Yet it’s not obvious that those who would plan actually understand this:
In 2018, a report by the TUC revealed that private and public investment as a proportion of national income put us 34th in a ranking of 36, trailed only by Portugal and Greece. In the 40 years to 2019, fixed investment in the UK averaged 19% of GDP, the lowest in the G7. Now, business investment in the UK remains more than 9% below its pre-pandemic level. Crucial parts of our national infrastructure have been failed twice over: first when they were state-owned and let down by the stinginess of the man from the ministry – and then when they became privatised victims of modern capitalism’s increasing fondness for stripping out, squeezing down, and chasing dividends.
Well, yeeees. Part of the TUC’s case there is that because we in Britain have a smaller manufacturing sector than many other countries therefore we invest less in manufacturing. Which seems entirely logical.
We might also ponder that investment is a cost. Therefore decrying the low levels of investment could be seen as complaining about how low our costs are.
However, there’s a deeper problem here, one of simple measurement. Or perhaps complex measurement. If we are to decide to plan, which is the insistence here, then we’ve got to understand the data that we’re trying to plan from. After all, it’s only that understanding that turns data into information. And the truth is that there’s a distinct lack of understanding of that data here.
The definition of investment is, in fact, non-current spending. For the GDP numbers - which all of this is drawn from - that becomes that spending which is accounted for across accounting time periods. Current spending is that which is accounted for as spending in this, the current, accounting period. Investment is that which is written off over more than the one accounting period. The inverse of this same statement is that investment is whatever it is that we depreciate, current spending is what we do not. We can get more complex than this but that is the essence of it in the national accounts.
That switch from manufacturing to services - the thing which we’ve done more than most nations - has an effect upon this. Because an awful lot of what could be called “investment” in services is in fact written off in the one accounting period. Very few firms capitalise their software development these days, just as one example. Those costs are - usually you understand - accounted for as current expenses in the wages of the developers, not something that is then depreciated across time.
This then goes further. This distinction causes other national accounts problems too. The old way of buying in software was to buy a license - that was a capital investment which then was written down, depreciated over time. The new way is to rent by the month - Software as a Service, or SaaS. That’s a current expense, not an investment. And as the developing firm is also accounting for the software development costs as a current expense - mostly to often enough - we seem to have a fall in investment within the economy. Switching from Office, on a 2 year licence, to Office 365, on a monthly rental, reduces investment in the national accounts even as exactly the same activity, by the same people, in the same place, happens.
This might all sound a little recondite and it is. It’s also not the full explanation but it is at least a part of it. The national accounts were drawn up in a different age, measure the world of that previous time. They don’t deal well, the definitions, with our modern world. They are, therefore, not all that useful as a base to plan the future from. Because they’re not telling us what most think they are.
If, just to pick an example, Trotters Independent Traders switches from a purchased copy of Sage to a monthly subscription to Sage then investment as classified in the national accounts falls. This does mean that looking at the levels of investment in the national accounts is not a good guide to the current state of the economy and is thus a very bad base from which to try to plan the future.
Just and only the public cloud part of SaaS amounts to some 0.5% of GDP.
Of course, Hayek said all of this rather more carefully but it is still true. The centre doesn’t have the information necessary to do the planning so many people want the centre to do. Therefore that planning from the centre isn’t going to work.