09 October 2006

The limits of quantification

Anything that exists, exists in some quantity, and can therefore be measured. Lord Kelvin
Social Policy Bonds would target quantifiable outcomes. In traditional societies, where people lived closer to each other, people probably knew a lot more about each other’s general state of happiness. They knew when the people that mattered most to them were happy, and they had a fairly good idea of the events and circumstances that would make them happy. They probably would not be able to quantify or even articulate these matters, but neither would they have needed to.

[W]e prefer to take our chance of cholera and the rest than be bullied into health - a leading article from the [London] Times, 1 August 1854, in response to government measures to provide basic sanitation.

The same applied when our own societies were less complicated. Problems themselves were more obvious; the causes of problems could be more readily identified, and so could solutions to some of them. Governments were largely successful in their policy interventions on behalf of the disadvantaged: they instituted basic health and education for their own populations. They provided other public goods, such as law and order, and sanitation. And they did so with great success and sometimes, as the quote above shows, against strident opposition.

In our industrial societies, with their large, complex economies, government bodies have far more complicated tasks, but they still believe that the best way solving problems is to look for causes and try to treat those. And they still believe that they are best placed to perform these tasks. Government has enlarged its role and largely supplanted families, extended families and local people in supplying a range of welfare services to those who need them. Increasingly government is turning to numerical indicators to manage its resource allocation.

But this use of indicators is relatively recent, unsystematic and unsophisticated. Few indicators are targeted explicitly for a sustained period: the targeted range of inflation is a rare (and not especially helpful) exception. Other indicators, such as the size of hospital waiting lists, don’t measure what matters to people, or are prone to manipulation. Even when numerical goals are clear and meaningful they are rarely costed, they are almost always too narrow, and they are largely driven by existing institutional structures. Those broad targets that are targeted with some degree of consistency tend to be economic aggregates, such as the inflation rate, or the rate of growth of Gross Domestic Product — which appears to be de facto indicator par excellence of rich and poor countries alike.

But GDP’s shortcomings as a single indicator of the health of an economy are well known: amongst other failings, GDP does not take into account changes in the quality of the environment, or the distribution of income, it ignores human capital (the education and skills that are embodied in the work force) and leisure time, and it ignores such social problems as crime and homelessness. Under a bond regime statistics like GDP would never assume the authority they appear to have nowadays.The goals of government policy should be social and environmental outcomes that are meaningful to natural persons (as against government agencies and corporate bodies), not growth rates or other abstract economic indicators.

Lord Kelvin's remark is nonsense, of course. Much of what matters most to us - family, relationships, connection with nature, meaningful work etc - is impossible to quantify. But if we take the large-scale organisation of our society as a given, then we can expect that societal goals will increasingly have to be represented by numerical indicators. It would appear that the choice will increasingly be between (a) the current de facto targeting of per capita GDP along with an almost random array of narrow, easily manipulated indicators that have no necessary relationship to societal goals, and (b) the targeting of consistent, transparent, mutually supportive indicators that represent meaningful social outcomes. A Social Policy Bond regime would be a step away from the apotheosis of GDP and toward the systematic use of indicators where they can be of most value.

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