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Growth in the design economy

Design Economy

The limited ability of economists to account for the value addition given to goods and services by design (as well as other emerging disciplines) leads to an underestimation of growth figures.

In recent months, methodologies to measure GDP- traditionally the sole concern of the most grave and solemn of economists- has become a topic of mainstream debate in India. The Central Statistical Office (CSO) made two changes in the way GDP was measured: the base year was shifted from 2004-05 to 2011-12, and market prices of products, instead of factor prices, were now included in the formula. As a result, GDP growth figures shot up to 7.9% in the final quarter of FY2016- a figure that has been viewed with skepticism within India as well as abroad. On the other hand, growth figures in the industrialised West- usually in the neighbourhood of 2%- have been known to be routinely underestimated. What causes these discrepancies can largely be explained by the complexity of methods employed to calculate economic growth.

Government statisticians and economists are tasked with assessing, independent of political constraints, various measures to describe how much a nation’s economy and its constituents have grown in a particular year. Aggregations at a national scale and repetitions in counting are obvious difficulties bureaucrats have to deal with, but major complications arise in measuring real economic growth after accounting for price inflation. This amounts to ascertaining whether Rs.10,000 spent in 2016 provide consumers with as much utility or value as they did in the previous year. Conversely, if Rs. 10,000 helped derive a certain utility for consumers one year ago, the CSO attempts to determine how much more it will cost consumers to derive the same satisfaction today.

Even in a theoretically ideal, static economy where the nature and relative role of goods remains constant, these measurements are fraught with multiple problems. But  when the nature of products or services changes drastically, things get so fuzzy that even the ubiquitous ceteris paribus is rendered helpless.

Picture the development of a radical medical procedure that brings respite to the patients of multiple sclerosis, or a new form of chemotherapy that can kill cancerous cells more efficiently. The introduction of such a technology into the economy means that units of currency (dollars, rupees) are worth more than what they were before the new procedure was invented. In most cases there exists a lag for this change to be reflected in GDP calculations, and growth methodologies (to some extent) account for it. But more damningly, the only change reflected in official figures is the change in the the price of the treatment, not for the increase in utility or satisfaction experienced by patients and their families.

Paradigm-shifting medical cures, moreover, are not a commonplace occurrence- the last revolutionary breakthroughs in patient healthcare came with laparoscopic surgery and HIV cocktails in the previous decade. This laconic pace of change is not different in sectors such as automobiles, consumer electronics and telecommunications. The core technology of the internal combustion engine, for instance, has shown little change in over a hundred years. However, even the most Luddite commentators would admit that goods and services have shown value addition over the previous decades particularly in one aspect: design. A large share of the increase in factor inputs employed to produce a car in 2016 come from product and automobile designers that enhance its utility not only in terms of aesthetics, but also with regards to ergonomics, passenger safety and navigation technology.

The real price of automobiles, however, has not risen proportionally. In some cases, there may be a marginal change in the cost of the car year upon year, but all the increase in value addition from design and energy efficiency still contributes towards producing one additional unit of a car- a statistical constraint that partly explains deflated growth figures in regions such as London, whose design industries have grown to an advanced stage and hold a significant share in the overall economy. The increase in value to products and services by using different disciplines of design is said to have contributed 7.3% of the UK’s exports (£34 billion) in 2013, and designers now account for 24% of the wage bill in its information and communication sectors- showing breakneck increases in the last decade. In contrast, UK’s overall GDP growth has languished at 1.4% since the official end of the 2008 recession.

Analysts and economists attribute this slowdown in aggregate demand and growth figures in OECD economies to a drop in overall productivity. In a panel discussion at the London School of Economics earlier this year, RBI Governor Raghuram Rajan admitted how these figures may seem surprising to many at the beginning of their careers- considering they are surrounded by stories of innovations, about problems being scaled in ‘faster, cleverer ways’. The present cohort of workforce entrants is seeing potential improvements to productivity all around them, but these do not seem to translate into concrete growth and employment- summarising a lamentable paradox in today’s economy.

The design-growth contradiction also explains issues that affect developing economies like ours. Simply reversing the argument shows how we overestimate inflation by measuring it nominally, whereas real inflation isn’t as high- partly because of the increase in purchasing power of the currency due to contributions from exciting new fields like design. In other words, your Rupee has a greater ability to purchase better cars than in the past because of the work of an an automobile designer- think of the ways in which the Suzuki Alto is better than the  Maruti 800, even in the latter’s most nostalgia-inducing moments.

Image Source: The Design Sketchbook/Youtube

#MartinFeldstein #RaghuramRajan

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