10 October 2006

The limits of quantification, continued

When numerical indicators are strongly correlated with what we as societies want to achieve, then they are invaluable. In setting up the basic health, education and welfare programmes of large societies, quantification is indispensable. We need the numbers to measure where we are, and where we are going. But my question, raised in the previous post, is whether we are in danger of applying numbers where they don't actually measure anything meaningful. GDP per capita, for instance, was, and for many countries still is, an easily measured and occasionally useful indicator of a country's well being. But at higher levels of wealth, the relationship between it and well being breaks down. Nevertheless, maximizing GDP per capita appears to be one of the main de facto priorities for governments of countries at every level of development.

The limits of quantification become more important as government expands its role. They help make the case against that expansion. on efficiency grounds at least, because once we have the basics, the things that really matter to us cannot be quantified. In some ways we in the rich countries are getting the worst of both worlds. We have under-provision of programmes that eradicate poverty and provide a tightly-woven safety net to the most disadvantaged members of society. Here numbers, such as basic health and literacy indicators are meaningful and strongly correlated with welfare. At the same time, government funds its corporate buddies with massive funding of the construction, agribusiness and other sectors, through perverse subsidies, which, as well as representing a transfer from the poor to the rich, impose deadweight losses on the entire economy and devastate the natural environment.

Perverse subsidies and other forms of corporate welfare invariably rely on vague, qualitative arguments, or they use numbers where there is no correlation between the numbers and societal well being. The case for universal safe water and literacy education for children, for instance, is solid; that for exacting funds from taxpayers for post-graduate programmes, or lining rivers with concrete (as in Japan) needs to be made explicit and subject to challenge. A Social Policy Bond regime would achieve this level of transparency; right at the outset it would specify its targets in objective terms. By subordinating policy to outcomes, instead of to obscure, misleading or mutually conflicting objectives, it would impose some rigour on the function of government.

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