“The economy is the central, critical, irreducible core of this election”, wrote David Cameron in the run-up to the election. “Everything depends on a strong economy.” And although I am not inclined to agree with everything Cameron says, this seems pretty much unarguable. If we as a country want to do the things that civilised countries do — educate our young, heal our sick, feed our poor, care for our elderly — we need money to do it.
But what exactly do we mean by “a strong economy”? How do we measure whether the economy is strong or not? And whether it’s getting stronger or weaker?
The ubiquitous answer is the GDP (Gross Domestic Product) — the total value of all goods and services produced in a year. As Wikipedia explains, “The pattern of GDP growth is held to indicate the success or failure of economic policy and to determine whether an economy is in recession.”
Obviously, larger countries have more economic activity, and therefore a higher GDP. So we often use per capita GDP, which is simply GDP divided by population size. This gives us a measure of prosperity by which different countries can be compared. For example, the UK’s GDP in 2013 was 2.678 trillion US dollars, across a population of 64.1 million. So per-capita GDP was 2678000000000/64100000 = 41778 US dollars — about £27589.
(£27,589 seems intuitively in the right ballpark for the average income; but remember, per-capita GDP is not about income nor restricted to earners. It’s an average across all the population, including children — so the per-capita GDP of a family of five, if you like, is £137,945.)
Is a per-capita GDP of 41778 US dollars good? Yes, pretty good. The United Nations National Accounts Main Aggregates Database is awkward to use: select all countries, then “GDP, Per Capita GDP – US Dollars”, then 2013; download the XLS, load into LibreOffice and re-sort the table. You can see a snapshot of the results in the 3rd column of this Wikipedia page.
The UN uses slightly different numbers from what I calculated above, though it’s close. Its results show the UK as 23rd out of 194 countries (or 32rd out of 241 areas). Monaco is top, with $173,377 per person, followed by Liechtenstein and Luxembourg — all tiny countries with disproportionately wealthy citizens. Perhaps more surprisingly, Norway is fourth, with $103,585 per person. (Somalia is last, with $133.27 per person.) Our $42423.40 per person puts us about the same as France, a little way behind Germany and Western Europe as a whole, and some way behind the USA ($52391.85 per person).
We’re doing well in the UK.
So the key question is this: if the UK economy is strong enough to be generating £137,945 per year for each family of five, why is it that a typical family of five lives on perhaps a quarter to a fifth of this?
The answer of course is inequality. Some people have much more than others.
I don’t for the moment want to get sidetracked into the question of how much inequality is acceptable. I am not a communist, and I agree with Paul Graham that a society needs to allow at least some inequality as an incentive. But I can’t accept a society where some people don’t have enough to live on, and that is pretty clearly what we currently have in the UK. Child poverty figures are so appalling under the current government that the government’s response is simply to scrap the child poverty targets. And this is happening despite consistent year-on-year growth in GDP which tells us that the economy is performing.
So here is the problem: GDP tells us that we’re doing well, but the reality is 3.7 million children in poverty (for some definition of the word) and just over a million families forced to rely on food banks in the last year.
And my conclusion: GDP measures the wrong thing.
When we want to determine whether a country is succeeding, it doesn’t suffice to ask whether its total economic activity is increasing. On that basis, if a thousand low-paid families each make a thousand pounds less this year, while a billionaire makes an additional two million, the GDP increases by a million pounds — which looks good — but by any rational measure the actual wellbeing of the country has reduced.
So I think we need to measure something else.
Those of you who actually know any economics might be able to tell me whether there are already better measures out there, which are not yet widely used but ought to be. But in the absence of an existing Right Answer, here are two approaches that occur to me.
Proposal 1. Sum the square root of incomes
GDP is, roughly, equal to the sum of everyone’s income (since economic activity generally results in someone getting paid). But the true value of increasing a low income is much higher than that of increasing a high income by the same amount. (A thousand pounds is a glorious windfall to a low-paid family, but just pocket-money to a billionaire.) So instead of summing incomes, maybe we should sum something like the square roots of incomes? Let’s call the result sqGDP for now.
Worked example: consider that £1000 increase in income, added to a family whose income is £10k and to a billionaire whose income is £1,000,000. In the first case, the contribution to sqGDP grows from sqrt(10,000) = 100 to sqrt (11,000) = 104.88 — a growth of 4.88. In the second case, the contribution to sqGDP grows from sqrt(1,000,000) = 1,000 to sqrt(1,001,000) = 1000.50 — a growth of 0.50. On that measure, the increase for the low-paid family is about ten times as valuable to the country, which seems to be in the right ballpark.
Obviously this measure could be tuned: we don’t need to take the square root of incomes — we could take the 2/3 power, or the 1/3 power, or whatever we felt gave us a result that best reflected what we want to achieve.
Proposal 2. Incorporate an existing measure of inequality
There are plenty of existing measures of inequality. The most common is probably the Gini coefficient, which varies from 0.0 (when everyone has the same) to 1.0 (when a single person has all the wealth). So we could use a measure which combines GDP with Gini in some way.
How, exactly? Well, we could just divide GDP by Gini, but that would give us a measure where exact equality is seen as desirable, which we probably don’t want. We’d need to be a bit cleverer — perhaps divide GDP by one plus five times the Gini, or something. Again, this can be tuned to give the results that best correspond to what we actually want to see.
In a sense the details are unimportant. Because …
What matters, I think, is getting away from the mindset that GDP is a good measure of how an economy is performing. If we move to a better measure, or even seriously discuss moving to a better measure, then doing so will force us to think about what we’re actually trying to achieve with our economy rather than giving carte blanche to those who are happy just to keep increasing the wealth of the top 0.001%.
We are a rich country by any measure. A rich country shouldn’t have poor citizens. It certainly shouldn’t have millions of children in poverty, by any definition of the word. Measuring GDP (and therefore optimising for it) is one of the things that leads to this. So let’s stop.