This is an aside note about GDP or gross domestic product, but I might as well bring it up since we are talking about money. Simon Küznets (1965) pointed out that “the welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GDP…goals for ‘more’ growth should specify of what and for what.“ As a gauge of economic performance and well-being, the GDP embodies at least seven major fallacies:
First, the GDP regards every expenditure as an addition to well-being, regardless what that expenditure is for and the effects. By this reasoning the nation's economic hero is the terminal cancer patient going through an expensive divorce, whose car is totaled in a twenty-car pile-up. The economic villain is the healthy person in a solid marriage that cooks at home, walks to work and doesn't smoke, gamble or spend the evening surfing Web porn. The hero borrows and spends; the villain pays cash and saves for the kids' education. What economists call "growth", in other words, is not always the
Second, the GDP ignores the crucial economic functions that lie outside the realm of monetary exchange. GDP excludes the value of unpaid housework, child care, volunteer work, and leisure. Parents do real work. So do neighbors, communities, open spaces, rivers and oceans, the atmosphere, and trees. Anyone who doubts this might try getting along without them. Such things contribute more to well being than does much that we buy from the market. Yet the GDP regards these life-sustaining functions as worthless - until the economy destroys them, and we have to buy substitutes from the market or from government. Then the GDP says that the economy has "grown." When parents default and kids need counseling or foster care, the GDP go up because money has changed hands. When a parent cares for kids at home the GDP stagnates; when that same parent takes care of other peoples' kids at day care the GDP goes up. When the city cuts down shade trees to widen a street, and homeowners have to buy air conditioners for cooling, the GDP goes up again. It looks like economic growth; but in reality no increase has occurred. Instead, something that used to be free now costs money; social and environmental decay has been transmogrified into "growth" through the myopic lens of the GDP.
Third, the GDP does not account for natural resources that are required to sustain current and future economic development implying that the future has no value. The GDP excludes natural resource capital, environmental resourcesservices, human resources and research and development. All that matters is the present. The implications of current economic activity for our kids and grandkids do not enter the calculation. For example, the GDP counts the depletion of natural resources as current income rather than as the liquidation of an asset. This violates both basic accounting principles and common sense. Similarly, saving doesn't add much to the GDP; economists actually chide Japan for its high savings rate. But maxing out on credit cards makes it soar.
Fourth, the GDP ignores totally the distribution of income, the social costs of inequality and poverty. Changes in GDP are insensitive to income inequality, poverty and the distribution of personal consumption and wealth. Even assuming that the GDP represents a rising tide of beneficence, it can’t have that effect unless all share. If the economy is getting bigger, but the benefits are going mainly to those who need it least, the result is material accretion but not economic advance. This is true even in conventional economic terms. For a Mark McGuire or a Michael Jordan, another thousand dollars is merely tip money. For a family struggling on the minimum wage, a tenth that amount can mean the difference between macaroni
and chicken for many nights.
Fifth, the GDP contains intermediate and regrettable expenditures that do not contribute to economic welfare. These include elements of government spending such as defense spending. It also includes personal spending such as cost of commuting to work, costs related to crime, environmental protection and automobile accidents.
Sixth, GDP includes expenditures on education, health care, social services and environmental protection that do not necessarily reflect the outcomes or returns on investment from such expenditures. Such outcomes might include physical well-being e.g. life expectancy, intellectual and labor market skills, educational attainment, and the quality of the environment.
Seventh, GDP does not directly measure investment in social capital.
Rowbotham (1998) mentions an ecological monetary reform as follows: “Money is capable of doing what we want it to do, rather than (as at present) making us do what it wants us to do. Money is capable of reflecting reality and conveying the policy we want. The true worth of money as an invention, frankly, has never been fully explored. The range of reform facing us, once we decide to correct the overbearing mathematical defect of debt, are as rich as the diverse opportunities and material benefits our economies can possible offer. In fact, in a sense they are the one and the same thing.”
First, the GDP regards every expenditure as an addition to well-being, regardless what that expenditure is for and the effects. By this reasoning the nation's economic hero is the terminal cancer patient going through an expensive divorce, whose car is totaled in a twenty-car pile-up. The economic villain is the healthy person in a solid marriage that cooks at home, walks to work and doesn't smoke, gamble or spend the evening surfing Web porn. The hero borrows and spends; the villain pays cash and saves for the kids' education. What economists call "growth", in other words, is not always the
Second, the GDP ignores the crucial economic functions that lie outside the realm of monetary exchange. GDP excludes the value of unpaid housework, child care, volunteer work, and leisure. Parents do real work. So do neighbors, communities, open spaces, rivers and oceans, the atmosphere, and trees. Anyone who doubts this might try getting along without them. Such things contribute more to well being than does much that we buy from the market. Yet the GDP regards these life-sustaining functions as worthless - until the economy destroys them, and we have to buy substitutes from the market or from government. Then the GDP says that the economy has "grown." When parents default and kids need counseling or foster care, the GDP go up because money has changed hands. When a parent cares for kids at home the GDP stagnates; when that same parent takes care of other peoples' kids at day care the GDP goes up. When the city cuts down shade trees to widen a street, and homeowners have to buy air conditioners for cooling, the GDP goes up again. It looks like economic growth; but in reality no increase has occurred. Instead, something that used to be free now costs money; social and environmental decay has been transmogrified into "growth" through the myopic lens of the GDP.
Third, the GDP does not account for natural resources that are required to sustain current and future economic development implying that the future has no value. The GDP excludes natural resource capital, environmental resourcesservices, human resources and research and development. All that matters is the present. The implications of current economic activity for our kids and grandkids do not enter the calculation. For example, the GDP counts the depletion of natural resources as current income rather than as the liquidation of an asset. This violates both basic accounting principles and common sense. Similarly, saving doesn't add much to the GDP; economists actually chide Japan for its high savings rate. But maxing out on credit cards makes it soar.
Fourth, the GDP ignores totally the distribution of income, the social costs of inequality and poverty. Changes in GDP are insensitive to income inequality, poverty and the distribution of personal consumption and wealth. Even assuming that the GDP represents a rising tide of beneficence, it can’t have that effect unless all share. If the economy is getting bigger, but the benefits are going mainly to those who need it least, the result is material accretion but not economic advance. This is true even in conventional economic terms. For a Mark McGuire or a Michael Jordan, another thousand dollars is merely tip money. For a family struggling on the minimum wage, a tenth that amount can mean the difference between macaroni
and chicken for many nights.
Fifth, the GDP contains intermediate and regrettable expenditures that do not contribute to economic welfare. These include elements of government spending such as defense spending. It also includes personal spending such as cost of commuting to work, costs related to crime, environmental protection and automobile accidents.
Sixth, GDP includes expenditures on education, health care, social services and environmental protection that do not necessarily reflect the outcomes or returns on investment from such expenditures. Such outcomes might include physical well-being e.g. life expectancy, intellectual and labor market skills, educational attainment, and the quality of the environment.
Seventh, GDP does not directly measure investment in social capital.
Rowbotham (1998) mentions an ecological monetary reform as follows: “Money is capable of doing what we want it to do, rather than (as at present) making us do what it wants us to do. Money is capable of reflecting reality and conveying the policy we want. The true worth of money as an invention, frankly, has never been fully explored. The range of reform facing us, once we decide to correct the overbearing mathematical defect of debt, are as rich as the diverse opportunities and material benefits our economies can possible offer. In fact, in a sense they are the one and the same thing.”
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