So close yet so far for Mr Baggini

Rather than seek an alternative focus of measurement to wealth, we should instead seek to measure wealth better. The problem with GDP is that it doesn’t measure real wealth at all, only the total cash value of the economy. It is a truism that money has no value in itself, only in what it allows you to buy. Money is only a proxy for wealth, and a deeply imperfect one at that. Real wealth consists in what we are able to own or consume, not in the size of our bank balances. Real wealth therefore grows when we can have more of, or better of, the things that enable us to live well. We are truly enriched by warmer houses, better medical care, healthier food.

Quite true, except we must not conflate wealth with income, stock with flow.

House price inflation has run far ahead of wage inflation in the UK for decades, so although – a few years of recession excepting – proxy wealth has tended to rise, real wealth for many has not, because housing has eaten up more than the increase.

That’s the sort of confusion you get into when making that conflation. Wages are the flow, house prices are the stock. We just shouldn’t be comparing them in this manner. Rent, or even imputed rent can be compared with incomes, should be even. It might even tell us the same story. Or, umm, given interest rates and the financing costs of the asset, perhaps not? Certainly, at times, given the three factors, they will move in different directions.

For example, hold incomes static, house prices double, yields on rentals halve, the effect upon that rent, or imputed, is zero.

Economists rightly celebrate the growth in prosperity that has marked the modern era. But ordinary working people are much better off than their Victorian forebears because they have better homes, better food, free education and healthcare, not because they have more money. The connection between the two is not inextricable, as recent experiences in Japan bear out.

Japan has experienced years of what economists see as the “nightmare of stagnation”. And yet the country is still a safe and affluent nation. David Pilling, the Financial Times’s former Tokyo bureau chief, has argued that “the standard of living, particularly in big cities like Tokyo, has improved significantly in the so-called lost decades. The city’s skyline has been transformed; the quality of restaurants and services improved greatly.”

How is this possible? Because “a lot of improvements in standard of living come not through what we normally consider as growth, but through technological improvements”. This is a concrete example of real growth without what is normally understood by economic growth.

Oh dear. This is the very thing that we try to accommodate into our numbers by inflation adjustments to get to real incomes (ie, deflation can lower nominal income, raises real) and hedonic adjustments (what we buy for the same money is improving in quality). This isn’t something new, this is where all the work is being done.

If we can grasp this, we can see why the argument about whether indefinite growth is environmentally sustainable is bogus. Orthodox economics says that it is essential if the world’s worst-off are to escape their poverty. Critics argue for zero or even negative growth, claiming that this is the only way to ensure we don’t deplete the planet’s resources. Both are wrong. Real wealth is created not just by exploiting more resources and increasing society’s cash pot but by exploiting the same or fewer resources better. The whole question of GDP growth is a red herring if we are interested in real wealth. What matters is that we do more with the resources we have.

But as I have been shouting for a decade we already include that in our GDP calculations. Baggini is missing that we already do this.

Building a better future depends on seeing this clearly. Take the need to reduce inequality, which many now accept is urgent. To do this it is assumed we need to reduce the income gap between rich and poor. But real equality is increased simply by making it possible for the less well-off to do more with the money they have. Social housing was, and could again be, an example of that. Take two people, one of whom earns £30k a year and the other £15k. To close the real wealth gap between the two does not necessarily require increasing the income of the latter. Providing them with a decent council flat at low rent effectively allows their disposable income to equalise.

Quite so, as I have been screaming for a decade. And as wealth (note, wealth, not income) inequality numbers stoutly refuse to incorporate. Good grief, state undunded, old age, pensions are not counted as wealth, private fully funded are. The three all achieve the same thing of course.

9 thoughts on “So close yet so far for Mr Baggini”

  1. I wish “undunded” were a proper word, it’s a good one.

    Wonder how much research went into writing this article? Don’t need to go very far with google/wikipedia to come across the concept of hedonic adjustment, for example.

  2. The Guardian appears to publish almost anyone’s musings on Economics – except for actual economists. Historians, Philosophers, music teachers, geographers, accountants, politicians, journalists, activists, trade unionists, feminists – all are welcome it seems. Anyone except people with actual knowledge.

    And it shows.

  3. ‘Take the need to reduce inequality, which many now accept is urgent.’

    SJW weapon of choice. Equality, as they mean it, cannot be imposed. But they’ll destroy you trying.

  4. Just on Japan, the nation benefits because its sluggish growth is combined with static or falling population. Tokyo’s population is actually growing of course.

    Japan might have had stagnation, but static wages (until recently) have been coupled with static prices*. Moreover, the nation’s wealth allows it continue to update and improve its cities.

    *A Chinese businesswoman I met recently told me her favourite ramen stall in Tokyo, which she visited as a student in the 80s still charged exactly the same price for a lunchtime bowl.

  5. Tim

    You may want to check out Murphy’s post on buy to let as well. Despite the size of Health warnings and plain packaging making writing a tax gap estimate on a fag packet quite difficult, he has found a way – apparently Newham has a tax gap of more then £1billion on buy to let alone….

  6. And Tuppence seems to have confused undeclared letting income with undeclared property disposals capital gains.

  7. UK public spending this year: £814 billion
    UK households: 27.1 million
    Public spending per household almost exactly £30,000 p.a.

    What is the implied capital value of the benefit of having £30,000 spent on your household?

  8. Seems Baggini is like Murphy – too ignorant of the subject to know that he’s ignorant. But it doesn’t stop either of them getting paid to write about it, because they say what the Left want to hear.

Leave a Reply

Your email address will not be published. Required fields are marked *