By Cliodhna Taylor
“The best things in life are free”. A simple sentiment, but a headache for economic statistics. When economists want to measure value, the first tool we reach for are exchange prices; the value something is actually bought and sold for. That’s great for measuring the value of a packet of crisps or a haircut, but not for measuring a walk in the forest and certainly not adequate for properly understanding the economic causes and consequences of something like climate change.
Enter “shadow prices”, sometimes known by their less mysterious name of “accounting prices”. These seek to value things according to their social value – i.e. the benefit they bring to society as a whole, rather than the benefit they bring to an individual or the price (if any) they can be bought and sold for. These have been a long-established part of economics, helping inform regulation and taxation policy and giving a way of acknowledging that the value of something can be different to its price tag.
The next logical step is to ask: if we can measure the value of a product according to its social value – given by its accounting price – can we measure the value of the economy according to its accounting price? It’s a fascinating proposal, not least because once we acknowledge that things can have a value beyond having a price tag, suddenly we can incorporate the value that things like the environment bring and the role they play in the economy.
The challenge is that this way of measuring value fundamentally clashes with the way we measure this concept in the national accounts – the key model National Statistics Institutes use for how value circulates and accumulates throughout the economy. The accounts are built on the principle of quadruple accounting; whenever a product is bought or sold, the value it’s sold for is equal to the value that it’s bought for and the financial gain from selling it is equal to the financial loss from buying it. It’s a logical, even beautiful principle which ensures all the accounts to click together and enables us to observe how an activity in one part of the economy ripples out to other areas. This principle meshes well with the use of exchange prices; in a market economy with free exchange, this quadruple accounting reflects the day-to-day reality we experience when we buy or sell anything. I wish my bank account wasn’t depleted whenever I buy the latest video game, but such is life.
We cannot bring in accounting-price-measured value for select products alone without breaking this quadruple accounting, and so breaking one of the biggest benefits of national accounting. Instead, we need to think about how we could comprehensively incorporate accounting-price-measured value into national accounting, it a way that preserves quadruple accounting in order to preserve the symmetry of national accounting.
That’s what our research has done. In our ESCoE Discussion Paper we propose some amendments to common national accounting that would allow exchange prices to be translated into accounting prices. When accompanied by an expansion of what we consider to be the economy, including (for example) the role the environment plays in generating value, this presents really exciting opportunities for better measurement of the social value of activity and the social value of our wealth.
We hope this will lay the groundwork for a lot of exciting future research, and we demonstrate what that research could look like. This framework, for example, can help reflect the value of worker training, and properly reflect who it is (the company or the worker) that reaps the benefits from the training. It can help us properly value the degradation of the atmosphere and understand the spillover effects of open source software. In time, we hope this will form the accounting basis for our measures of value, which stretch beyond the traditional national accounts, to give inclusive measures of income and wealth. This is an exciting step forward for a new type of economic accounting, which will enable us to better understand some of the oldest as well as some of the most contemporary issues in economy.
The Discussion Paper can be downloaded here.
Cliodhna Taylor is Assistant Deputy Director for Research Partnerships at the Office for National Statistics
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.