idea.
We think about GDP as being something like you trying to measure the height of a mountain
and you can measure it more or less accurately.
Actually, it’s not like that at all.
It’s an artificial construct.
It came out of the dark days of the Second World War when the government in the United
States and United Kingdom wanted to know what resources they had available to fight the
war effort and what kind of sacrifice that meant to their populations we’re going to
have to make.
So it had a very specific purpose and at that time there was a very big debate about should
we have GDP or should we have a measure that was going to try to look at people’s economic
wellbeing in a much wider sense.
One very famous economist Simon Kuznets argued for the latter.
He said we ought to be trying to measure wellbeing.
Why would you include something like advertising or spending on lawyer, things obviously not
good for people in his view?
So the debate he lost at that time.
The war effort was all important of course and GDP has come to be increasingly the only
measure of how the economy is doing that drives politics.
There’s a lot of debate now about is it right?
Should we go back to thinking more of wellbeing?
Douglas Goldstein: Well the fact is the politics that you brought up even in the beginning
of the book was how in Greece, Andreas Georgiou was looked at as a criminal for the way he
measured GDP which was perhaps more standard.
I mean this is obviously a very serious figure that people were looking at.
Why is that?
Diane Colye: In the Greek case, it’s because all the financial market contracts were tied
to how big the Greek deficit was as a share of GDP.
So if you changed the GDP measure you’re going to make people in the financial market
very angry and we all know how dangerous that can be.
It just has become because it’s a number and it looks like it’s got real meaning.
It’s become the only thing that drives our sense of what’s business is all about, what’s
the economy all about and the time has come to debate about should we look at a wide array
of things?
Apart from anything else, environmental issues don’t get picked up in GDP.
Pollution isn’t picked up in GDP.
Carbon emissions isn’t picked up in GDP and whatever you view about those environmental
issues, we ought to be factoring them properly into the policy debate by having the numbers.
Douglas Goldstein: Is there anything that a regular guy, a retail investor can learn
by looking at the GDP numbers as they come out?
Diane Colye: I think the question for retail investor is “Are you one of the people who
is doing this because you want to make short term money?
You’re trading as often as you can, you are looking for the quick returns or do you
have longer term horizon?
Are you thinking about what’s going to be important in the world in twenty years’
time and what are the real returns that you could get on investment in new technologies?
Are you interested in what the demand is going to be for a clean environmental technology?”
for example.
So I think a lot of it depends on the person and there’s no shame in being short term
about it but I think for many people the question about longer term meaning might be more important.
Douglas Goldstein: If there was a number that someone wanted to hang his hat on in making
decisions other than GDP, what would you suggest people look at?
Diane Colye: That’s part of the problem.
There’s no single number.
And perhaps there can’t be a single number because there are lots of things that affect
our wellbeing or our social welfare as an economist would call it.
And there are tradeoffs between some of them too.
As a person, you often think about have you got the right work life balance?
But obviously, there’s a tradeoff between your work life balance and the amount of income
you make from working and those kinds of tradeoffs apply at the level of the whole economy as
well.
So the approach that a lot of people are taking is what’s called a dashboard and the OECD,
Organization for Economic Corporation and Development has a great website with something
called the better life index where they put all of these separate indicators on one visualization
and you can change what’s most important to you and see how your country then does
compared to other countries.
So if we have something like that for each country over time there would not be a way
of assessing policy makers in the light of what you think is important.
Douglas Goldstein: Let’s talk a little bit of your second book the Economics of Enough.
What did you mean by that title?
Diane Colye: It’s really about the long term versus the short term and when people
talk about what’s sustainable they usually mean the environment.
I think it goes much wider.
It’s also about social sustainability.
So inequality matters there.
A lot of countries have seen a return to levels of inequality not seen since the 1920s and
there are questions about what that will do to politics and social stability.
So the book is about how we think about the long term and why we have to become so short
term in the way we drive the economy and society?
Douglas Goldstein: Why have we become so short term?
Diane Colye: I think the answer lies in the financializations of our economy.
This actually dates back to 1916 when Henry Ford who was 58% majority owner of Ford Motors
announced a special dividend and then he [inaudible 00:07:23] on that because he want to spend
some more money on employee benefits and his minority shareholder which is the Dodge Motor
Company held 10% of the company sued and won that case.
And that was the origin of the fiduciary duty that public companies have to their shareholders
which has gradually over time come to trump any other obligations that companies have,
but even if you think that’s right it’s also become very short term.
We have quarterly earnings announcements.
We have [inaudible 00:07:52] trading in financial markets and I think these get all decisions
towards an increasingly short time horizon particularly the most important businesses
in every country that are listed in the stock market.
Douglas Goldstein: A lot of times people look at a company and if you know that the goal
of the company is to maximize profits or to maximize shareholder value, it’s certainly
much easier to make a decision than when you say well you have to give healthcare benefits
and they have to deal with the unions and they have to deal with the retirement, in
which case everything gets kind of muddied.
Isn’t it easier as an economist to have things more in black and white?
Diane Colye: It obviously is easier but maybe it’s wrong, that’s the point.
Maybe a company would do much better over a 10-year horizon if it weren’t focused
on profit quarter to quarter.
Maybe it would serve its customers better by thinking about what its real purpose is
and that will be better over a somewhat longer timeframe than quarter to quarter.
Of course it’s easier to have a single figure to focus on but the world around us isn’t
just one dimensional.
Douglas Goldstein: If you are looking to change these economic attitudes, is it possible even
today?
Would society and politicians cooperate?
Diane Colye: You might have a better sense than I do about the social appetite of change.
But I think a lot of people feel a bit trapped in a system they don’t like, but they don’t
know how to change by themselves and there would I think be an appetite for political
leaders or financial market leaders to say “Hang on, we’ve got it a little bit wrong.
We need to change the way that we are approach things.”
I am an economist so I see everything in terms of numbers and can you test this and that?
So I think the numbers are important and that’s why I wanted to write about GDP in particular.
I think we have to give policy makers tools by developing for them a set of different
indicators.
GDP growth is important and it always will be.
It drives jobs and it measures innovation.
We’ve got to have that but I think we need to give them some other tools to say “Well
there are some tradeoffs here, what do we think?”
Douglas Goldstein: How about just the world of technology?
Is there some sort of modern technology that could be harnessed as a positive force for
change?
Diane Colye: I don’t have particularly morality attached to them but we can use them in better
and worse ways.
I found a lot of work over the years on the use of mobile phones in developing countries
and that’s the technology when we got it in western economies.
We thought it was a bit of a gimmick for well healed financial traders and my country it
was tax, it’s a luxury for a little while in the 1990s.
In poor countries it’s been absolutely transformative because it went to a landscape where there
are no communications, people could find access to jobs much more easily, stay in touch with
family members, send money securely when they have to use vulnerably cash before.
So the use of technology depends on the context on what we do with them.
Douglas Goldstein: How can people follow your work?
Diane Colye: Apart from my books The Economics of Enough and GDP: A Brief But Affectionate
History, I run a blog called the Enlightened Economist and you read lots of books much
about in there.
Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host
of the Goldstein on Gelt radio show (Monday nights at 7:00 PM on www.israelnationalradio.com.
He is a licensed financial professional both in the U.S. and Israel.
Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA,
SIFMA.
Accounts carried by National Financial Services LLC.
Member NYSE/SIPC, a Fidelity Investments company.
His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered
at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.
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