The most important bi-product of the study of economics has been the creation and collection of measures of commercial and financial activity. We now know to a reasonable degree of accuracy a country’s total sales, investment, income, exports and imports. We know how this income is distributed – what share goes to company bosses and what is the average income of the poor. We have (less reliable) estimates of total monetary wealth and what proportion is owned by the top 10%. We know how many people are unemployed and of those how many are simply unable to work.
How we use these measures to direct national policy is important. As with all measures, it is vital to understand both their definitions and limitations. A country’s economic statistics can never be said to be totally accurate; they are always based on sampling and arbitrary definitions of what is included. Predicting GDP to an accuracy of 0.1%, as many economists do, makes no sense.
A further issue is that the critical measure selected by economists for politicians to concentrate on is GDP, the total value of goods produced and services provided in a country during one year. Countries are encouraged to achieve high levels of GDP growth. For the national good, however, it is crucial what type of growth is being achieved and who is benefiting. This is being largely ignored in setting policy.
An example of misleading GDP growth occurred before the financial crisis in 2008. The definition of GDP includes interest charges by banks. Just before the credit crunch banks were making huge profits by making irresponsible loans and GDP grew rapidly as a result. Subsequent asset losses when the loans failed were not fully taken into account due to government intervention.
Another example of the misleading nature of GDP measurement is that it includes estimates of the income from crime and gambling. Few would agree that an increase in either would be of benefit to a country.
Further, and this is the case at the moment, if the gains are largely made by the super-rich whilst other incomes stagnate then social discontent is bound to follow.
The biggest problem, however, in concentrating on GDP as the sole measure of success, is that it records changes in income and expenditure, not wealth. Money spent on defence and policing, protects but doesn’t improve the wealth of the nation. Money spent on fashion, entertainment and leisure, whilst being enjoyable, doesn’t increase a nation’s wealth unless it attracts custom from overseas. Money spent on gambling only enriches (largely overseas based) bookmaker firms.
Surely a country should be aiming to increase its wealth. The wealth of a country is determined by the total level of resources it acquires. There are 4 types of resource: physical, natural, knowledge and human. Improvements in physical resources, buildings, plant and infrastructure, are achieved by business investment and government expenditure. Natural wealth is our inheritance; it is easy to destroy. With care, however, it can be both preserved and exploited. Knowledge and skills are maintained and developed in our universities and businesses and are improved by expenditure on research, development and training. Human abilities are advanced by education, healthy living, and healthcare and welfare support.
Focussing on GDP as the sole measure of wealth creation can, and will, be counterproductive. By encouraging politicians to ignore wealth creation and distribution, economists may well have set back rather than helped the development of advanced nations.
