Rethinking GDP And Wealth In The 21st Century

Professor Diane Coyle, leader of the Wealth Economy ProjectGETTY IMAGES

Professor Diane Coyle, leader of the Wealth Economy Project GETTY IMAGES

Pity the GDP — the Gross Domestic Product. It is one of the hardest working statistics in government policy today, a single number that sums up the entirety of a country's productive capabilities. It is ubiquitous, quite often used to provide a country's economy compared to other economies when it comes to rallying the troops.

Yet as a statistic, it is surprisingly poor as a means of actually measuring what it is supposed to measure. It measures a rough aggregate of the total number of transactions made within a given country. It's used primarily because it is easy to calculate, but it does not matter to this calculation whether the transactions involved are used when building new houses or repairing houses after a hurricane. Building a bomb, throwing a lavish party, or paying for school, it doesn't matter much what the transactions do, the statistic is only really concerned with the amount of money passed between hands.

When the idea of a gross domestic product came up after World War II (then called the Gross National Product), it is arguable that GDP provided a very cursory metric that reflected factory activity, which was, at the time, the primary vehicle for wealth generation. However, as the economy has evolved from being primarily manufacturing-oriented to service-oriented and then technically oriented, the value of that statistic declined as the thing that it measured also declined.

Recently, the Institute for Public Policy at the University of Cambridge released a report intended to provide an alternative tool for measuring what GDP was intended to give: wealth. The distinction between the two measures is important - GDP is a measurement (and a fairly crude one) for measuring how much economic activity occurred in the space of a year. Wealth, on the other hand, is a measure of how much potential a country currently has that can be converted into meaningful production. Put another way, GDP measured the number of miles per gallon the engine in a car used, while Wealth is the number of gallons left in the gas tank.

This shift in perspective is important because each drives policy differently. GDP is, at its heart, a measure of industriousness, a Calvinistic concept best translated as how busy everyone is. This notion is deeply ingrained in our culture: even the word for an enterprise is a business - an organization filled with busy people. To be productive is to be in a state of grace, and to be unproductive a sign of moral turpitude.

Wealth, on the other hand, is a measure of potential. When applied at the level of individuals, wealth can largely be identified as the number of resources that an individual has that could be converted into money if it was all used. For a nation, however, the definition needs to be a bit broader, and this was the purpose of the Wealth Economy Project, led by Professor Diane Coyle.

The report breaks down national wealth as being of six types:

1. Physical assets and produced capital, those structures and infrastructures that people within that nation have built and that are available to a significant percentage of the population,

2. Net financial capital, a measure of the readily convertible instruments used for financial transactions, including the amount available for taxes,

3. Natural capital, such as oil, iron, fertile ground and the food that can be grown and so forth,

4. Intangible assets, such as intellectual property and data

5. Human capital, the skills and capabilities that its citizens can exercise to complete tasks, and a measure of the educational levels and overall health of the populace.

6. Social and institutional capital, which is, loosely, a measure of the trust and cohesiveness of the nation's citizenry.

The focus of the study was the European Union, and as such, it did not include a comparison (yet) with the Americas, Asia or Africa, but what it did do was to highly what many have long intuited : that the Scandinavian countries, in general, scored the highest overall, both due to good stewardship of natural resources and due to policies that promoted a highly educated workforce, social cohesion and effective stewardship, even though their net financial capital (and GDP) was just a little above the average. Their per capita financial wealth, however, was high.

By comparison, the closer to the Mediterranean and the more Eastward the country, the lower the wealth measures were. This reflected both a paucity of physical resources and a breakdown in trust, with more capital concentrated in fewer hands.

Scenic view of Mount Rainier reflected across the reflection lakes at sunrise GETTY

Scenic view of Mount Rainier reflected across the reflection lakes at sunrise GETTY

The same metric, applied to the United States, is not flattering, though it's considerably better for Canada. The US has a great deal of natural capital, though it has also squandered a considerable amount of it, and remediation is a growing problem.

Its infrastructure is aging and not being funded sufficiently to keep it viable. Inequality of wealth distribution is rapidly creating a class of extraordinarily wealthy families while wages relative to prices have dropped for more than five decades. The educational system of the country varies dramatically from world-class (Massachusetts) to poor (Alabama) and social tensions are high and rising throughout much of the country.

Healthcare, by the same metric, is wildly variable though most Americans are considerably less healthy than their European counterparts, and have fewer options for the same money per capita.

It is possible to read a political slant to the concept of a generalized wealth-centric approach, but it is an approach that more and more economists are moving towards. Productivity, which is another way of looking at GDP, does not have much correlation at all with quality of life, but rather only indicates how much money is being spent in the economy at any given point, for good or ill. By shifting the focus towards a holistic view of wealth, what gets measured indirectly is a country's resilience, its ability to weather crises, both in the short term and in the longer term. This metric also establishes a larger accounting framework that factors in aspects such as resource depletion and remediation costs, aspects that have a real-world impact but often are ignored on corporate balance sheets.

The work being done by the Wealth Economy Project is still in early stages, but the long-term goal is to provide ways to quantify each of the six components of the index as given above to make it a useful measure for policymakers in both government and business. Especially as the economy increasingly shifts to less tangible forms, a new metric for determining the economic health of a country is becoming critical.

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Kurt Cagle is Managing Editor for Cognitive World, and is a contributing writer for Forbes, focusing on future technologies, science, enterprise data management, and technology ethics. He also runs his own consulting company, Semantical LLC, specializing on Smart Data, and is the author off more than twenty books on web technologies, search and data. He lives in Issaquah, WA with his wife, Cognitive World Editor Anne Cagle, daughters and cat (Bright Eyes).