Adding to GDP

Sex, drugs and R&D

There are lies, damned lies, and headline economic statistics, writes Paul Demarty

A peculiar thing happened to the Ghanaian economy in 2010 - overnight, it went from being a ‘low-income’ to a ‘middle-income’ country. Quite a feat!

Yet, oddly, we were not subjected to endless nonsense about the ‘African tiger’ or the like. Because this sudden lurch from poverty to prosperity was the achievement not of industrialists, or even financiers, but statisticians. Ghana’s method of measuring gross domestic product had changed significantly; unsurprisingly, so did the resulting figure.

We were reminded of Ghana’s fortunes this week by a flattering adjustment to our fair nation’s own recent GDP history. The Office for National Statistics declared, after much research and general wonkery, that over the period since 2009, UK GDP has been underestimated by an average of 2%. Billions of pounds, somehow, managed to go missing from the grand tally (adjustments for the next decade back are still to be calculated).

So what was missing? One significant change is the reclassification of research and development (R&D) spending by capitalist firms: previously it was considered consumption, and now it is considered output. That accounts for a large slice of the good news, as does incorporation of non-profit enterprises to various degrees.

The headlines have been grabbed by other matters, however - the new estimates include, among other things, the illegal drug trade and prostitution. Earlier this year, the ONS claimed that, taken together, these two economic activities added up to around 0.7% of total British GDP, roughly on a par with farming.

The calculation of GDP, naturally, is not a dry statistical matter. For Ghana, there was a clearpoliticalchoice involved in recalibrating its methods of estimation. Going up a few notches in the global economic pecking order offers the prospect of attracting greater foreign investment, and borrowing more easily on international capital markets. On the other hand, it loses much of its eligibility for international aid. In sound capitalist fashion, the Ghanaian government opted for the former.

What of the ONS’s sudden enthusiasm for hookers and blow? Ostensibly, the purpose of this adjustment is to bring British GDP calculations in line with European Union regulations - the great pseudo-explanation of our times. We cannot but note that the timing is, for George Osborne, serendipitous at the very least. He gets to claim - just in time for party conference season - that the recession ended a whole year earlier than previously thought.

Whether or not the hand of the treasury really is to be found in this, the reactions of senior politicians tell all. The addition of the black market to GDP statistics could have been decried by Tories as another loony diktat from Brussels. The government could have dragged its feet, rattled sabres, taken this bizarre imposition to the European Court of Justice.

It has done nothing of the kind, of course - the treasury has seized the opportunity to crow about how the new figures show Britain outperforming Germany in the period since 2010. Labour, on the other hand, is repeating its line heretofore. “It’s still the case that working people are substantially worse off under this government, that the recovery was choked off in 2010 and that it is the slowest on record,” said Chris Leslie, shadow chief secretary to the treasury. On both sides of the house, then, we see the ‘good news for George’ pattern.

There is a certain amount of truth to the Labour retort, as often there is when George Osborne is feeling ebullient. Things were slightly better over the last five years if you add some variables to the equation - so what? It seemed perfectly plausible to everyone at the time that things were pretty miserable, economically speaking. Is anyone really likely to suddenly believe that Britain was in a good state after all? (The ONS stresses that this period was still the longest and deepest recession since the quango’s formation in 1948.) Are defectors from the UK Independence Party going to come scurrying back on the basis of the UK’s apparently roaring drug and sex trades?

Not to mention the fact that there are bigger problems looming. After The Sunday Times ran the first poll of Scots to find more willing to vote for independence than not, the markets went into a small panic - the pound sank to a 10-month low, and billions were wiped off the value of major Scottish firms. Whatever the result on September 18, these little flaps are a compelling reminder that - for all the talk of recovery - the economy remains in a perilously twitchy state. Throw in potential bubbles in real estate and (in this writer’s estimation) digital technology, and you have several potential difficulties that will not be masked by Westminster cocaine sales.


The ONS’s new figures may not tell us anything substantial, then - but that is surely the point here. GDP is a most peculiar yardstick: decided by state regimes on the basis of innumerable decisions about what does, and does not, count as production. These decisions are, in many cases, essentially arbitrary. The reclassification of R&D is interesting: is it production? Is it consumption? For Marxists, the answer is simple: both. For bourgeois economics, apparently things are not so easy.

Eyebrows are raised at the addition of the drug trade, for example, but that is surely easier to call a productive industry than the various pseudo-jobs in advertising and financial services, which have always counted. It does not, of course, represent taxable transactions, by definition; but if that was to become a significant yardstick for GDP, then half the major corporations operating in this country would have to be excluded.

More significant is the issue of measuring the contribution of illegal drugs. It is not as though you have Companies House filings for salaries, capital expenditure and the like. The Independent (September 4) has some detail on how the prostitution figures were arrived at:

The ONS used data from the Metropolitan Police on the number of street prostitutes in London. They worked out the number of prostitutes per head of population in the capital and then scaled this up to create a national figure for the UK. Then, using academic studies, they calculated the average number of clients seen by each prostitute every year, the number of weeks worked and the payment per client.

Putting this together, they were able to come up with an output figure. Finally they calculated the average overhead costs of prostitutes, and subtracted it from the output figure to come up with the gross value added of the prostitution sector.

For “calculated”, in the preceding passage, we must surely read ‘guessed’: especially if London is being taken as an exemplary slice of British society, and indeed if street-walkers are being taken as synonymous with prostitution as a whole. Who knows what liberties have been taken with the more complex drug trade? “Because the home office says data on the seizure of illegal drugs should not be used as a measure of total drug use,” Steve Tolley of Money Marketing writes, “the ONS uses data on the number of drug users and then guesses at the amount they use.”1 Very convincing.

The reportage around the incorporation of such economic activity, on the other hand, does give us a window into the sheer hypocrisy of drug prohibition. Again, this is not being treated as an insult to everyday Britons, trying to get ahead in one honest trade or another, but as an amusing salacious detail, a little treat for the dying days of the silly season.

When reactionary demagoguery is the order of the day, press and government alike will cast drug dealers as unconscionably evil monsters. When it comes to scraping together some economic good news in lean times, it turns out that a quid spent is a quid spent after all. Perhaps the EU will decide to bring money-laundering onto the books in future, and the ONS can try to guess that by reading a couple of academic papers. (It has certainly helped the bottom line of Britain’s major banks over the years …)

The incorporation of such ‘grey areas’ highlights, above all, how little GDP figures actually tell us. Yes, plotted on a graph over decades, they give us a vague sense of how a country’s economic development is going at particular times, but not much more than that. The essentially arbitrary nature of many decisions as to what counts as ‘product’ contributes to the uncertainty; but then there is also the ‘domestic’ part of the GDP phrase.

Capital is primarily international, including in its black market form (it is a good thing for George Osborne that drugs are not being factored into the balance of trade). Thus, Osborne can present himself as the man who brought Britain to recovery; and perhaps enough people will believe him to get David Cameron a second stint in No10 - as if the international system was not kind to him (relative to many of his counterparts around the world), and as if it could not very quickly turn cruel.


1. www.moneymarketing.co.uk/opinion/sex-drugs-and-gdp-how-the-new-growth-measure-is-calculated/2013887.article.