Closer To The Ideal

David Van Couvering is talking about a steady state economy.

A few reactions:

Imagine an accounting system that allows a company to treat all incoming cash as a profit. Expenses are not counted at all. If this company gets $1 million in money, and has expenses of $1.1 million, it records a $1 million profit. Sounds pretty crazy, huh? And if this company’s incoming cash increases to $2 million, while its expenses increase to $3 million, it is allowed to claim that its profits have increased by 100%.

I am exaggerating to make a point. But it is a point worth considering. The way GDP is calculated tends to count all increases as good. Many forms of losses are external to the way the GDP is calculated.

Imagine this scenario: A healthy and prosperous man is standing on a street corner. Another man approaches him, pulls out a gun, shoots the first man, takes his wallet and then flees the scene. Someone calls 911. The injured man is rushed to the hospital. Over the next 6 months he requires multiple surgeries and extensive physical therapy to recover. All of this medical care is counted toward the growth of the GDP. The emotional pain and suffering of the man and his loved one’s are not subtracted from the GDP. To the extent that the GDP is suppose to offer a rough indication of human welfare, it fails badly in situations such as this.

If the economy is at full employment (and let’s note that “full employment” is something of an abstraction) then, theoretically, there are no extra people who can replace that injured man at his job, so for the 6 months that he is recovering, his lack of labor is subtracted from the GDP. So in this scenario, the GDP would shrink somewhat, due to the man’s injuries (but let’s note that his lost ability to produce wealth is not the only loss that has been suffered). However, if the economy is not at full employment, then society has surplus labor, and so, in theory, someone could take the job that the injured man had held, and so the GDP would see no shrinkage at all (I’m leaving aside the issue of whether or not the man had a rare skill that no one else could replace). Though, from a moral and practical standpoint, the man, his loved ones, and society have all suffered a loss, the loss is never recorded in the GDP (if the economy is not at full employment).

Any exchange of money is treated as something positive. This is like the company I mention above, that gets to record all incoming cash as profit, and never has to record any expenses.

There are, at this point, some well known areas where losses are external to the way the GDP is calculated. Environmental loss is an obvious one. Property rights don’t extend to the air we breathe, so air pollution can not easily be recorded as damaging anyone’s wealth. “Tragedy of the commons” scenarios are common, especially involving areas such as deep sea fishing, where property rights are non-existent.

There are other scenarios that are less talked about. There are the emotional losses that a family might suffer when the forest they live next to is torn down and replaced with a chicken processing plant. The new plant produces wealth that is added to the GDP, but if something has been lost, it is not recorded. That sense of loss that people might feel in such scenarios is sometimes denigrated as a nostalgic and sentimental attachment to the past. Emotions show up in the GDP only when something symbolic of emotions is purchased, for instance, a wedding ring. Or, to bring up the issue of subjectivity, we could ask, what is the value of perfume? It’s practical value is difficult to assess. It’s value is determined subjectively, by each person who purchases it. It no doubt has some emotional value to the person using it, and we measure that value by its price, but other kinds of emotions, if they don’t involve a purchase of some kind, don’t get counted.

My point, in all of this, is to suggest that “growth” is a nebulous term. Or rather, when I hear the word “growth” I think of Mandelbrot’s essay “How long is the coast of Britain?” In the same way that he argued that the coast of Britain could be of any length, depending on how you wanted to measure it, so too, I think one could argue that we suffer, or enjoy, a lot of growth, a little growth, or negative growth, depending on how you might specify which inputs are valid. I can think of a thousand ways to measure to growth, and each way would give a different answer. As Joseph Schumpeter once said “The social process is really one indivisible whole,” from which economists pluck various aspects and call them “economic”. Given an endless stream of data that has as many dimensions as we wish to define, the process of deciding which dimensions shall be treated as important will always be arbitrary. Or rather, such decisions can be made to build models that work for us as useful tools (or un-useful tools). Such models don’t take us closer to any kind of reality, they simply give us feedback that we have decided that we need if we are to build whatever kind of world that we have previously decided we want to build.

Again, if you are measuring the coast of Britain, you first need to decide on what your goals are for doing the measurement. If your goals are to aid navigation by boat, you might come up with one method of measurement, useful for your goal. If your goal is to track the growth or shrinkage of the eco-system available to some ocean-loving bird, you might use a different method. All that matters is whether your method of measurement allows you to achieve your pre-determined goal. Neither method can pretend to be more accurate than the other. Accuracy is not a coherent concept, in this discussion. And likewise, the word “growth”, when applied to the GDP, has to be understood as a tool that is maybe useful, or perhaps un-useful, in achieving a particular kind of civilization. But there is no final reality behind it. We could use a different system of measurement and achieve a different result, and whatever system of measurement we used, none could be said to be more accurate than the others, they could only be judged on how well they help acheive pre-determined goals.

On a different note, right before he was assassinated, Robert Kennedy offered a similar critique, far more eloquent than mine:

We will find neither national purpose nor personal satisfaction in a mere continuation of economic progress, in an endless amassing of worldly goods. We cannot measure national spirit by the Dow-Jones average, nor national achievement by the gross national product. For the gross national product includes air pollution and advertising for cigarettes, and ambulances to clear our highways of carnage. It counts special locks for our doors, and jails for the people who break them. The gross national product includes the destruction of the redwoods, and the death of Lake Superior. It grows with the production of naplam and missles and nuclear warheads… It includes Whitman’s rifle and Speck’s knife, and the broadcasting of television programs which glorify violence to sell goods to our children.

And if the gross national product includes all this, there is much that it does not comprehend. It does not allow for the health of our families, the quality of their education or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials… the gross national product measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile; and it can tell us everything about America – except whether we are proud to be Americans.