A sideways look at economics
Economics is, at its core, a study of markets. Goods markets, energy markets, financial markets — there are so many fields that it covers. That’s what makes it so interesting as a subject. But, one thing that’s often overlooked is our own market, the market for economic research and economic statistics. It’s an important discussion to be had, not just for ourselves, but also for users of our products.
Economists define natural monopolies as markets with high fixed costs and low marginal costs. What does that mean? It means that the initial production of a good/service is prohibitively expensive to most firms — it’s a barrier to entry into that market — but that all subsequent production entails little-to-no additional cost. In such cases, it’s often argued that governments should step in and oversee production.
Arguably, the creation of national statistics falls into this category. Though the construction of most economic indicators is a relatively straightforward task, collating the underlying data is fairly resource intensive. Their construction is also governed by internationally agreed standards,[1] meaning that, even if multiple estimates of the same thing were produced (say if the ONS measure of GDP faced competition from private companies purporting to measure the same concept), it’s not like you’d expect them to show different results. Any differences would arise from idiosyncratic measurement errors rather than from different objectives. And, given that most official statistics are now published electronically, the cost of wider distribution (the marginal cost of taking these statistics to market once they have been estimated) is effectively zero.
Nevertheless, a private sector has emerged in this market in recent years — what can it offer that the public sector can’t?
Well, one thing it can offer is Big Data. In an increasingly digital society, the quantity of information held relating to our activities is growing every day. In recent months, we’ve seen Google and Apple release data tracking our movements, while data on card transactions have been used to analyse spending patterns. Even if this raises serious questions about Big Brother surveillance, its value to economists is beyond doubt.
But, even before the advent of Big Data, there were private-sector data providers. The reason for this is that the private sector can provide objective scrutiny of national statistics. Indeed, there are occasions where national statistics fall short of international standards, sometimes due to misaligned incentives. At Fathom, our independence allows us to call this out and offer objective alternatives (see for instance our China Momentum Indicator). Likewise, through measures such as our Financial Vulnerability Indicator, we possess the ability to assess signs of weaknesses in sovereigns, something the public sector is likely to understate…
Users of Fathom’s data are also paying for our IP — it’s not just the time required to produce the indicator, it’s the judgement born out of years of collective experience. Indeed, many of our proprietary indicators were initially developed for consultancy projects or are products of our large-scale macro models and can’t be found elsewhere. Almost by construction, the public sector can’t possess the same IP. As a result, the role of the private sector is most definitely here to stay.
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[1] For example, European countries calculate GDP according to the standards laid out by ESA 2010, while the ILO sets out the internationally recognised definition of unemployment.