Business Life: Bean counting
First published: Business Life Magazine, August 2008
Sir William Petty, an advisor to Oliver Cromwell and a Professor of Anatomy at Oxford, seems an unlikely hero for economists. Yet nowadays his claim to fame is that he produced the first estimate of Britain’s national income, which he put at £40 million a year back in 1664, or about £4.5 billion in today’s money. The modern equivalent, UK gross domestic product (GDP), is a little larger: about £1400 billion.
Sir William was celebrated in his day, but the field he fathered, national income accounting, seems to be the most tedious in modern economics: back-office bean counting, far removed from eye-catching “Freakonomics”-style research.
Yet the bean counters have been having their revenge. New ways of gathering data have gradually been transforming our understanding of how economies grow, and even changing the way we think about what really matters when they do.
One important step was taken Alan Heston and Robert Summers, two professors from the University of Pennsylvania’s economics department. (Summers was the brother of economics demigod Paul Samuelson, and the father of Larry Summers, US Treasury Secretary under Bill Clinton.) After the World Bank neglected to take up the task, Heston and Summers collected international data on prices all over the world, allowing a meaningful comparison, like-with-like, of rich countries with poor ones. The fruits of this labour, the first Penn World Table, were published in 1986, and circulated to the profession via floppy disks. The two decades since have seen a great outpouring of studies based on the Penn data, trying to answer the question of what makes poor countries poor, and how they might get rich. One conclusion: investment in roads, factories and even education doesn’t seem to matter as much as was once thought. What matters is that rich countries manage to used these investments well.
With this in mind, the World Bank is now trying to count things that might matter for the business environment – for example, its Doing Business project, which has been running for five years, collects and broadcasts information about red tape in 178 countries, such as the number of days an entrepreneur needs to wait before legally establishing a new business. The project is intended to diagnose problems, but it is also a terrific spur to shamefaced bureaucrats.
Other statistics aim to show economic performance in a new light. The most respected is the Human Development Index, published since 1990, which emphasises literacy and health as well as economic growth, and has helped to change the focus of development agencies.
And the data gathering goes on: Nobel laureate Daniel Kahneman is trying to develop credible happiness accounts, based on time-weighted data on how people feel throughout the day. Not so much bean-counting as smile-counting – Sir William would have been astonished.