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What happens when you try to put a value on everything?

Updated Wednesday 2nd July 2014

Should we downgrade statistics' triple-a rating? Has the rush to put a figure on everything had a negative impact on how we do politics?

Laurie Taylor:
Standard And Poor's HQ Copyrighted image Icon Copyright: King Ho Yim | Dreamstime.com Just an opinion? Standard and Poor's rating of nation's credit can have global effects Do you remember – I think she was called Janice – yeah Janice, on Thank Your Lucky Stars back in the Sixties: “Oi’ll give it five”, she’d say, after hearing a new release and that was enough to settle the record’s fate. After all a five was a five was a five.

It isn’t all that different though from the examiners’ meetings I used to attend at university because after all the marks for a particular student had been added up and weighted and averaged, the final figure of say 57 or 62 or 71 would seem immutable - a perfect representation of the examinee.

“Well you know she’s really always been a 57”, we’d say, “You know I’m not surprised by that 71. He’s very, very much a marginal first.”

What was so pleasurable about allocating numbers in this manner was the way in which it turned the messy ambiguous reality of actual students into closed unnegotiable categories – into Thirds and Lower Seconds and Upper Seconds and Firsts…

But of course it is not only the fate of students which is numerically determined, numbers also decide the fate of society, the manner in which we ascertain the state of the economy, the credit worthiness of entire countries, the present and future significance of the natural environment.

And what are the consequences of this reliance on number? Well that is precisely the issue explored in a new book called How Numbers Rule the World: The Use and Abuse of Statistics in Global Politics. Its author, whose previous books include Gross Domestic Problem: The Politics behind the World’s Most Powerful Number, is Lorenzo Fioramonti, who is Associate Professor at the University of Pretoria in South Africa. He’s now with me. Welcome Lorenzo.

You say that the close relationship, that I was mentioning there, this relationship between numbers and politics has got a pretty long history, I mean if we go back in politics people are always citing numbers, but you say aloud what you refer to as the audit explosion in the 1990s as representing a significant escalation. Tell me about this explosion, how did it come about?

Lorenzo Fioramonti:
Well thank you for this question. The relationship between numbers and politics definitely goes back centuries. I mean the Greek philosopher Pythagoras built a whole political system based on numbers. But ever since the 1980s, late 1980s and 1990s, we see a rise in our public governance institutions, a rise of a narrowly defined conceptualisation of efficiency and resource driven policies and so on and so forth that required numbers to be pinned down and to understand what type of policies and solutions would be actually be the most effective. And our policy makers went out there and borrowed the matrix from business and market systems and applied them to sectors of society that nowadays have virtually no boundaries. And this has given markets probably the most powerful boost in terms of their influence in our governance systems even now at a time when we should see those tools as profoundly bankrupt and inefficient.

Laurie Taylor:
I mean it is extraordinary the effect, I know myself occasionally when I’m sort of sitting in the morning and I hear that the FT index had gone up a few points and I think oh jolly good, excellent and I think what am I saying that for because you want to say there’s a certain hierarchy of numbers have emerged with some figures, like that stock index and the GDP figures, they really exert a very big influence on political decisions but you want to argue these numbers aren’t fit really for the use to which they’re put.

Lorenzo Fioramonti:
Absolutely, I mean when policy makers started adopting those numbers, borrowing them from the business sector, they never even questioned whether they were a comprehensive and efficient matrix for business let alone for society. I mean GDP’s ruling our lives, it’s the most powerful number in the world but how many people do actually know what GDP measures and why it is not fit to measure the wellbeing and the economic performance of economies? Stock indices flood our media, we all watch TV every day and we get all these numbers in front of us and the idea – the appearance – that when they go up there’s something good for society. But stock indices – actually what they do they measure the concentration of wealth on a small number of blue chip companies, large capitalisation….

Laurie Taylor:
We’re talking about the FT index?

Lorenzo Fioramonti:
Exactly, the FT, Dow Jones, the NASDAQ – all of them actually looking only at a small sample of the largest companies that are publicly listed on the stock exchange. Which means basically that when they go up they attract money from other sectors of society. So actually what would happen is that when the stock indices go up small businesses suffers – that’s what happens – and we think actually it’s the other way round, we see them as indicators of a good and strong society.

Laurie Taylor:
Well this enormous stress upon numbers, I mean you’ve got excellent examples in your book but I want to take one is the role of credit rating agencies. I mean I’m certain 20 years ago we’d probably never heard of credit rating agencies but the influence of them seems to have been pretty inescapable over the past few years. Here’s just one example from 2012:

BBC News:
BBC News at 6 o’clock on Saturday 14th January. France and eight other countries in the Eurozone have had their international credit ratings downgraded putting European leaders under renewed pressure as they try to resolve the debt crisis. The Standard and Poor’s Agency stripped France of its top rating last night raising fresh questions about the credibility…

Now one would in a way think on the face of it that it’s a good idea to try to assess the credit worthiness of a company or even a nation, that these are useful numbers but no.

Lorenzo Fioramonti:
But they’re not. They’re not because – we don’t have time to investigate the methodologies behind the ratings but suffice it to say that rating is considered an opinion. Standard and Poor’s, Fitch ratings and Moody’s – the big three – say it very clearly, although in the fine print of their rating reports that a rating is nothing to be – to base policies, so to base investment decisions on because it’s an opinion. And then when they get taken to court by governments because they have abused the ratings or they’ve given a wrong rating to a country they, in the US, appeal to the First Amendment – Freedom of Speech – to protect themselves.

So they see their ratings as personal opinions, like a journalist writing a notepad for the financial newspaper. And yet they have been hardwired in to our governance mechanisms. Nowadays a company cannot operate without a rating, a government cannot go out there and get money unless they have a rating so we have hard wired opinions into the way in which we take financial decisions all over the world.

Laurie Taylor:
And I mean we hardly need to look very hard in order to find out examples of how these don’t work have we, I mean three days before the collapse of the Lehman Brothers in 2008 its bonds were being given the highest possible grade by these credit rating agencies. I mean but these do of course, as you’re saying, these have an effect, these ratings, as far as investors are concerned, they look at these ratings and they think well I may not necessarily believe them but they’re going to influence other investors rather than…. So therefore I’ve got to work with them.

Lorenzo Fioramonti:
Absolutely, they have an influence, not as providers of information but they have an influence as indicators of where the markets may go because I may not believe in the rating but as an investor I believe in what other people believe, so if everybody believes in the ratings then I may as well follow it.

It’s a very perverse incentive and yet you know like what we do not realise that we have hard wired all these measurements which are fundamentally subjective and often fraudulent into our decisions, entire governance mechanisms and this is the topic of the book – the issue’s not just about numbers, whether they’re good or not, but their political power by having been integrated into our regulatory mechanisms.

Laurie Taylor:
No you’re not arguing against the use of statistics or the way in which statistics – good statistics - can inform decision making. What has been happening recently – your book deals in this in some detail – is the way in which numbers have been applied in order to put a value on the natural world. I mean where did this come from and how on earth do you determine a value – a numerical figure – to characterise a river system or a mountain range?

Lorenzo Fioramonti:
As crazy as it may sound to most reasonable people around the world this is happening under the radar screen of our public debate. And mainly it originates from the need to complement GDP, GDP is our most powerful number, it drives our policies, but GDP neglects the economic value of a lot of things, including Mother Nature, our natural ecosystems.

So a bunch of economists came up with the idea of actually doing – complementing it by putting a price tag on the natural world, on ecosystem services, what they call the natural capital. Now this may be actually a profoundly progressive idea, in order to – for GDP to reflect the value of nature we need to put a price on it.

Laurie Taylor:
Yeah because I mean one of your complaints about GDP is that it doesn’t normally talk about the value of natural resources.

Lorenzo Fioramonti:
Absolutely, absolutely. So some of these people were meaning well – they’re trying to put a price tag on nature so that nature becomes relevant in our economic policies. However, when you put a price on something that is not marketed it gets commodified, it may be becoming part of a new market. And what we’re seeing nowadays is that a lot of investment banks, a lot of speculators, are using what they call forest bonds – new markets of biodiversity credits - to make a lot of money. And making nature productive by turning rainforests, water streams and waterfalls into ecotourism destinations and so on, so that they can produce money. That’s the perverse incentive. These types of numbers turn things into marketable goods.

Laurie Taylor:
But you would want to say that we do need to take into account the natural environment, I mean the past is not being taken into account, what you’re objecting to is if you like the numerical way in which it’s being taken into account.

Lorenzo Fioramonti:
I’m objecting to the fact that we think that things are only worth something if they have a price. GDP has misled our understanding of reality because GDP is only looking at prices. So what I’m saying – you want to take nature seriously then reform GDP and try and have a dashboard of different indicators that quantify the contribution of nature but doesn’t – don’t put a price tag on it. This is exactly the opposite of what is happening with these new trends in natural capital accounting, so instead of putting a price, measure, quantify and try to deconstruct GDP rather than expanding it to what is not usually conventionally marketed.

Laurie Taylor:
Tell me about the – I mean what about the overall consequences for society, this increasing reliance on these sorts of numbers?

Lorenzo Fioramonti:
Well we focus a lot on our democratic freedoms, we believe at the end of the day that we have the power to influence the decisions that are taken collectively through our institutions but if the measurements – the tools that we use to decide what is good and what is bad, what is effective and ineffective – are fundamentally biased, whatever decision we take is already a foregone conclusion. These numbers are a factor in which we deal with climate change, in which we analyse the cost and benefits of building a new airport vis-à-vis building a school and so on and so forth. So in the end this number politics is reducing politics to an algorithm, to an algorithm that is influenced by market considerations. The only way out of this is by reclaiming the space for politics. The idea of numbers give us an idea that somehow the conflict and the different interests can be dominated by the perfect algorithm and this is not true in society, society – the distribution of interests and power are out there and they need to be mediated via politics not via econometrics.

Laurie Taylor:
Lorenzo Fioramonti – thank you very much.

 

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