GDP Comparisons Across Time

This continues a sequence of posts aiming to show how apparently objective statistics conceal large numbers of arbitrary value judgements.  (1) Lies, Damned Lies, and Statistics, (2) Subjectivity Concealed in Index Numbers, (3) The Values of a Market Society, (4) Cross-Country Comparisons of Wealth, (5) Purchasing Power Parity, (6) Downfall of Rhetoric in 20th Century, (7) Facts & Values: Distinction or Dichotomy?. This is the 8th post, which considers comparisons of GDP across time within a single country.

In comparisons across countries, we face the difficulty that the concept of “wealth” has varied across societies, and changed with time. The “average basket” of goods varies for each country, because different societies have different preferences and values. We cannot compare apples and oranges. It seems that these problems would be reduced if we considered a single society across time. The concept of wealth, and the average bundle of goods would remain relatively stable, at least across short periods of time. We will now discuss difficulties which arise when we consider growth across time, comparing GDP across the years for a single country.

Turning back to Table 1, we can see that all of the GDP values are increasing as time goes on for all of the countries in the Table. Does this mean that GDP has been growing in all of these countries? Well, may be “no” since the values in the Table are in local currency units. The increase may be due to increase in prices or it may be due to increase in quantities. Therefore, without knowing which increase is dominant, one can not be sure whether GDP really increased or not.

To see how deceptive just looking at the numbers can be, the case for Turkey for the years 1978 – 1988 is useful. The country experienced very high inflation over this period of time. Table 2 summarizes the information.

Table 2: Inflation and Growth of Turkey (1978 – 1988)

Year GDP (LCU)

(Billion TL)

Growth

    (%)

Inflation

   (%)

1978 1.58 2 50
1979 2.78 -1 76
1980 5.23 -2 88
1981 7.9 5 51
1982 10.5 4 33
1983 13.9 5 33
1984 22 7 58
1985 35.1 4 60
1986 51.1 7 46
1987 74.7 9 46
1988 129 2 73

Second column in the Table is GDP in current LCU, that is Turkish Lira. GDP in 1978 was 1.58 billion TL and it was 129 billion TL in 1988 which is close to 100 times growth but actually the growth over the period was not that high. Most of the growth was due to inflation, as shown by the numbers in the last column. After deducting the inflation, the growth rates are actually quite low. So, it is clear that direct comparisons of GDP in current LCU are false and misleading. The table provides the “official” statistics, as recorded in the World Bank WDI Data set. It separates the growth in LCU into two parts. One part is the rise in prices, or inflation, while the other part is the growth of the “real” GDP, which measures wealth according to official statistical accounts. How objective is the official method, as a way of measuring real GDP, and thereby enabling us to compare the wealth of Turkey over time? We will examine the subjective values hidden in the way these numbers have been manufactured.

External and Internal Critiques of the GDP

From one year to the next, the GDP changes in many different ways. The quantities of the goods produced is increased, technological changes make the quality go up, the prices also increase, new products are introduced, some products become obsolete. Can we wrap up all of these changes and summarize them by ONE number? The simple answer is NO – this is impossible. Over time changes take place, and these can be characterized qualitatively. Using old fashioned rhetoric, a writer arguing that Turkey is making progress and experiencing growth would talk about how we have more and better roads, we have more educational institutions of higher quality, we are manufacturing high quality products, and exporting them, and similarly describe the many dimensions of change taking place in positive ways. An opponent who want to argue in the opposite direction might say that real wealth consists of friends, family, and social relationships. As the people of Turkey get more and more engaged in production of artificial goods which make no genuine contribution to our lives, we are losing our traditional values which enriched our family and social lives. Instead of learning to be human beings, our education is turning us into human resources, to be used just like machinery is used, as inputs to the production process. So, Turkey is becoming poorer, when wealth is properly understood in terms of what makes us genuinely happy, enriches our lives, and develops our human capabilities.

In the modern rhetoric, all of this discussion and debate about values is buried and concealed beneath the apparently objective official statistics. Which factors should be chosen as measures of wealth? This is not under discussion; it is automatically assumed that all products produced and sold as final consumer goods are the wealth of the nation. Once we recognize the value-based nature of this choice, there are two types of criticism which we can make of this choice of factors. The first is an internal criticism, which accepts the idea that wealth should be defined in terms of material resources, but says that we are missing essential aspects of this material wealth because they are not sold in the marketplace. Among these, the informal education, and character building, done by families, as well as social services provided by friends and relatives are extremely important. As more and more people start working in order to create wealth which is measured by the GDP, there is dramatic reduction in the non-market transactions which produce wealth, as well as in the informal economy. It is not clear whether there is a gain or a loss from this process. In particular, human capital adds enormously to productive capacities, so that it is an essential aspect of material wealth. In fact, according to World Bank report on the wealth of nations, this part is more important than the natural resources, which used to be far more significant in earlier times.

An external critique of the idea reject the idea that only markets produce wealth. It also rejects the idea that the market price is a good measure of the social value of the product. A lot of goods produced on the market are luxuries, wasteful, or useless products, which actually reduce wealth. Similarly, human capabilities are extraordinary and unique, and cannot be priced in the market. For the purposes of this article, it is sufficient to highlight that choosing market goods as the only factor to be counted as wealth, and choosing market prices as the measure of wealth, introduces market-values, substantially in conflict with traditional values, into the measure. At the same time, an appearance of objectivity is created by the numbers.

(to be continued)

1 comment
  1. Dingo said:

    “In comparisons across countries, we face the difficulty that the concept of “wealth” has varied across societies, and changed with time. The “average basket” of goods varies for each country, because different societies have different preferences and values. We cannot compare apples and oranges. It seems that these problems would be reduced if we considered a single society across time. The concept of wealth, and the average bundle of goods would remain relatively stable, at least across short periods of time. ”

    A lot of time and energy would be saved if the whole field of economics began from the legal foundations upon which all economic activities and wealth are made possible. No economic activity can take effect without legal consideration, irrespective of the personal value placed on it. As it was said in the Supreme Court, it is not the job of the court to question how much value a party to a contract places on a peppercorn, but rather, was the contract duly and lawfully formed, and if so, it matters not what the party has agreed to pay for that peppercorn.

    Whilst it is almost hypnotic that most if not all economists cannot see the economy past real things like peppercorns and fruit, and then statistics, accounts, and T ledgers, what is most important is the fact that behind all these real things and accounting, are legal rights and duties. You cannot produce anything from an economic perspective unless you own the means of producing, you cannot exchange anything from an economic perspective unless you own what you are exchanging, and you cannot agree to exchange something in the future (a contract) unless you give up future legal rights. All government statistics and all business accounts are nothing more than accounts of the ownership and movement of legal rights and duties.

    What is the actual subject matter of those legal rights and duties is meaningless. If we agree to swap my apple for your orange, what we are swapping are the legal rights to those things, nothing more. If you enjoy the apple more than the orange, then that is a personal benefit in personal terms but it has nothing to do with economics or law. From an economic perspective, you gave up legal control of the orange in exchange for legal control of the apple. What you do with that apple afterwards is meaningless unless you decide to swap it with someone else and then it becomes an economic activity again.

    The very definition of wealth is not the experience we have when consuming, it is the legal power, the legal claim, the legal right to control the resources which we personally wish to consume; it is not the consumption itself.

    Once you see this is how the economy works, then the real question becomes, can we as a society possess more legal rights than there are legal obligations? Because in order for an economy not to be zero-sum, in order to eliminate poverty, homelessness, etc, in order to create wealth for all, you must answer this question in the affirmative!

    All the technology in the world, all the great productive achievements and all the increased productivity does not change the legal principles upon which these technologies and production thereof are owned and controlled. We can produce far more than is needed by all, and the stats prove this. In most developed countries, the average worker produces 5 times in GDP than what a welfare recipient receives. If we take the base income for a full time welfare recipient to mean a basic amount to live, then we produce on average 5 times our own needs – and yet, we cannot eliminate crime, homelessness, unemployment and poverty – and the simple reason is because legal rights cannot exist in isolation – they always carry legal obligations on others. The reason a T ledger must balance to zero is because the law requires it to – you cannot have a legal right of any sort unless there is a legal obligation on another or society as a whole. Even human rights are not immune from this legal fact.

    Those who are wealthy in this world are wealthy in legal rights, particularly permanent legal rights, and those who are poor and destitute are poor in legal rights, and only ever at most receive temporary legal rights in the form of welfare etc. Those temporary legal rights always end up back into the hands of those owning the permanent legal rights (business, land owners etc), and it is only by charity or taxation that they can be diverted back to the poor, if the political will exists.

    If you look at all the debt that exists today, and you also look at how debt is being extended out further and further (we have 100 bonds now), this is the reason, and the only reason, that many of society are able to claim that from a material perspective, the world is richer. Our debt is the price for this stuff. Further, we may be living with far more stuff but I conjecture that the quality of the stuff we own today is crap compared to 30 years ago meaning we have to consume more of it , i.e. buy more of it – another piece of evidence demonstrating the fallacy that we are all wealthier. Even the technologies we use today like internet, mobile phones, computers etc have us enslaved to the extent that we know very little about the technologies we use and they are constantly being updated and we have to keep paying for this technology. My children are now required by law to have internet to do school work. I would hardly call this wealth without a cost. All wealth has a cost. It is legally impossible otherwise. Just look at housing. Years ago houses had yards. Here in Australia, one of the biggest countries on earth, houses are built now with no yards, and so close to each other that you can smell next door having a crap in the toilet – and yet this has been forced due to the insatiable need for home ownership. Again, there is always a cost.

    So I leave it to you to answer the question above. I am very keen to read anyone who can prove to me that legal rights can exist in isolation. Show me how this is possible, and then I’ll show you how to solve most if not all economic problems.

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