A Revolution in Economic Data and Interpretation

Correction ahead!

In my recent prophecy on money and time, written at 4AM in the midst of my travels in the UK — I blundered.

Hey, it happens. At least I didn’t mistakenly board a plane to Wuhan!

You see, one of my fourteen points was misleading — as I realized immediately upon rereading the latest report from Gale Pooley and Marian Tupy, the pioneering masters of time-prices. You can read the report here.

But the process of correction — like all learning processes — should be edifying for us all. After all, learning curves, fed by feedback loops correcting for mistakes, are the essence of economic growth.

I wrote:

“Time-prices can be crudely translated into currencies and compared by dividing the gross domestic product (GDP) or gross output of any economy by total hours of work, yielding the wage of an average worker.”

That’s just a first step. To get the time-price, you then have to divide that “average wage” (actually average hourly income) into the price of the good or service or aggregate of interest, whether Gross Domestic Product (GDP), the price of Brent Crude Oil, or the price of smart phone features.

The key to the effectiveness of time-prices is that they are always ratios that consist of nominal quantities divided by nominal quantities (unadjusted for inflation and deflation).

In most cases, these are GDP or gross output and hourly income all expressed in the same currency. Measured in the same units, they abstract away from all the details, skews and manipulations of ordinary currencies and prices, inflation, and deflation.

In the resulting ratios or fractions, both the nominator and the denominator are affected by the same distortions, leaving an undistorted fractional outcome. Converting this ratio to a decimal by simple division yields a time-price in hours. Calculated finally in hours and minutes and seconds, this number is comparable to any other such ratios in time and space through history and across the globe.

Thus, the time-price of any good or service is its nominal price divided by the relevant nominal hourly income.

Simplifying the Simon Abundance Index

It was Yale Nobelist William Nordhaus’ failure to address this critical point clearly that plunged him into endless complexities of lighting values and efficiencies despite his ultimate recognition that time-prices are the “true prices.”

Pooley and Tupy sum it up:

“Since last year, we have tweaked our methodology to make The Simon Abundance Index® [named after the late economist Julian Simon] simpler and more robust. The most important change is that we no longer deflate commodity prices and income in any way. Economists differ on what kinds of deflators are appropriate. Moreover, deflators are unnecessary. Thus, in this year’s index, we arrive at our time-prices, which underpin all of our subsequent calculations and findings, by simply dividing the nominal price of a commodity by the nominal hourly wage in 1980. We do the same for 2018.

Note that the Index deals with global prices of commodities relative to the average global GDP per capita per hour. We recognize that GDP figures are not the same as wages. Unfortunately, a global hourly wage is tough to calculate – people work different numbers of hours, economies are composed of different kinds of workers, the proportion of non-wage compensations differs, etc. As such, GDP per capita per hour remains the best approximation of global hourly income. That said, what matters for our analysis is not the exact income level, but the ratio of change over time.”

This is the key point that I blurred in my prophecy. It bears a revolution in economic data and thus in economic interpretation. It disproves common beliefs in the onset of economic stagnation, of growing inequality, and even of negative real interest rates (adjusted for real economic growth).

Matt Ridley, the supreme UK science and economics writer who also uses time-prices, last month published an article in the UK Spectator (December 21, 2019):

“We’ve just had the best decade in human history. Seriously.” He pointedly showed that because growth in Asia and Africa is exceeding growth in Europe and North America inequality declined. And because of constant innovation and efficiency improvements the quantity of resources consumed per capita in Britain (and the total quantity as well) have both fallen by one third since 2000 (including imports).”

Because of rapid economic growth and progress, everything is getting more sustainable. However, Ridley warns, there is one threat to this happy trend and that is environmental extremism:

“A modern irony is that many green policies advocated now would actually reverse the trend towards using less stuff. A wind farm requires far more concrete and steel than an equivalent system based on gas. Environmental opposition to nuclear power has hindered the generating system that needs the least land, least fuel and least steel or concrete per megawatt. Burning wood instead of coal in power stations means the exploitation of more land, the eviction of more woodpeckers — and even higher emissions. Organic farming uses more land than conventional. Technology has put us on a path to a cleaner, greener planet. We don’t need to veer off in a new direction. If we do, we risk retarding progress.”

As I wrote in Life After Google, with more than thousand-pound batteries delivering the energy of 60 pounds of gasoline, electrical cars — for all their virtues of silent luxury — are vastly less efficient in power per pound than internal combustion engines.

None the less, the key finding of all these pioneering researchers is that over the last four decades’ innovation and the spread of markets have countervailed all the forces of manipulative finance and inflation, debt and war.

Today’s Prophecy

Using time-prices we can see that even though the US is falling behind Asia in growth and inventiveness, our decline is only relative. It is chiefly an effect of luddite fears of climate change and the inexorable associated rise in lawsuits and bureaucracy.

Even our leading financial institutions such as Goldman Sachs are becoming Luddite vendors of climate panic over science and diversity politics over meritocracy. Our leading universities focus on teaching their students how to stop things rather than how to start them.

By reforming our educational institutions, rationalizing our environmental laws as the Trump Administration is doing, and replacing detailed regulation with common sense, we can recover our dynamism and growth.

Expanding trade rather than stopping it would be particularly helpful. We should exploit and absorb the Asian engines of world capitalist growth rather than fight them. Decoupling economies is simply a program for world poverty and retreat.

This finding tells us that we can continue to invest with some confidence, if we selectively target the advance of technology around the globe. This is exactly what we do in this Daily Prophecy, The George Gilder Report, and Gilder’s Moonshots.

Regards,

George Gilder
Editor, Gilder’s Daily Prophecy

You May Also Be Interested In:

A Blessing from China: A Challenge to Innovate

Some of my readers worry that I am “soft” on China, too optimistic about the prospects for freedom there, and unwary of the Chinese threat to the US. As one reader recently wrote, “at the end of the day China is still a communist country” which “does not recognize the right to private property,” and...

Read This
George Gilder

George Gilder is the most knowledgeable man in America when it comes to the future of technology — and its impact on our lives.

He’s an established investor, writer, and economist with an uncanny ability to foresee how new breakthroughs will play out, years in advance.

And he’s certainly no stranger to the financial newsletter...

View More By George Gilder