By Diane Coyle
The conventional measure of economic progress is growth in real GDP over time or compared across countries. This is a monetary measure of total economic activity adjusted for the general rate of increase in prices. However, there is increasing interest in alternative measures that could better capture economic welfare understood more broadly than real GDP, which is well understood to be an imperfect indicator. This is particularly the case now because the ever-increasing use of digital technology both by consumers and in production.
In earlier work in the ESCoE programme, now published in Economica, I looked at the way digital technology was changing household behaviour and shifting some activities across the ‘production boundary’ that divides what gets counted in GDP and what gets allocated to ‘home production’, not in GDP. In a new ESCoE Discussion Paper with Leonard Nakamura of the Federal Reserve Bank of Philadelphia we consider time allocation as a potential alternative measure of economic welfare. Not only is digitalisation changing time allocation, but it also makes sense to take time seriously in the context of an economy where so much activity consists of services. Both the consumption and production of services involves ‘spending’ time.
Time and money are linked of course. I can use my time to make money, which allows me to use my time in different ways, which then changes the trade-off between spending time on making money or not. Time is one of the senses in which Adam Smith ascribes value: “The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it, or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose on other people.” (Wealth of Nations, 1776, Book 1, Chapter 5.)
Some economists have focused on time. In a well-known paper Gary Becker introduced home production into the consumer’s joint decision about work, leisure and consumption. Ian Steedman (in a 2001 book Consumption Takes Time) considered time to consume but not home production. These two approaches could potentially be merged. In our new paper (ESCoE Discussion Paper 2019-01) we suggest an alternative approach, combining time allocation over paid work, household work, leisure and consumption with measures of objective or subjective well-being while engaging in different activities.
This approach raises key questions, specifically how to value the time allocated to different activities, given the well-being to which they give rise. A monetary measure is necessary because it is only possible to say whether a change in time use increases welfare if it occurs holding income constant. So both a measure of well-being is required, and a ‘shadow price’ for the value of time for every activity. One possibility would be to use the survey-based stated preference approach adopted in much cost benefit analysis and applied recently to zero (money-)price digital goods by Erik Brynjolfsson and his colleagues. There are also some challenges and unanswered questions when it comes to measuring well-being.
As a final note, although our main focus in the new paper is on consumption and economic welfare, it is worth noting that the time allocation perspective is an alternative way of thinking about production and productivity too. In Adam Smith’s pin factory, factory production reduces the time required to produce a pin vis à vis home production of the same pin. One of the major process innovations in modern manufacturing is even described as ‘just in time’ production.
There is some way to go to being able to implement our proposed time-based approach to measuring economic welfare. It would also require the collection of regular and detailed time use statistics by the Office for National Statistics, with a particular focus on the digitally-driven shifts in behaviour. Nevertheless, we advocate an experimental set of time and well-being accounts as a wider economic welfare measure.
How might this quantification be established as a long-term means of evaluating a national economy’s contribution to the welfare of its residents? Macroeconomists currently rely upon GDP or some subset of its components to answer this question. If there is an increasing difference between the answer supplied by measures of GDP and measures based on welfare then it may be that a measure of welfare should become part of the system of national accounts. Establishing this additional accounting may be crucial if economists are to be able to discuss economic policy issues meaningfully, in a context in which there is growing public questioning of whether real GDP growth is an adequate measure of broad economic progress. However, this task will require a sustained dialogue between government statisticians and the economics profession at large.
Diane Coyle, ESCoE, University of Cambridge
ESCoE blogs are published to further debate. Any views expressed are solely those of the author(s) and so cannot be taken to represent those of the ESCoE, its partner institutions or the Office for National Statistics.
Tuesday, January 22, 2019