Metrics vs People in Economic Analysis

by | Feb 2, 2020

Metrics vs People in Economic Analysis

by | Feb 2, 2020

Metrics are created to establish quantifiable ways to determine certain trends, be they positive, negative, or neutral. As far as the metrics appropriately signal what they’re intended to represent, they may be quite useful to a certain extent, but unless one is conscious of their limitations, they can be “cheated” and accordingly become misleading indicators. Unless we are conscious of how they may be manipulated in this manner, we run the risk of acquiring a false understanding of both the theory and history involved.

Economic metrics are generally interpreted as more or less accurate ways to determine how the economy is going relative to previous times, and how the economy is going is by extent presumed to be in line with the well-being of the people. Gross Domestic Product (GDP), for instance, is the main metric analyzed to this end [1]; if it goes up, the economy is supposedly doing better, and if it goes down, it’s doing worse. This metric is said to be based on the five components

C (Consumer spending) + G (Government spending) + I (investment) + EX (exports) – IM (imports).

From this, it might be said that imports are bad for the economy and that an increase in any of the others is good for the economy, which has in recent years led to a quite unfortunate resurgence of Protectionism (i.e. establishing trade barriers like tariffs). Further mathematical manipulation of this equation also leads to what is called the “multiplier”, which, for instance, claims that an increase in government spending can create a sort of scattering effect adding more to the economy than what was taken from it through taxes. By this logic, it doesn’t matter what the government spends money on; just that in some way or another the economy will be “stimulated” by it. The deception here can, however, be broken through if we understand the limitations of the metric at hand.

Why would it, for instance, be considered a positive that people increase their consumption? If it was due to a decrease in poverty that led to less people dying of thirst and hunger it may indeed be a positive, but why should a Black Friday surge in consumption of things the buyers may end up not even getting much practical use of be treated the same way? How about a trend of increasing leisure and focus on minimalism in a given population? This would be represented negatively on various economic metrics, but should they really be condemned for making personal choices that make them happier just because of some collective metric claiming that the population “overall” is worse off for it? How about if government spending increases due to the government initiating a war? Are we to see that as a good thing only because an economic metric or two increases? Many more examples could be mentioned, but this will probably suffice for the point at hand.

In addition to these clear problems to the representation of underlying trends in social and economic metrics, even if they had accurately represented statistical trends in the past, it could still cease to be so if they were to be used as targets for policy, according to “Goodhart’s law“, named after Charles Goodhart, the former chief economic adviser to the bank of England. His brief explanation of the “law” is that “Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” Robert Lucas has further explained that

Given that the structure of an econometric model consists of optimal decision rules of economic agents, and that optimal decision rules vary systematically with changes in the structure of series relevant to the decision maker, it follows that any change in policy will systematically alter the structure of econometric models.”

After all, it is the collective outcome of people’s individual actions that are represented in these metrics, and is it really worth it that we be coerced into doing something that supposedly increase them but actually makes us worse off? Living free and making personal decisions based on what we believe is the best for ourselves and others shouldn’t be tossed aside to satisfy some arbitrary numbers. The government may find it a convenient way to gather support for its policies, but we free minds can see through this propaganda, however subtle. Consider what is best for people as individuals, not as collectives based on some abstract model of speculative economic relationships.

No action can be considered virtuous unless it is undertaken freely, by a person’s voluntary consent;” that is the libertarian creed – our creed. We find Austrian economics to be the tradition most appropriately analyzing economic phenomena by its individualistic and causal-realist methodology, standing as a preferable alternative to the collectivist and abstract mathematical approach to economics devised mainly by Leon Walras and John M. Keynes. We follow the Austrian tradition because it actually analyzes and describes people’s actions and its consequences, not just metrics spuriously representing them. The limits to growth is the extent to which a metric can be manipulated without eventual side effects; there’s no limit to individuals’ pursuit of bettering the conditions of themselves, their families, and their friends.

Reprinted from Mises Revived.

About Stefan Kløvning

Stefan M. Kløvning is a former journalist for the British alternative media site Goldfire Media and now writes regularly on his personal blog MisesRevived.net about various topics of interest, including political, economic, and philosophical questions. Stefan is also the author of “Vaccines as Weapons Against Us”, host of the educational channel “The Praxeological Academy” (https://www.youtube.com/channel/UCuZivdr9gthajs0mKuLPEDw) on YouTube, Vimeo, and Bitchute, and founder of the site The Anarchist Perspective.

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