Sunday, November 2, 2014

Malala Cakeonomics

So.  This is supposed to be an economics blog, so I promised to turn yesterday's cake into economics somehow.  What on earth are the economics of cake?  Well, let’s see.  Actually, there are a lot of directions I could go with this, but I think I’ll write about a topic that I’ve been meaning to talk about anyway: the problems with GDP as a measure of economic production.  These are all well known, but they get buried in the political fluff that passes for front-page news these days, and even economists generally just dismiss them and continue to uncritically treat GDP as the whole truth in discussions.  I do it too.  And GDP is the best measure we have.  But it’s wrong, or at least incomplete.  So how do we get to that from cake?

To start with, we need to notice that the cake we’re talking about is not just cake, but cake made from scratch at home.  That gives us an excuse to get into the issue household non-market production  by observing that rather than buy a cake ready-made, I produced a cake from raw materials that I bought from a relevant input supply vendor---that is, from a grocery store.  We could notice that a huge fraction of the production of any nation takes place like this, by households buying raw materials and performing the final production tasks themselves, and that production inside the household, which is really the basics of everyday life, never shows up in the GDP.  How much this matters is hard to measure; here’s a Bureau of Economic Analysis (BEA) study on it that reports on a number of different attempted measures of household production in the United States, and finds that the estimated value of that household production is somewhere between 12% and 58% as high as the measured value of market based GDP (see section 8, particularly the top of p.9).  That's a lot:  GDP is around $17.5 trillion this year.  The lower figure is what we get if work in the house is valued at the minimum wage; the higher figure is what we get if household work is valued at the average hourly wage of professionals doing the same kind of work---in the case of my cake, for example, chefs or professional bakers.  But in either case, that means that the measured GDP that’s reported in the newspapers is actually pretty far off from the real total product of our nation.  And having observed that fact, we could take one more step and observe that not only GDP but also measures of economic growth are impacted by this, because some measured economic growth might result from simply moving existing production from households into the market economy: the same amount of production takes place, but what used to be invisible is suddenly revealed to the National Income and Product Accounts.  That’s what would have happened if I had gone out to buy a cake on the market instead of making one at home. 

The proportion of total production that takes place within households, rather than in the market, varies widely across cultures and countries, which is one reason you might want to take strange statements like “the average Ziltonian peasant lives on $3 a year”, or whatever, with a very, very big grain---maybe a boulder---of salt.  What it really means is that the average Ziltonian peasant lives almost entirely outside the market economy: he hunts, farms, gathers, builds, makes his own tools, cooks and so on without buying much of anything from a store.

And that’s just the economics of what did happen.  But here’s something that could have happened but, in my house in this instance, didn’t.   As an inexperienced cake maker, I could have made some horrible mistake.  I could have gotten my tie tangled in the egg beater, and in the resulting chaos of physics ended up with an injury that induced a trip to the emergency room.  Or I could have forgotten the cake until my smoke alarm alerted the local fire department, and caused them to send fire trucks to my house.  Or I could have actually started a fire that burned down my house with all that’s in it.  In every one of these cases the GDP would record the response from the market---my treatment at the emergency room, the construction of a new house, the cost of sending a fire truck and all manner of emergency responders to my house---as a positive thing, an increase in the GDP.  They are all things the market did, products the market provided.  But none of the losses would have shown up in the GDP at all.  Think about that a bit: wherever there is destruction, the GDP records the replacement of whatever was lost, but does not deduct the loss itself.  A hurricane, a volcano, even an accident on the highway, all add to the GDP.  But they aren’t the kind of thing we think of as an improvement in our lives.

I have a book to recommend on this if you’re interested in the topic: Mis-Measuring our Lives, edited by Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi, with a introduction by Nicolas Sarkozy---yep, that’s right, the former President of France.  Here’s a quote from that introduction:

“We have wound up mistaking our representations of wealth for the wealth itself, and our representations of reality for the reality itself…We have built a cult of data, and are now enclosed within.”

It’s a little overstated, perhaps, but he’s a politician and should be forgiven for drama.  It’s basically true.  And it’s good to constantly keep in mind not just that our data misrepresents reality, but how: that among other flaws with the GDP is the flaw that omits our “leisure” time (the time we spend pursuing our own goals, or with friends or family), our household work, our hobbies; these are simply not counted, but they are important parts of our real economic product.  And the repair of our disasters are counted as adding to economic good, rather than simply restoring what was lost.  And finally, a corollary of the last point, is that damage that is done and never repaired---like environmental damage from smokestacks or car exhaust---are never subtracted from the value of the market processes that produce them. 

Ok.  Finally, I can’t ignore this.  I know this recipe is not just homemade cake, it’s homemade Malala cake, and the issue she’s known for is not the household production function, but women’s right to education. So in keeping, perhaps, with Ms. Yousafzai’s focus on women, I should point out that a very big fraction of household production is performed by women---how big varies across countries and cultures and is just as hard to measure, and for the same reasons, as the total amount of household production, but at least in the United States two-thirds seems like a reasonable first rough guess from Table 2 of the BEA study linked above.

On the issue of women’s education, or more generally, gender differences in education around the world---that would take a book to explore, not a blog post, and it’s not a topic on which I have any expertise at all.  I’ll leave the explanation of that topic to Malala.  But here’s a starter book: the UNESCO Atlas of Gender Equality in Education.  This is a very accessible book, mostly graphics showing various comparisons, and the problems it depicts are not always those faced by young women: some are problems faced by young men.  From the book:

“An important theme is that although girls are still disadvantaged in terms of access to education in many countries and regions, they tend to persist and perform at higher rates than boys once they do make it into the education system. Another theme is that all countries face gender equality issues of some sort, including situations where boys are disadvantaged in one way or another.”

Why is this education issue in an economics blog?  Well, because it’s my blog and I can put whatever I want in it.  But it shouldn’t take a lot of thought to realize that any nation that simply refuses to educate a significant part of its population, or mis-educates them, or damages their ability to learn by pushing them into classrooms that don’t suit their natures or capabilities, or educates them and then under-employs that education---any nation that does those things is seriously hampering its prospects for economic growth. 

But that’s a blog post for another day.

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