Can Europe Make It?

The politics of numbers in the age of austerity

The inherent power of numbers explains why all sorts of data, good or bad, can become a potent weapon to shape complacency and subservience in society.

Lorenzo Fioramonti
25 January 2014

Welfare cuts have become a common phenomenon in the age of austerity, especially in Europe, where conservative policies carry the day. As with the cuts recently proposed by George Osborne in the UK, these reforms hit the poorest and leave the wealthy almost unscathed. What is more, they are presented with an aura of inevitability thanks to the dubious statistics dominating our modern economies. Most politicians are fond of dishing out data as they are fully aware that the sense of neutrality these numbers provide makes people more willing to accept welfare cuts. Indeed, governance by numbers de-politicizes decisions. The appearance and design of such statistics are structured around the notion of evidence. When we see a number, we perceive certainty. Factual information. Numbers are not like words, which require interpretation. Numbers are a source of authority in so far as they reveal truth. And truth cannot be disputed. But have you ever wondered what these numbers actually mean?

Take the much discussed topic of inflation. The consumer price index, inflation’s conventional measure, gauges individual price differentials in a predefined basket of goods and services. When it goes up, it means that the various items we buy are, on average, more expensive. While acknowledging methodological problems, including the quality of data (that depends on how much retailers are willing to disclose), the ONS also reminds us that the CPI is by no means a measure of the ‘overall’ cost of living. The head of the Bank of England, Mark Carney, cheers when it goes down, but many British households may still find themselves poorer, especially if they need to buy more stuff to satisfy their needs. This is exactly what happens when previously public services are privatized and provided to a cost to households.

Credit ratings systematically depict welfare cuts as a ‘safer’ system to increase revenues if compared to more socially-minded policies, such as increasing incremental taxation. At least two governments, in Italy and Greece, have collapsed under the pressure of these numbers.  But what are these all-powerful ratings? Nothing more than opinions, as recognized by the very agencies producing them, some of which have been accused of data manipulation and fraud. Despite their suspicious nature, our policy makers have hardwired these statistics into financial regulatory mechanisms by mandating that companies, banks and even public institutions get a rating before issuing any type of obligation. Politicians toast when the Dow Jones or the FTSE go up, as if these numbers measured the health of our economies. In fact, stock indices cover only publicly traded companies with the largest capitalization. When they rise, it means more money is going into these giant firms, which may very well result in less money invested in small companies. 

The most powerful economic indicator, the almighty gross domestic product (GDP), is also misleading policies. Most economists agree that GDP is a poor indicator of economic performance, let alone social welfare. It is ‘gross’ because it does not count the depreciation and depletion of assets, including machineries, natural resources and other inputs to the production process. It neglects economic activities performed outside the market, such as household services and the various ramifications of the informal economy, which according to the IMF accounts for about 20% of economic output in industrialized nations and up to 45% in less developed countries. Moreover, it gets adjusted and recalculated at every turn, providing contradictory information to policy makers over time. Even the OECD claims that GDP is the most controversial statistic in the world: “It measures income, but not equality, it measures growth, but not destruction, and it ignores values like social cohesion and the environment. Yet, governments, businesses and probably most people swear by it.”

This is precisely what the EU did: it elevated GDP to its gold standard by forcing member states to keep below a 3% margin of GDP for deficit and 60% for debt. This put Europe’s entire social welfare, from education to healthcare, under the jurisdiction of a number.  But what justifies such fixed ratios? In 2010 an influential paper by Harvard economists claimed that nations should never surpass a 90% ratio between debt and GDP, as this automatically triggers the risk of a systematic recession. These findings were used by the EU Commission to defend its approach, until a student found that the economists’ numbers simply did not add up, casting serious doubts on the key tenets of fiscal prudence.

Nowadays, there is virtually no social or environmental policy that is not vetted through the numbers of cost-benefit analyses. At first sight, these methodologies appear rational. But, when looking more closely, we notice that their discount rates systematically assign a higher value to the present vis-à-vis the future, thus producing a clear bias towards short-term approaches. For instance, the UK Treasury’s Green Book establishes that returns in the future lose 3.5% of their value every year. This apparently harmless methodological requirement profoundly affects the capacity of public and private institutions (including the non-profits that get funding from the state) to plan for the long-term and value social and environmental sustainability.  

These days new numbers are being developed by the same investment banks that plunged the global economy into chaos with a view to putting a price on anything, from human wellbeing to Mother Nature, given that measuring social and natural capital has become a lucrative business. In a recent article focusing on the governance of environmental conservation, Barbara Unmuessig has shown the proliferation (and degeneration) of the derivative industry supported by natural capital accounting, with all its biodiversity credits and offset markets.  She argues that the collapse of carbon trading should be enough to stay away from similar approaches to sustainability. The environmental advocacy group Greenpeace has also pointed out that giving numerical values (generally, prices) to “deeply interconnected natural systems is inherently speculative and not always sensible.” Putting a price on ecosystems may force us realize the economic contribution of nature. Yet, it may also open up dangerous possibilities for a marketization of natural resources, given that anything that has a price can be bought and sold.

This inherent power of numbers explains why all sorts of data, good or bad, can become a potent weapon to shape complacency and subservience in society. Although they are presented as tools that advance knowledge, in so far as they remove our collective capacity to exercise our critical mind, they run the risk of fostering stupidity. A society based on numbers “endangers itself because it invests too heavily in shallow rituals of verification at the expense of other forms of organizational intelligence,” argues LSE accounting professor Michael Power. Through numerical-based auditing systems, it becomes “a form of learned ignorance.” These standardized approaches “support abstract managerial values” and “tend to prioritize that which can be measured and audited in economic terms.”

It goes without saying that, without statistics, policies would be simply dominated by impressionistic considerations and rhetorical arguments. Measuring is a fundamental component of human life. Our education, healthcare and housing – just to name a few fundamental areas of development – depend on measurements. At the same time, however, we should not credulously accept that numbers always reveal facts. In the social and economic field, the incorporation of statistics is invariably driven by critical assumptions, which should be taken into account when taking decisions that affect society as a whole. More often than not, these assumptions are driven by a narrow econometric approach at the expense of more holistic considerations.

In contemporary politics, numbers have been used to strengthen technocracy at the expense of democratic debate. The politics of numbers has reinforced the grip of markets on our social and political life, thus making market-based governance ‘the only game in town’. As remarked by the economist Friedrich Hayek back in 1945, “We make constant use of formulas, symbols, and rules whose meaning we do not understand, [which] have in turn become the foundation of the civilization we have built up.” In the age of austerity, this unfettered trust in numbers is being purposefully used to maintain the status-quo and strengthen market society, reducing the space for social policies and innovation.


The author will be launching his new book, How Numbers Rule the World at King's College in London on February 6, 2014. 

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