The Fairy Tale of GNP per capita

GNP[Clarification — this is not the followup post to Misconceived Project of Social Science — that will be posted a few days later — however, it is part of sequence showing the serious defects of modern economic theory]

Observations of the real world massively contradict trickle-down theories, so economists generally do not admit to believing this idea that further enrichment of the wealthy will lead to prosperity for all. Nonetheless, trickle down is built deeply into the foundations of modern economics. The greatest illusion fostered on the un-suspecting public is that GNP per capita is the best measure of economic growth. The use of GNP per capita as a measure of growth is equivalent to the assumption of a trickle-down effect. The “per capita” means that this statistic is calculated by dividing total national income produced equally among all the people in the country. Unfortunately, the reality is starkly different from this fairy tale statistic, which assumes equal distribution of income. Since the 1980’s, an increasing share of all the income produced in the world has been going to a small elite minority within the top 1%. The starkest demonstration of this inequality is furnished by the recent research which shows a fifteen year gap in life expectancy between the richest 1% and the poorest 1% in the USA. Similarly, Oxfam published statistics showing that the bottom half of the world lost a trillion dollars, while the top 62 people, who own more than half the planetary wealth, gained half a trillion. The statistics furnish strong evidence for a vacuum cleaner effect: a powerful suction of wealth from the bottom to the top. This vacuum cleaner effect means that the GNP per capita furnishes an excellent demonstration of the famous aphorism: “Lies, Damned Lies, and Statistics.” This statistic is not just misleading, it is deliberately deceptive, and directs attention away from issues which are essential to progress and development.  It is a brilliantly crafted piece of propaganda in that it misleads people by measuring a fairy tale number: what would happen if we took all the national income and divided it equally?

Famous economist Joan Robinson said that “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.” One the major weapons of mass deception in the arsenal of the economists is the GNP per capita measure. In the battle of ideas, achieving widespread acceptance of the idea that GNP per capita is the main measure economic progress has been a major victory for the wealthy. One cannot oppress the majority of the population without achieving their consent in some measure. False measures of progress are a key to victory. Today, governments all over the world are measured by their achievements in rate of growth. A thousand crimes are forgiven at the altar of growth, while tremendous accomplishments are ignored if growth is slow. Making GNP per capita the center of attention ensures that no one pays attention to where all this growth is going, which is in the coffers of the already wealthy.

It is very worthwhile studying the propaganda tactics used by economics textbooks to get innocent students to believe in absolutely incredible myths about how the economy works. In the entering class of graduate students in the Ph.D. Economics program at Stanford, most of us were motivated to study economics in order to solve the major economic problems we could see around the globe. We wanted to help solve problems of poverty, and create better lives and prosperity. During the course of our studies, we were taught to believe that free markets solve all economic problems automatically, and the main economic problem is do-gooders (like us) and governments, who wish to help. If everyone would pursue their self-interest, it would automatically lead to the best economic outcomes for all. The ideals of serving humanity were washed out of us, and replaced by the pursuit of personal ambitions. Julie Nelson has beautifully captured this brainwashing process in a paper entitled “Poisoning the Well: How Economic Theory Damages the Moral Imagination.” She states people would act in socially responsible ways, but are pushed by the economic theory of self-interested utility maximization to believe that it is permissible to be irresponsible, opportunistic, and selfish in when participating in markets. She describes the large number of ways that economic theory counters natural moral instincts, and the tremendous harm that has resulted to societies as a result of this immorality taught by economics.

Among the propaganda tactics used for this brainwashing, one of the most powerful ones is the creation of a single minded focus on GNP per capita as the primary goal of economics.  Every effort is made to ensure that economics students do not pay attention to distribution, so that the rapid and increasing income inequality, and the vacuum cleaner effect created by blind pursuit of growth, does not come to their attention. For example, Nobel Laureate Robert Lucas writes that: “of the tendencies that are harmful to sound economics, the most seductive, and in my opinion, the most poisonous, is to focus on questions of distribution.” Students can go through entire courses with the deceptive titles relating to Income Distribution, Inequality and Poverty. These courses go through a lot of mathematical material on how to measure inequality, and descriptive empirical material, but implicitly teach students to regard these as natural features of an economy. There is underlying message of indifference: inequality does not matter, and the best way to combat poverty is through economic growth. The use of the GNP per capita measure helps sustain these myths. The rapid transfer of trillions from the bottom billion to the top 100 people will not show up in the GNP per capita statistics.

It would be a critical victory for the bottom billions if we could shift the focus of the debate from GNP per capita to measures of poverty and employment. Before the well was poisoned by economic theories, it was clearly understood by all that it is our collective social responsibility to provide for education, health, jobs and social welfare needs of all members of society. If these statistics made the headlines, and governments were held responsible for improvements in the incomes earned by the bottom 25%, instead of the top 1%, there would be a significant change in policies. However, such changes will be strongly resisted by the wealthy, who benefit from widespread poverty in many different ways. This creates a wide pool of labor available for ready purchase to those who have the money. It is this money of the wealthy which drives think-tanks, research organizations, and universities to produce tons of research supporting the use of GNP per capita as the primary target of economic policies. Many have recently raised voices against the numerous deficiencies of this measure, most notably the Stiglitz-Sen-Fitoussi report which includes two Nobel Laureates among its authors. Deficiencies include neglect of damage to the environment, society, and many other issues which directly affect well-being of all members of the society. Unfortunately, while the gears of the statistical machinery are well-adapted to measuring GNP per capita, they have not been designed to measure the things which matter. One can only get shoddy and incomplete data on measures of inequality, unemployment, education and health which are of critical importance in assessing the welfare of nation. This is actually important to conceal the realities which would lead to revolt against the exceedingly unfair system. For instance, recently  researchers stumbled across an amazing statistic related to white US Middle class. In contrast with nearly every other social group, the life expectancy of this group has been rapidly decreasing. Why? It seems that the primary cause is suicide, either direct, or indirect by means of alcohol and drugs. As somebody remarked it is depressing and sad statistic. The question, why was this discovery accidental? A good set of statistical indicators would have picked it up right away, so that steps could be taken to cure the problem The answer is that inequality, misery, poverty are actually beneficial to a small number, who have learned to enjoy the benefits of creating crises which leave millions homeless while the financial elites reap trillions from the catastrophe. For them to create the consensus necessary to implement these cruel policies requires projecting certain types of statistics while hiding others from common view. Angus Deaton remarked that all statistics are political. Simply a display of the statistics related to social welfare of the public would be remarkably useful in the battle for justice. But it hard to prevail against status quo and ignorance.

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3 comments
  1. Per capita real GDP (or GNP per capita) may not be the best measure of economic growth and its benefits but there is no other broad measure which is as widely accepted by economists and the general public for this purpose. And when this measure is combined with other measures of performance and well-being it is a good measure of how a society is doing. Of course, human nature being what it is, there is no limit to the extent one can manipulate data to fit one’s conclusions for the mastery of knowledge.

    With that pronouncement let me commence with my version of the mastery of knowledge. Taking a look at the 225+ years of history of the United States, the greatest period of peacetime economic performance, in length of time and rate of growth, was the period around the 1960s — especially the thirteen year period starting after the recession of 1958 continuing to the next recession in 1970, a period of over 30% economic growth; with a ten year period from 1960 to 1969 of over 35% growth. There is no other peacetime period in U.S. history that comes anywhere near this economic performance — not even close.

    The only period of time that exceeds this economic performance is the war years of World War II — so going from the Great Depression years of the 1930s to the end of WWII in 1945, a period of fifteen years, the GDP more than doubled. Looking at the U.S. historically for superior economic performance for some substantial time period with superior economic growth you will only find two other periods that compare to the performance of the 1960s, and these are ten year periods with growth over 30% — the 1790s at 33% and the ten year period from the mid-1890s into the 20th Century with 31% growth. The next grouping of time periods are of six and seven year durations with growth rates somewhere in the 2% per annum.

    So the 1960s had great growth over a sustained time period, but what about the well-being of society? The Gini Index increased (meaning more income inequality) by 25% from the 1960s to the present. The poverty rate decreased during the 1960s from 20% to 15%. Comparing personal income, savings, personal consumption expenditures, personal debt from the 1960s to the present — it would appear people in the 1960s were better off than today.
    Ah!, but what about the smaller houses, air-conditioning, automobiles, international travels, and all the gadgets and technologies we get to enjoy today? My toaster today has 10 knobs whereas my toaster in the ‘60s only had two knobs. My answer is that we are not trying to go back to the ‘60s but are comparing if people as a whole felt better in their time. John Kenneth Galbraith wrote ‘The Affluent Society’ in 1958 and revised it forty years later in 1998 during another period of acceptable economic growth — I don’t think one could get away with this characterization today after 15 years of some of the worst economic growth in our history.

    To be sure, the 1960s were not a perfect period or a utopia. There was much civil disturbances, protest, and unrest, to include several periods of cities going up in flames and riots. Still, this was a period of economic growth of over 35% for this ten year period, never achieved in our history; so, that should tell you that people still worked while all this was going on. Or, how else could this achievement be accomplished?

    I might also add that the Federal Government had a role in society that was accepted by the great majority of people. In spite of one federal deficit after another, the total National-debt-to-GDP ratio decreased from approximately 70% in 1960 to approximately 40% by 1970 (the publicly held debt-to-GDP decreased from over 40% to less than 30%). Federal Government spending was modest compared to today — 15% during the early part of this period to 20% by the end of this period with the Vietnam War going on and the Great Society programs being initiated — and deficits were also modest.

    Looking at economic indicators for this performance only tells part of the story. Labor productivity was high, but went into decline from these high levels by the mid-1960s. Capital investment was good. This decade is only second to the 1990s since the post-WWII period for the effects of technological innovation. But those things alone do not account for the extraordinary economic performance of this period. The 1990s had somewhat similar good indicators; and, yet the 1990s grew at only 70% of that of the 1960s — less than 21% compared to over 35%. One would have to do a sector analysis of the economy, an input-output analysis, to see how the different sectors benefited each other as advances occurred in one sector affected other sectors of the economy. I think the sharing of information during this decade was better than what we have had in the past twenty-five years, and that is with the internet advances and all. The Federal Government at that time played a much bigger role in research and development and that no doubt contributed to the sharing of information rather than the protection of proprietary information.
    The other major factor that contributed to this extraordinary growth was the sharing of the prosperity of this period. Productivity gains went to all who worked and invested in the economy, whereas in the past 25 years it has been the well endowed, the elite, and the well connected (politically). Seventy-five percent of federal revenues come from the taxes on wages and salaries. Capital gains contribute no more than 10% of federal revenues, and sometimes less than 5%. Businesses were taxed more back then than now, but were not the major contributor to federal revenues. When the economy is at or near full employment, the society in general benefits and the social welfare function of the government is financed.

    The last fifteen years are some of our worst economic growth and income disparity. We have the ‘60s as an example. We should study it. Our progress is linked to our quest for knowledge; and, technological advance is tied to economic performance and an understanding of our past which make it the key to the pace of that quest and well-being.

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