Redefining Wealth and Prosperity in the 21st Century

May 11, 2016 1:01 AM

Kennedy was right - "Much that is valuable is neither tangible nor tradable... Gross domestic product (GDP) is increasingly a poor measure of prosperity. It is not even a reliable gauge of production."*

When a first-year undergraduate first encounters the idea of GDP as the value added in an economy, adjusted for inflation, it sounds pretty straightforward, says Sir Charles Bean, the author of a recent review of economic statistics for the British government. Get into the details, though, and it is a highly complex construct—and, as Mr Nordhaus's fable shows, a snare for the unwary...

By convention GDP measures only output that is bought and sold. There are reasons for this, only some of them sound. First, market transactions are taxable and therefore of interest to the exchequer, an important consumer of GDP statistics. Second, they can be influenced by policies to manage aggregate demand. Third, where there are market prices, it is fairly straightforward to put a value on output. This convention means that so-called “home production”, such as housework or caring for an elderly relative, is excluded from GDP, even though such unpaid services have considerable value.

How to measure prosperity: GDP is a bad gauge of material well-being. Time for a fresh approach

Although a big improvement on today's measure, GDP-plus [pdf; 1,2,3] would still be an assessment of the flow of income. To provide a cross-check on a country's prosperity, a third gauge would take stock, each decade, of its wealth. This balance-sheet would include government assets such as roads and parks as well as private wealth. Intangible capital—skills, brands, designs, scientific ideas and online networks—would all be valued. The ledger should also account for the depletion of capital: the wear-and-tear of machinery, the deterioration of roads and public spaces, and damage to the environment. Building these benchmarks will demand a revolution in national statistical agencies as bold as the one that created GDP in the first place.

Because what is not measured tends to be undervalued and ignored, conversely in a 'market' economy, activities that result in dollar transactions at their associated prices tend to be overly privileged. And yet it's the main signaling mechanism and incentive system that we coordinate on and organize our lives around. Hence, as a pervasive and decidedly non-neutral value system, it is (literally) worth interrogating; the proverbial missing keys to ongoing prosperity may well indeed lie beyond the cold glow of the streetlight. Meanwhile, blindly measuring everything is no solution either, or worse. So a corollary is that proper measurement and continual (re-)evaluation is both hard and necessary to improve our well-being and our understanding of how to better organize society.

also btw...

• What Is Wealth? - "Wealth assets are always and anywhere political and social constructs. Things exist, but 'wealth' is a fiction, the contours of which are fully derivative of how we create our systems of control and power over the material things of the world."
• What is Prosperity? - "And therein lies the difference between a poor society and a prosperous one. It isn't the amount of money that a society has in circulation, whether dollars, euros, beads, or wampum. Rather, it is the availability of the things that create well-being—like antibiotics, air conditioning, safe food, the ability to travel, and even frivolous things like video games. It is the availability of these 'solutions' to human problems—things that make life better on a relative basis—that makes us prosperous. This is why prosperity in human societies can't be properly understood by just looking at monetary measures of income or wealth. Prosperity in a society is the accumulation of solutions to human problems. These solutions run from the prosaic, like a crunchier potato chip, to the profound, like cures for deadly diseases. Ultimately, the measure of a society's wealth is the range of human problems that it has found a way to solve and how available it has made those solutions to its citizens."
• Whose Are the Ruling Macroeconomic Ideas? - "When I look around, I see lots of ideas with a potency that is extremely great but with influence that is nowheresville. The ruling ideas are... barely ideas--they are, rather slogans. The bipartisan technocratic policy center of politicians who listen to arguments about what policies might actually work is gone--or at least paralyzed. And too many key levers of power are held by a right--in Germany, in Britain, and in the U.S.--that appears profoundly uninterested in argument about policy effectiveness, if not uninterested in policy effectiveness itself."
1. The bankers have us by the plums: Thus it is important to cosset, coddle, and enrich our bankers, because only if they are confident will the engine of financial intermediation that is the only thing that can create a booming full-employment economy run smoothly.
2. Debt is bad (except when it is used to fund tax cuts for “job creators”): Hence it is important to cut Social Security and make sure that not an extra drop is spent on public infrastructure.
3. Today's extremely low interest rates must be unnatural: Hence they need to be reversed and monetary policy "normalized" as quickly as normalization can be accomplished without renewed recession.
4. Only pain can drive reform: Hence boosting employment and restoring fast growth would be bad as it would impeded the essential process of actually undertaking the badly-needed "structural reforms".
5. We couldn't have done any better: The most urgent economic problems of the North Atlantic aren't the standard ones of too-little "money" (of various kinds) chasing a normal amount of goods, but are complicated and irresolvable.
• A Conversation With Joseph Stiglitz - "GDP is just the sum total of the output of the economy, it doesn't say how much of that is going into whose pocket. In the first three years of the recovery, 91 percent of all gains went to the top 1 percent. So the bottom 99 percent saw nothing. Many were actually becoming worse off: Their balance sheet had been destroyed, their major asset has been their home and the value of their home had gone down anywhere from 20 to 50 percent. Then came QE, and it created a stock-market but the average American has very little in the stock market. Overall ownership of stocks, is much more concentrated than the concentration of wealth itself, so QE was basically a gift to the 1 percent."

Most of the models used by economists ignored inequality. They pretended that macroeconomy was unaffected by inequality. I think that was totally wrong. The strange thing about the economics profession over the last 35 year is that there has been two strands: One very strongly focusing on the limitations of the market, and then another saying how wonderful markets were. Unfortunately too much attention was being paid to that second strand.

What can we do about it? We've had this very strong strand that is focused on the limitations and market imperfections. A very large fraction of the younger people, this is what they want to work on. It's very hard to persuade a young person who has seen the Great Recession, who has seen all the problems with inequality, to tell them inequality is not important and that markets are always efficient. They'd think you're crazy.

• Kristol, Kalecki, and a 19th Century Economist Defending Patriarchy all on Political Macroeconomics - "So if you are a type who believes the government can only do bad, who believes that prosperity flows from how appreciated the business community feels, and who believes strongly in the Natural Order, then you are not going to be in favor of activist monetary and fiscal policy to fix the economy. You also won't have any actual coherent view of what is wrong with the economy."


• New paradigms in economic theory? - "There seem to be three mini-paradigms here: bounded rationality, interdependence, and holistic analysis. The first two have already been making inroads in economics, though I think they should make more inroads. The latter is kind of an older idea that doesn't seem to have panned out as well as many hoped - there isn't actually going to be a Second Enlightenment replacing reductionist science with holism. But I think that more important than any of these theoretical changes - or the evolutionary theory suggested by Wilson - is the empirical revolution in econ. Ten million cool theories are of little use beyond the 'gee whiz' factor if you can't pick between them."


• Free Lunch: ways to build a helicopter - "An op-ed in the FT by Shahin Vallée makes the very important and under-appreciated point that there is a choice to be made about whom the helicopter drop should target, and that how this choice is made matters for economic and political economy reasons. Vallée rightly distinguishes between three targets: the government, households and the banking system. We could, for completeness, add the non-financial private sector, that is to say businesses producing goods and services in the 'real economy'... banks and businesses are already insufficiently willing to either lend or invest despite record low funding costs. The same is strangely true for governments. By far the biggest bang for the helicopter buck can be expected from a money drop to households." [1,2,3,4,5]


• Universal basic income continues to attract attention - "The oldest argument for UBI (Thomas Paine's) is that it justly allocates economic rent to which no one has a fair individual claim, since it results from windfall natural resources or the overall productivity of society. Paine applied his argument to land ownership; it seems entirely plausible to apply the same argument to some of the rents created by technological innovation and privatised intellectual property."


• Nixon's Basic Income Plan - "It was the summer of '68, the end of the decade that brought us flower power and Woodstock, rock and roll and Vietnam, Martin Luther King and a feminist revolution. It was a time when everything seemed possible, even a conservative president strengthening the welfare state. While young demonstrators the world over were taking to the streets, five famous economists — John Kenneth Galbraith, Harold Watts, James Tobin, Paul Samuelson, and Robert Lampman — wrote that '[t]he country will not have met its responsibility until everyone in the nation is assured an income no less than the officially recognized definition of poverty'. The New York Times published their letter, signed by 1,200 fellow economists, on the front page. The next year, Richard Nixon was on the verge of making these economists' dream a reality by enacting an unconditional income for all poor families."


• Running India: Domesday 2.0 - "A technological blueprint for better government"

IN A month or so, India will have registered a billion residents—the latest stage in the creation of a complete identity database of what will soon be the world’s most populous country. Aadhaar, which means “foundation” in Hindi, matches names with fingerprints and iris scans on a scale that has never been seen before. Reimagining government with such technology at its core will be key to meeting the mounting aspirations of India’s citizens, according to two of the scheme’s architects, Nandan Nilekani and Viral Shah. If the Domesday Book, an 11th-century survey of England, was commissioned to raise funds for government, Aadhaar’s most useful purpose is to help their disbursement... It allows the government to pay benefits directly to over 200m bank accounts linked to its database, so cutting out layers of corrupt and inept middlemen.

• No Great Technological Stagnation - "Many economists say we are living through a Great Stagnation. The term, was made famous by Tyler Cowen's book of the same name and the latest iteration is, of course, Robert Gordon's The Rise and Fall of American Growth. But they usually look at economic factors like Total Factor Productivity (TFP) or GDP per hour worked. By these measures, we are living through a stagnant period. Some expected that the stagnation would go away once we properly accounted for the Internet and similar hard to account for innovations, but apparently this was done, and the picture doesn't change much. In this post, I take an engineering perspective and look directly at technology itself."


• Decomposition: Technology versus the Distribution of Workers in Aggregate Productivity - "Gordon's critics could well be right about their individual technologies, and yet wrong about this having anything to do with aggregate growth, because those sectors may not employ many people. And Gordon can be right about aggregate growth, but wrong about individual technologies stagnating, because the movement of workers to low-productivity sectors may be dragging down growth. In short, you cannot talk about aggregate productivity growth without talking about both technology and the distribution of workers across sectors."


• The Productivity Slump and What to Do about It - "How much productive talent is wasted simply because of lack of opportunity? How many women and minorities, for example, could be contributing greatly to our economy but never got the chance? Increasing opportunity so that talented individuals have the chance to reach their full potential would give the economy a needed efficiency boost. Education is one component of this, but we also need to be sure that the barriers that keep people from realizing their potential are removed... Productivity growth is the main driver of economic growth and a rising standard of living. By itself, an increase in productivity won't necessarily translate into rising living standards for everyone -- that depends on how the increase in output is divided among various groups in the economy. If all of the increase in output due to rising productivity goes to those at the top of the income distribution, as it has in recent decades, it won't do much for most people."

posted by kliuless (9 comments total)

Amazing work, kliuless.
posted by Joey Michaels at 1:19 AM on May 11, 2016 [7 favorites]

It is disappointing that that first link, from the Economist, doesn't include more of the Robert Kennedy speech, which is my favorite speech of all time. Here's what I think is the best part of it - though it's worth hunting down and reading the whole thing:

Even if we act to erase material poverty, there is another greater task, it is to confront the poverty of satisfaction - purpose and dignity - that afflicts us all.

Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things. Our Gross National Product, now, is over $800 billion dollars a year, but that Gross National Product - if we judge the United States of America by that - that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage.

It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl.

It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.

Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. 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.

It 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 why we are proud that we are Americans.
posted by newdaddy at 2:45 AM on May 11, 2016 [47 favorites]

I've been reading so many books and watching so many documentaries on poverty that this is like a gold mine of, not the opposite, but another side of the equation. Thank you for this amazing post, kliuless
posted by xingcat at 6:09 AM on May 11, 2016

(It seems shabby not to comment on this amazing post -- but there's so much to read that I might not get through it all before the commenting window closes next month. Great work!)
posted by wenestvedt at 7:28 AM on May 11, 2016 [2 favorites]

I am always impressed and humbled by your mega-posts, kliuless!
posted by domo at 8:11 AM on May 11, 2016 [2 favorites]

Elucidating. Thanks.
posted by dazed_one at 12:42 PM on May 11, 2016

This call to deemphasize GDP has been going on for years now, but I'm a bit suspicious of the timing of establishment sources like the Economist climbing on board.

I don't see that much over-emphasis on GDP as an indicator. Things like The Deficit and Inflation and Business Confidence and Uncertainty seem to get more attention than they really deserve. Meanwhile indicators like Unemployment and the Trade Deficit get less attention now than they may deserve. Unemployment is higher now than when it was a big political issue in the Seventies and Eighties, but it's just been quietly decided that it's just about personal laziness rather than a macroeconomic problem that the government should address.

So, it's oddly convenient that now the Washington Consensus/ neoliberalism/monetarism is conspicuously failing to deliver increased GDP, the people who supported it have suddenly discovered that GDP isn't that important after all. It's even more convenient that instead of turning to alternatives like unemployment rates instead; there are new, fancy measurements to be used instead.
posted by TheophileEscargot at 3:24 PM on May 11, 2016 [1 favorite]

kliuless your explanation of GDP implies a Keynsian aspect I never thought about before. Are you saying we're in a post-Keynsian world so governments' managing aggregate demand is no longer relevant ?

>>>>By convention GDP measures only output that is bought and sold. There are reasons for this, only some of them sound. First, market transactions are taxable and therefore of interest to the exchequer, an important consumer of GDP statistics. Second, they can be influenced by policies to manage aggregate demand. Third, where there are market prices, it is fairly straightforward to put a value on output. This convention means that so-called “home production”, such as housework or caring for an elderly relative, is excluded from GDP, even though such unpaid services have considerable value.
posted by Narrative_Historian at 1:55 AM on May 12, 2016

Are you saying we're in a post-Keynesian world so governments' managing aggregate demand is no longer relevant?

no! just the opposite actually :P the paradox of thrift is still very much prevalent and more, not less, aggregate demand management is called for imo, which i think you're starting to see in different 'experiments' around the world whether negative (nominal) interest rates, basic income pilots, fiscal/credit expansion in japan/china, aadhaar in india, etc. the key i think lies in some kind of new institutional fiscal/monetary coordination-arrangement-configuration or whatever, if not outright fusion (consider china again and, perhaps to a lesser degree, japan), that no one's quite figured out yet.

the 1930s depression and WWII was all about fiscal mobilization, while the last several decades has been primarily monetary -- since nixon took us off the gold standard -- driven by central bank interest rate 'manipulation', which was considered more value-'neutral' i'd say up until recently... so negative rates have been broached and breached, and could go further, but also only so far to the extent the transmission mechanism is confined to the banking system, per vallée above. so if more QE asset purchases and NIRP don't end up working effectively, you now have policymakers seriously considering 'helicopter drops' as a next step, which would place monetary policy directly in the realm of fiscal policy! (again see the helicopter drop bullet above ;)

anyway, if stuff like this keeps happening:
Get Ready for High-Frequency Lawyers

Sannikov’s work doesn’t have a lot of application to the world as it exists today. It has to do with the way parties would design and update contracts at incredibly high frequencies. For a more complete description of this research, check out the summary by the excellent econ blogger Kevin Bryan. In a nutshell, Sannikov’s theories describe how an employer would adjust a contractor’s compensation in real time, in response to changing performance and external conditions. Where most previous researchers only allowed contracts to be updated at regular intervals, Sannikov described what happens when they can be changed infinitely fast.

In reality, of course, Sannikov’s work is just pure math conducted in an econ department. No one adjusts contracts by the microsecond. Yet, that is. In the future, we will almost certainly design computers to manage our economic interactions for us. Instead of teams of human lawyers drawing up fixed rules on sheets of paper, machines will talk to one another, exercising broad powers to renegotiate deals on the spot. At that point, Sannikov’s work will go from esoteric math to reality...

Picture supply chains managed by algorithms, with purchasing contracts adjusted at high frequencies in response to constant flows of data about sales, shipping times, manufacturing costs, and so on. Imagine demand shifting back and forth across continents at close to the speed of light, switching small-batch production and shipping orders from one bidder to the next. Instead of high-frequency traders, imagine high-frequency lawyers, adjusting contracts to reward contractors appropriately for tiny improvements in efficiency, using sophisticated statistical analysis to figure out whether performance is being driven by outside conditions or by the contractor’s skill and effort. Of course, in this sci-fi vision, the contractor will also be a robot, using equally sophisticated procedures to optimize its payment relative to its cost.

This may be our future: a whole economy of ultra-fast robots, negotiating, making agreements and adjusting incentives. Sometimes, just like their financial counterparts, the high-frequency lawyers will try to fake each other out. They will try to shirk, to disguise their lack of effort and corner-cutting, to save money at the purchasers’ expense, just like human contractors do now. The government will even have its own high-frequency lawyers, monitoring private-sector robots for regulatory violations. The economy will become a beautiful ballet of data and math, dancing to the beat of equations like Sannikov’s.

And where will we fit into the equation? That, of course, is the big question with all automation. High-frequency lawyers will threaten the jobs of human lawyers, white-collar office workers, and business service providers of all types. With advanced enough machine-learning techniques, they may even come for the jobs of top managers and executives. There will be near-infinite wealth floating around the economy, and our traditional systems for allocating it to human beings will become less and less useful. Business service robots will bring forward the day when we need to think hard about how to spread the massive wealth created by the automation of everything.

i'd guess the issues in the FPP will only become more pressing?
posted by kliuless at 1:59 PM on May 12, 2016