This month we talk about gross domestic product, William Petty, and the polycrisis.
We also discuss the Human Development Index, the Genuine Progress Indicator, and Bretton Woods.
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Transcript
William Petty was one of those well-to-do generalist, learned people who did a lot of the science in England back in the 17th century.
It wasn't a given that most people would be literate, much less have access to scholarly works from around the world back then, nor the time and energy and resources to spend on learning about whatever random thing caught their fancy.
But Petty, who eventually became Sir William Petty, was a doctor, a professor, an inventor, a business owner, a scientist, a philosopher, a politician, and eventually an economist as well—and he's probably best known for that last label, because he came up with the original, formal conception of what became known as the laissez-faire approach to economics, which by some estimations also led to the creation of modern economic theory.
His investigations into this particular field of study began when he was granted an estate: the consequence of a bizarre sequence of events, that began with his witnessing a hanging that didn't go as planned, which led to Petty seemingly bringing the hanged woman back to life—an event that contemporaries considered to be an act of divine intervention, but which was almost certainly just a weird, hanging-induced medical issue that he, serving as an anatomy instructor at the time, was in a fortunate position to help with.
Whatever the specifics, Petty became a bit famous as a result of that event, ended up traveling with Oliver Cromwell's army in Ireland, after, and as part of that Ireland visit, during which he formally served as physician-general, but also, in his spare time, managed to chart the country while in-transit, completing an important survey of central Ireland—as a result of that he was granted an estate of about 30,000 acres, which is about 120 square kilometers, in Kenmare, in the southwestern portion of Ireland.
Coming into land, a potentially major asset, was the spark that led to his economics-related undertakings.
He took some time to figure out what this meant and how best to benefit, financially, from this gift.
And during that time, he worked out how much cattle grazing on his fields would be worth, sold as meat, how many years of income would result from the sale of that meat, how much future-years'-worth of cattle-related income would be worth, today, and how to measure the value provided to future generations compared to value provided to himself, in the present.
Petty refined this rough calculation into a more general formula in the mid-to-late 1600s, using it to support his argument that high taxes levied on landowners during a series of conflicts between England and the Dutch were unjust, arguing, via this math, that landowners paid out a lot of money in wages that were not being accounted for when the state looked at their assets and inflows, which they at the time used to determine how much landowners should pay into the war pot.
This fundamental, and let's be honest, fairly self-serving bit of calculation, eventually led to a more cohesive and objective means of measuring economic activity, which was refined in 1695 but which wasn't fully realized, and named gross domestic product, or GDP, until 1934, hundreds of years later, when an American economist and statistician named Simon Kuznets came up with the concept for use in a US Congressional report, where—and this is important—he explicitly warned it should be used only as a measure of goods and services produced, of economic productivity, not a measure of overall welfare.
What I'd like to talk about today is GDP, its influence on the modern world, and other, currently less-known ways of measuring productivity.
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The article I'd like to start with today comes from CNBC, and it's entitled:
The world’s in a ‘polycrisis’ — and these countries want to quash it by looking beyond GDP
As mentioned in the intro, GDP was developed, in the first half of the 20th century, as a means of measuring productivity—how much stuff and how many services are produced—and it was developed after an economist was asked to show the US Congress what was happening at that moment, in 1934, so that the government would have a better sense of how to end the debilitating and ongoing Great Depression.
The Bretton Woods Conference, held a decade later, took a look at this metric for productivity, which was useful mainly because it aimed to aggregate all production by individuals, companies, and governments into a single measure, and decided to adopt it as the primary measure for newly-deployed international organizations and institutions, like the International Monetary Fund and Wold Bank; they wanted to determine which countries were doing well, which ones were not, and where all the countries on the planet ranked in terms of economic output so they could then decide how to support those that needed it and make the world wealthier and more productive.
This was in some ways a better option than the till-then most-used metric for these purposes, gross national product, which measured income generated by a nation's citizens, wherever it was generate, globally; GDP was considered by many to be more accurate because it doesn't measure goods and services produced elsewhere, even if they're produced by people who are technically citizens of the country being measured, which GNP, which is today more commonly called gross national income, or GNI, did.
For most countries, their GNI is quite close, within a fraction of a percentage point, of their GDP, but that tends not to be the case in poorer countries, which earn a lot of their income from citizens leaving the country, working elsewhere, and then sending money back home to their families, through what're typically called remittances.
For those poorer countries, then, their GDP rating might be substantially lower than their GNI ranking; which means, among other things, GDP favors wealthier countries, in the sense that their means of earning money provide them with a higher ranking because of the formulas used, the variables that are favored, by GDP.
This distinction is worth understanding in part because the metrics we use to measure this sort of thing can shape our perception of how countries are doing, economically, and how they stack up.
It's also important because this measurement method and perception has played a fundamental role in determining next-step plans for governments, globally, since WWII, and even more so since 1991, when the US—a laggard in this regard—adopted GDP as its primary measurement; it was the last remaining holdout amongst the world's major economies to do so.
So after that, the world's major economies were making decisions about how to set up their economic rules and regulations, how to set taxes, and how to gauge the well-being of their people, based on GDP-centric numbers; and that was true mostly from WWII onward, and even more so from the 90s onward.
This unified perspective, in turn, shaped how international organizations decided who to help, how to help them, and how to measure success: if you're receiving aid from the World Bank or United Nations or United States, if you're not showing progress based on GDP-optimized figures, there's a chance that aid will dry up, even if you're seeing progress by other metrics that aren't as well-captured by this particular way of looking at things.
And that brings us back to that aforementioned article, about how some countries are looking beyond GDP for other measures they might use to help them cope with the so-called polycrisis; a term used to gesture at all sorts of things, but in the current context, it generally refers to the interlocking problems we face related to human-amplified climate change, economic ebbs and flows, military conflict, issues related to rapidly growing economic inequality, deteriorating infrastructure, increasing levels of ideological and political extremism, and a slew of other major and minor problems that are mutually reinforcing and which don't have clear solutions—they're wicked problems that can be addressed in temporary, regional ways, but larger, cohesive solutions would seemingly require a more fundamental rethinking of how the world works, and how we perceive it.
And if we're going to rethink those fundamental things, we also probably need new ways of measuring what we're seeing, so we can assess where things are, where they've been, and where they're going—otherwise we have no way of tracking how different solutions work, what variables they tweak, and what we might do to make them more effective in the senses we actually care about.
This grand rethinking is being led by the governments of Finland, Iceland, Scotland, Wales, and New Zealand, which have formed a coalition called the Wellbeing Economy Governments partnership, focused on transforming economies around the world so they deliver more, and more shared and equitably distributed, well-being for people and the ecologies they occupy, by 2040.
One of the main tenets of this coalition's thinking is that this will almost certainly mean stepping away from the primacy of GDP as a meaningful measure, and reframing things using metrics that take into account damage caused to the environment, actions that increase inequality despite generating a lot of wealth for a fortunate few, and even one of the core dogmas of modern economics: that growth at all costs is vital if we want to continue increasing overall human well-being; something that once seemed to be the case, as economic growth of this kind did in fact pull a lot of people out of extreme poverty during the 20th century in particular, but this is a truism that seems to have slowed since then, with most of the economic winnings in modern times being divided between the wealthiest and most powerful, very small percentage of the total human population.
This group also hopes to refocus on more specific wellbeing-related markers, like educational attainment, housing affordability and quality, and mental health—none of which are currently captured by GDP, or at least not in a fashion that accurately quantifies their current dearth, which consequently makes them tricky to perceive at the right level and resolution, and then address accordingly.
One of the most fundamental concepts underpinning this new way of thinking, was actually voiced in a report that was published by the Club of Rome think tank back in 1972 which warned that our then-current rate of growth wasn't sustainable for a planet with finite resources; you can only grow something exponentially for so long before the fuel powering that growth dries up, with potentially dire consequences.
Previously posited alternatives to GDP, developed in the 70s and since haven't been terribly well received, despite this warning, as they tend to be demonized by businesses and politicians who have staked their reputations and business models (and investments) on the concept of everlasting growth; something that can be difficult and expensive to pivot away from.
If the world decides, for instance, that the factory you built is no longer good, because despite producing energy or widgets it causes a lot of environmental harm—that's a huge sunk cost and stranded asset on your balance sheet.
Ridding the global economy of fossil fuels makes sense through the lens of GDP if you start looking at externalities and the long-term gains associated with new energy infrastructure, lower health care costs, and a reduction in the damage caused to valuable environmental assets, but it tends to make less sense through the lens of an individual company or other entity.
It's a more straightforwardly obvious, though, when you look at this issue through the lens of other value-metrics.
By the logic of GDP, income generated by highly destructive strip mines and income generated by clean energy-generating solar power plants are measured the same way—but the same is not true of all possible measurements of productivity; some alternatives will take non-monetary, non-goods and services-related variables into consideration.
At the moment, there are only a handful of well-known, fleshed-out measurements that could viably replace GDP for most of the purposes we use it for, today.
The Human Development Index, or HDI, for instance, uses life expectancy, education, and per capita income as its primary metrics of success, while the Genuine Progress Indicator, or GPI, separates societal progress from economic growth, considering both but weighing things so that a lack of one or the other, a lack of balance between resources and equitable distribution of those resources, basically, shows up in the final figure.
Many of the alternative measurement options, today, are sparsely applied and mostly serve as thought-exercises, rather than real-deal, ready-to-go gauges of productivity and progress.
The World Economic Forum started publishing research and analyses on this topic beginning in the early 2000s, but even those works have been mostly theoretical what-ifs at this point, the majority seeming a bit like TED talks for world leaders, with everyone nodding along in agreement as they're presented with ideas about how they might change things to make the world better and better-calibrated to deal with all those interconnected issues we face, before they go back to work, doing all the things they usually do in the same way they've always done them: no changes applied or, in some cases, even seemingly possible, under the current paradigm.
This new coalition may turn out like all the other efforts that have formed and then quietly dissolved since GDP took hold over the world's wealthiest governments and international organizations, then, but this moment and on ongoing, increasingly tangible polycrisis, could serve as a catalyst for some type of change in this space, even if that change is slow to roll out beyond a handful of wealthy, but relatively small countries that are most keen to nudge the dominant, global economic perspective in a new direction.
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Show Notes
https://www.cnbc.com/2022/12/26/well-being-these-countries-are-looking-beyond-gdp-and-economic-growth.html
https://en.wikipedia.org/wiki/Gross_domestic_product
https://www.bea.gov/data/gdp/gross-domestic-product
https://en.wikipedia.org/wiki/William_Petty
https://en.wikipedia.org/wiki/Simon_Kuznets
https://www.economist.com/finance-and-economics/2013/12/21/petty-impressive
https://en.wikipedia.org/wiki/Human_Development_Index
https://en.wikipedia.org/wiki/Genuine_progress_indicator
https://www.weforum.org/focus/beyond-gdp
https://foreignpolicy.com/2011/01/03/gdp-a-brief-history/
https://weall.org/wego
https://fraser.stlouisfed.org/title/971
https://en.wikipedia.org/wiki/Gross_national_income
https://en.wikipedia.org/wiki/Bretton_Woods_Conference
