Philip Whiteley's Blog

February 9, 2013

Bad metaphors, useless data

Filed under: Uncategorized — felipewh @ 9:32 am

Don’t read the newspapers, Professor Cary Cooper told the audience at the recent Chartered Management Institute Book Awards. The UK is doing well! We have some of the best business schools, producing great business leaders. There is a strong economic future.

So why are there so many harbingers of doom from the economics profession, at least the type quoted in the Business section and by politicians? And why this disconnect between economists and the world of business? Debt and malfunctioning banks are obviously part of the picture, but the disjuncture between economics and business is an aggravating problem.

Formal economics is a discipline that prides itself on analysis of factual data and mathematical measurement. This is preferred to qualitative information, held to be subjective. Yet when asked to describe what is going on, economists still search for a narrative. Unfortunately, the tendency to believe that economies follow laws, like the laws of physics, leads them to some misleading narratives. They link data points together – the primary indicator being changes to Gross Domestic Product (GDP). The assumption that laws of motion are propelling the economy upon a certain path tends to result in a transport metaphor.

Nautical ones are common. So if GDP ‘growth’ is less than expected, we are ‘facing head winds’, or ‘heading for the rocks’, or ‘becalmed’. If things pick up, suddenly we’re in a spacecraft! We have ‘escape velocity’! Wow, that’s a lot more exciting than being stuck in the Doldrums with half the crew dying of scurvy.

GDP is not even a useful indicator. It tells us nothing about business performance. Using GDP to measure growth is rather like using the number of visits to the leisure centre to measure your fitness, without recording whether you worked out in the gym or went to the café. Rising GDP can reflect sustainable growth in trade and development of highly networked ‘clusters’ of businesses, or it could simply be the development of an unsustainable credit boom, of the kind that afflicted Ireland, the UK, Spain, Greece and Iceland in recent years. Or it could be a mixture.

Too many economists match weak quantitative data with misleading narratives. The problem is not that they prefer the quantitative to the qualitative – it’s that they are bad at both.

The daily reality is that an economy is not on a journey and GDP does not measure progress. The economy does not follow laws of motion; indeed it is not governed by laws at all. Fiscal and monetary policies are not the only ones with influence because the economy does not consist of money, it consists of people.

  • In defence of the more enlightened economists, there is a much more intelligent blend of quantitative and qualitative information that the profession has developed, but which seems to feature very little in macro-economic decision-making. I shall blog about this soon.




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