Edward Hadas

An American, a Frenchman and a physicist were talking about some unusual weather. “It was twice as hot this afternoon as this morning”, said the American, “the temperature went up from 40 to 80 degrees.” The Frenchman interjected: “That’s in Fahrenheit. In Celsius, it was six times hotter.” The physicist was scornful. “On the only really scientific measure, the Kelvin scale, the increase was a piffling 5 percent.”

Who’s right? Well, all the measures are accurate and it certainly was hotter. But no single ratio – whether twice, six times or 5 percent – captures just how much hotter it actually felt. The feeling of hotness, like the feelings of pain or anger, cannot be measured with genuine precision.

It is the same for the feeling of prosperity – any measure will be arbitrary and quite possibly misleading. Consider gross domestic product, the most common index of economic success. GDP is the sum of spending on everything in the economy, from shoes to shoe-shines, from cars to child care. In comparing countries with each other or over time, GDP is usually adjusted for inflation to calculate what is ambitiously called “real GDP”. It is then often divided by the population, creating “real GDP per person”. This is usually measured in “constant dollars” and, for 2011 in the United States, becomes $43,149 of 2005 dollars.

Economists recognise that GDP is far from perfect. In 2009, a French government commission suggested that it should be augmented by measures of the distribution of wealth, environmental sustainability and “quality of life”. The Human Development Index, which is widely used by the United Nations, combines GDP with life expectancy and years of schooling.

These modifications are welcome, but they fail to correct GDP’s main weakness – that is what might be called the fallacy of precision. The human meaning of prosperity simply cannot be reduced to numbers. Supposedly exact measures generally confuse more than they illuminate.

My rejection of quantification is anathema to most economists, who fancy themselves to be hard scientists. It also goes against utilitarianism, economists’ favourite philosophy, which claims all decisions can be reduced to numerical comparisons.

But consider an example: real GDP per person in the United States is up 103 percent since 1971. That sounds basically right: overall, Americans are substantially richer than they were four decades ago. The improvements include a 12 percent increase in life expectancy at birth, the shift from clunky black-and-white to sleek colour television and the introduction of the Internet into more than 70 percent of households. The gains far outweigh the losses, such as a 26 percent fall in the number of highway miles per resident.

The exact number, though, is a fiction. There is no way to assign a weight to each of the gains and losses, and no reason to assume that GDP, which measures the inflation-adjusted price of the various goods and services, is a particularly meaningful summation.

Happiness economists try to dodge the problem by looking for a measurable and meaningful number in people’s feelings. They claim subjective satisfaction can be counted up, simply by asking people to rate their happiness on a scale of, say, 1 to 5. The approach has many problems, one of which is that it doesn’t make any sense to say happiness has increased by, say, 12 percent.

Emotions just don’t work that way. George may love his current girlfriend more than his ex, but it’s only a figure of speech to say he loves her twice as much. Similarly, it makes no sense to say we are twice as happy as our parents or 12 percent happier than we were a half a decade ago.

GDP and similar measures can be quite helpful rough indicators, especially for poor countries. For example, the Chinese government aims at 8 percent annual real GDP increase – that rate creates jobs without putting excessive strain on society. But the authorities in Beijing should be careful, for the precision is spurious. Sometime soon, the right GDP growth number will be lower. And when China gets rich enough, no measure of wealth will provide much insight.

Look at the International Monetary Fund’s calculation that GDP per person was 27 percent lower in France than in the United States in 2011. The exactitude is ridiculous and the basic conclusion, that Americans are substantially richer than French people, is silly. The countries are both rich and modern, just in somewhat different, incommensurate ways. France has cheaper medical care, longer holidays and better mass transit and bakeries. The United States has bigger houses and more cars per person.

Numbers are seductive, so economists, politicians and pundits tend to fret over every tenth of a percentage point of GDP. But it is easy to exaggerate the importance of incremental changes in measures of this sort. It would be better to stop striving for precision. Or at least to cut back by 92.4 percent.

“The Owl of Minerva takes flight only as the dusk begins to fall.” Or, to speak more directly than G W F Hegel, we can only become wise about the direction of history late in the day. The aphorism is pertinent to the euro crisis. Is this the twilight hour for the single currency or are the clouds over the euro no more than an early morning mist in pan-European history? The euro’s fate will look inevitable in retrospect (that is Hegel’s point), but for now the balance of historical forces is far from clear.

The technicalities of the euro crisis are bewildering, even to financial professionals. There are rescue funds constructed with baroque techniques of financial engineering, arcane details of labor market reforms and political feuds that have festered for decades. But something much bigger is at stake – whether or not there should be, in the words of Angela Merkel, “more Europe.” If so, the crisis can be resolved relatively simply: lenders would accept the losses caused by their past mistakes and errant governments would promise to play by the fiscal rules henceforth.

But should there be more Europe? Most British politicians think not and most mainstream continental politicians are in favor, if only warily. The reasons on both sides are fundamentally Hegelian. It is a question of which historical forces should prevail.

The anti-euro case is based on one of the strongest forces of the last few centuries – nationalism. The sentiment is sometimes expressed in economic terms, as when the previous British government rejected membership of the monetary union. A multinational currency always goes directly against the nationalist flow, even where the economic case for it is strong. In order for the euro to succeed, Germans must abandon hopes of duplicating their super-strong national currency and Greeks and Italians must either abandon longstanding traditions of loose fiscal behavior or learn to tolerate interference from EU authorities.

On the pro-euro side, two grand historical forces have provided most of the support for both the European Union and its currency. Both are faltering.

The first is a peculiarly modern force, the fear of war (Hegel thought war was a major spur of historical progress). While Europeans still dread another conflagration, nearly seven decades of peace, including the non-violent fall of the Communist bloc, have been enough to render the threat of war largely theoretical, and irrelevant to the European monetary system.

The second force is the desire for ever greater prosperity. This force, which has come into prominence during the last two centuries, influenced the European leaders who wanted to bring Europe together after the Second World War. They thought the economy was the most promising domain for cooperation, and they were right. European politicians and voters alike have proved willing to sacrifice national traditions and rivalries for the sake of European prosperity. The EU now has free trade, standardized regulation and almost unconstrained mobility across borders. The single currency was supposed to be the culmination of economic integration.

The bitterness surrounding the euro crisis shows that the lure of prosperity is now, at best, barely enough to inspire European governments to change their ways. While most politicians still believe that the euro will eventually bring their nations more wealth and economic stability, they and their voters are seriously in doubt whether those goods are worth more than national self-determination.

Philosophers of history might speculate that the desire for prosperity is a waning force today because it no longer has the same power to inspire the comfortable citizens of the EU as it once inspired the impoverished men and women scraping a living amidst the rubble of post-war Europe. Whatever the reason, the euro will not survive the next crisis (even if it scrapes though this one) unless European leaders make a stronger effort to identify their project with historical forces more politically compelling than ever more material gain.

The stakes are high. If the member nations retreat on the euro, further disintegration is likely. That owl of wisdom will probably look down on the movement towards European unity as no more than a wrong turn on history’s path.

But the euro and indeed the entire European project could draw on stronger forces. You don’t have to be a Hegelian to see that Europe as a whole, rather than individual jurisdictions, has been shaped and guided by such great ideas as Christianity and the philosophies of Greece and the Enlightenment. More recently, the entire region has striven to realise the dreams of democracy, honest government, economic security and educational opportunity.

Supporters of the euro and of “more Europe” might look to the French revolutionary call for liberty, equality and fraternity. These are ideals which erase neither national borders nor local customs, and so they can co-exist peacefully, if somewhat delicately, with nationalism. But the euro does indeed have the power to enhance the liberty that comes with effective economic management: the equality of citizens protected by fiscally sound governments and the fraternity that binds the strong and weak.

PHOTO: German Chancellor and leader of Germany’s conservative Christian Democratic Union (CDU), Angela Merkel gives her closing speech of the party convention at the fairground in Leipzig, November 15, 2011. REUTERS/Tobias Schwarz