What the Inventors of Our Leading Indicators Actually Meant — Recommended Reading

Karabell, ZacharyThe Leading Indicators: A Short History of the Numbers That Rule Our World. 2007, New York: Simon & Schuster.  

[You can read an excerpt from the book here.]

One of the fundamental agreements most of us have unconsciously accepted has a major impact on the decisions we make everyday, from the very mundane to the global: the way we measure success as a nation and as a global community.  Historian Zachary Karabell retraces some of the leading indicators we use today, most of which we tend to assume are universal in their applicability.

“Fast-forward to the present and this way of viewing economic policy, government, and the state through the lens of economic indicators is so embedded in the way we live and how governments govern that it’s nearly impossible to imagine a world without them. The leading indicators are fused to policy and to the way that we collectively discuss ‘how we’re doing.'” (page 92 of book)

Karabell sets the historical context for the individuals who developed the indicators of GDP, unemployment, and inflation to address very specific issues of their time, showing how the inventors were very clear that the indicators needed to be further developed and were only applicable in very narrow domains.  Karabell then shows how we have completely forgotten these warnings of limited applicability, from those who invented them, and now use these indicators as if they represent “the truth.”

“How individuals experience ‘the economy’ is distinct from how statisticians measure the economy.” (page 135 of book)

Karabell then shows how the data for these indicators is gathered, how that gathering has changed radically over the years, and how sketchy and problematic the indicators still are.  What comes out loud and clear from this historic perspective is that these brilliantly designed indicators of national health highlight very specific aspects of “the economy” to highly trained specialists, and that they should not be used as general indicators by the untrained populace.

To be clear in the assumptions that guide your everyday agreements, such as macro indicators of national health, I highly recommend Karabell’s historical walk through the creation and misuse of leading indicators.  We might all benefit from a historical understanding of how key indicators we use were initially developed, the contextual and procedural limitations their inventors put on them, and how their measurement has changed over time.  We might then look at those indicators with much greater clarity about what they actually tell us about current reality.

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