The missing link?

Economic commentators remain gripped by unshakeable fatalism. Even those who didn’t fall for the last downturn that wasn’t, have succumbed¹ this time. If the near future seems bleak, further out seems even more cluttered with as yet unexploded economic ordinance – from the giant, wobbling, stacks of global debt to an ageing and ultimately shrinking global workforce, there is plenty to keep us up at night, if that is what we want.

Worse yet, the answers to many of these worries lean hard on humankind’s past track record at problem-solving, a trait that can seem insubstantial when set against such vivid future nightmares (near and far). In any case, ‘problem solver’ are not the first words that spring to mind when describing the currently most prominent and visible parts of humanity.

This week, we take a look at what we may be missing.

A sense of the loss

Attempts to more accurately measure our economies only really gathered momentum during WW2, with Simon Kuznets and John Maynard Keynes two of the most important architects. The ‘measured’ productive capacities of the US and the USSR then came to play a defining role in the ensuing cold war. The single GDP number derived is intended to tell us about ‘market production’ – products and services that are either exchanged through market transactions or produced with inputs purchased on the market.

The sharp eyed will have spotted problems already – what of the economy that never touches a market, that doesn’t come with a clear price or quantity? And what of the things we buy that didn’t exist only a few years ago?

Housework bestrides both. One famous, albeit rapidly ageing, example of these blind spots in GDP is that an individual can marry their housekeeper, and thereby lower the country’s measured output. Conversely, that same person could send their parents to a care home and output will rise.

For the latter question, it is the invention of various tools aimed at making housework easier that count as the most statistically underappreciated. In the US, for example, time spent on housework fell from 58 hours a week in 1900 to only 15.5 hours a week in the following century.² Hoovers, washing machines and dishwashers appear mundane relative to various incoming technological wonders. However, it these white goods that can lay claim to some of the most profound transformations of our daily lives (and chores).³

We, of course, pay for these everyday marvels (ever less admittedly hence their welcome ubiquity), so at least some of their value does show up in the statistics. However, much of their potency is surely unquantifiable – emancipation from a (literally) endless cycle of chores a century ago has created space for us to use that time in any other way we want. Widely affordable mega libraries of books, music, film and sport await on the supercomputers tucked into our back pockets.

As an aside, these same supercomputers ‘cancelled’ about 40 other resource-eating consumer goods, from torches to answerphones. This highlights how economic growth can co-exist with environmental and other deadlines – the world of materials is finite, but the limits on the world of ideas central to productivity growth are far less knowable.

If these datasets miss a lot of what is important in our day to day, there is a consolation. Long-term patterns in GDP and other associated statistics appear related to other measures of human flourishing. So, we do seem to be capturing something useful in trend terms, albeit much less in the snapshots we chew over day to day.

In his study of the price of light over the millennia, William Nordhaus was able to argue that although we appear to be missing a lot of activity, the amount we are missing seems to have stayed roughly the same over recent centuries.⁴

Relevance to today

There are a number of points here. First, keep in mind an updated observation from statistician Hans Rosling – yesterday, 106,000 people were lifted out of extreme poverty and every day for the last 35 years (Figure 1).

Figure 1: 106,000 people escaped extreme poverty every day between 1990 and 2024

Source: World Bank Poverty and Inequality Platform, Barclays

There are a range of explanations for that triumph, from policy to technology to trade. For our part, we would caution against the catch-all narratives, as with elsewhere. Humankind’s tendency to simplify, overfit and pattern spot can get us into trouble here – one-size-fits-all attempts often collapsing into one-size-fits-none. Such grand narratives are often entertaining to read and discuss, but of little use in serious analysis.

Second, much of the work of modern econometricians and statisticians involves building models of the world that explain as much as possible with the least variables. With well-described, reliable datasets this can be powerful. AlphaFold’s breakthroughs in protein folding prediction is one such example. However, in a world economy where the data set only tells part of the story, unreliably, the risk is that we are just giving licence to humans’ previously useful tendency to spot patterns.

Third, we love to be able to tell history and theory with an easily accessible/marketable flourish. Geography, technology or various other super-factors as determinist explanation for all that followed. An all-explaining model or theory still seems to be the golden ticket, as suggested above.

Such attempts are likely to always fall (well) short. Remember that not only is much of the economy that surrounds us invisible to statistics, but the currents and eddies that hint at the path ahead are formed by our constantly evolving, subjectively formed, expectations. We don’t speak of these; they are occasionally glimpsed in transactions with the market.

Fourth, just as we exaggerate the role of things we think we can see and measure in economics, we risk overstating the likelihood of the vivid in our future. Future recessions, bubbles, climate catastrophes and pandemics just seem more tangible than the solutions we might quietly continue to assemble in mitigation.

Investment conclusion

In the long run, the connectedness and interdependence of people in different parts of the world increases and does so in many different respects. At any given time, however, integration may be increasing in some areas and decreasing in others. As we’ve seen in more recent times, integration is capable of directly causing disintegration elsewhere.

We hear an awful lot of big ideas bandied around at the moment, aiming somehow to leash the chaos we see around and behind us. There is no reason to pay more attention now than usual. The future is messily invisible, but with still more cause for optimism than pessimism based on the path behind us.