Imagine for a moment two people, Bill and Ben. Bill is a banker and earns $200,000 a year at Goldman Sachs. OK, he’s miserably paid by banking standards, but bear with me. Ben is a gardener and earns $20,000 pruning roses and trimming hedges. Who is better off? If you measure the income each receives, then Bill is clearly richer, in fact precisely ten times richer. This measurement is the equivalent of GDP; it tells you about the ‘flow’ of income each receives in a particular year. But, just like GDP, these numbers don’t reveal much about the true wealth of Bill and Ben.
To discover more, you’d need to know about their stock of assets. Did I forget to mention that Ben the gardener recently inherited a huge country estate in Long Island worth $100 million? In truth, he works in his own vast garden as a bit of a hobby on Tuesday afternoons and pays himself a token wage. But he plans to sell off the estate next year, move into somewhere more modest in Manhattan and live off the interest from investing the $95 million or so he’ll have left over.
Poor Bill, meanwhile, is up to his neck in debt. He has to fork out half his salary each month on his mortgage, which has another ten years to run. He has car payments on his (scratched-up) Porsche and a troubling bank overdraft that he’s acquired to maintain his highfalutin lifestyle. Unfortunately, he’s also pushing fifty (Ben is nineteen by the way) and the bank is going to have to let him go.
Now who looks better off, Bill or Ben?
Our standard growth measurement tells us everything about income and nothing about wealth. This is one of its fundamental shortcomings. That goes for nations as well as individuals. Growth numbers for Saudi Arabia are virtually meaningless. Why? Because they are predicated on flows of oil, which will one day run out. At that point, unless Saudi Arabia has discovered another method of producing today’s level of income, its economy will shrivel.1 Saudi Arabia would then become the Bill-the-banker of nations.
Measuring wealth – the stock of assets – is indispensable if we are to get a true picture of the world. And yet, when it comes to national accounts, we have limited tools at our disposal. National accounts contain huge amounts of information, but these are rarely brought to light by growth-obsessed policymakers who home in on only one of the numbers – GDP – at their disposal.
That is extraordinary if you stop to think about it. When investors are sizing up a company, they look not only at its profits and losses, but also at its balance sheet. The profit and loss account, sometimes known as the income statement, shows the flow of revenues and expenditure over a set period. Broadly speaking, if revenues exceed expenditure, the company is in profit. If not, it is in loss. The balance sheet is different. Rather than measuring the flow of incomings and outgoings, it takes a snapshot. It lists assets, liabilities and shareholder equity. It shows what the company owns and what it owes. In the process it reveals what a company is actually ‘worth’ rather than merely showing the profits it is able to generate this year – but not necessarily in the years ahead.2
Politicians and policymakers rely on only a threadbare set of accounts by comparison. We call it GDP. It is the equivalent of an income statement. Beyond a few experimental satellite accounts, there has been no systematic attempt to measure a nation’s stock of assets, or what we might call its wealth.3 ‘There’s been no innovation in national accounts. It’s totally stuck,’ says Umair Haque, a leather-jacket-wearing economist. He regards this as a shocking failure. It is urgent, he argues, for the so-called great economic minds, including those at multilateral bodies like the IMF and World Bank, to come up with wealth measures to match all the countless revisions and updates that have gone into perfecting measurements of growth. ‘Why isn’t there innovation in national accounts that lets us have a more accurate picture of the economy? Without a measure of national wealth we have no idea,’ he fumes (literally), cigarette in one hand and espresso in the other. ‘Without a picture of the stocks, we can’t say with any accuracy how wealthy we really are.’
Partha Dasgupta is the Frank Ramsey professor emeritus at Cambridge University and a pioneer of environmental economics. He has spent much of his career looking at how we might think differently about our economies. I went to Cambridge to talk to him. He met me outside the imposing Great Gate of St John’s College, dressed in a suit jacket, trousers and white trainers. For a man of seventy-four, he looked trim and agile. He walked me to his book-lined study near the River Cam, where he offered me sherry, a throwback to a more genteel age. I readily accepted. It was, after all, already 11 a.m.
Like many people who have made their home in a new country – Dasgupta was born in what is now Bangladesh but came to England in the early 1960s to do a PhD in economics at Trinity College, Cambridge – he is more English than the English. He has a gentle, refined way about him. Dasgupta is not so much a critic of growth as convinced that it is measuring the wrong thing. Whatever unit we are studying – households, nations or the planet as a whole – we ought to be interested not in income but in wealth, he argues. By wealth he means ‘the social worth of an economy’s stock of capital assets, comprising manufactured capital (roads, ports, machinery, and so on), human capital (population size and composition, education, health), knowledge (the arts, humanities, and sciences), and natural capital (ecosystems, sources of water, the atmosphere, land, sub-soil resources)’.4
That seems like a tall order. How on earth, for example, could we put a numerical value on knowledge or culture? Dasgupta is not oblivious to the conceptual difficulties, but he has two responses. One is that since the 1940s humans have invested huge intellectual capital and tens of billions of dollars in creating, revising and refining growth measurements. In comparison, the effort to produce a balance-sheet version of national accounts has been minuscule. ‘Never mind how difficult it is to estimate. The fact that it’s very difficult to estimate is not an argument for running away from it,’ he says firmly. ‘Because GDP is also very difficult to estimate.’
Second, he says, the best intellectual approach to any problem is to push a hypothesis to its limit and then retreat if things turn out to be too hard. Conceptually, we ought to have a balance sheet of our national economies, a snapshot of what we own and what we owe. So we should not shrink from the task; instead we should put our collective brains into creating one.
Stock and flow measures are intimately related, much as they are in a set of corporate accounts. A company has machinery and a skilled workforce that help it produce goods and services to generate an income this year and in future years. It can run down its assets to generate more profits now, or build up assets, suppressing today’s income in order to make more money down the road. For example, it could stop replacing machinery to maximise profits today. At some point though the machines would grind to a halt. Alternatively, it could invest in next-generation robots or send its workers on expensive training courses to upgrade their skills. Both would maximise competitiveness (and profits) tomorrow, but at the cost of lower profits today.
Take a household. In a rich country a person’s assets might include her house, her investments and an estimate of her likely future lifetime earnings and pension adjusted to today’s prices. ‘That’s a stock, and it’s what enables you to have a plan of life. You could eat into it if you wish – say, to educate yourself. You might be disinvesting some of your assets in order to acquire some other asset, namely human capital.’ In a poor country a person’s assets might include land, livestock or the right to fish in communal waters off the coast. In hard times you might sell your cow to buy food to maintain your own human capital (in this case physical strength) and to pay for transport to the city to find salaried work. ‘You are converting one form of capital into another.’
The assets of a household or a nation go beyond physical assets, whether natural or industrial. They include skills, counted for example in trained carpenters and the number of professionals with PhDs. You can stretch the idea as far as cultural capital. Take two identical islands. On the first households have absolutely no trust in one another, and on the other they have absolute trust. On the island with trust trade across households is possible because people trust one another to fulfil their side of the bargain, say providing milk for a year in return for two blankets. But in the other there’s no trust and thus no prospect of exchanging goods between households. The futures of the two islands are going to be entirely different, even if they start with exactly the same asset base.5
Let’s stick for the moment to natural capital. ‘Contemporary models of economic growth and development regard nature to be a fixed, indestructible factor of production. The problem with the assumption is that it is wrong,’ Dasgupta writes. ‘Nature is a mosaic of degradable assets. Agricultural land, forests, watersheds, fisheries, freshwater sources, estuaries, wetlands, the atmosphere – more generally, ecosystems – are assets that are self-regenerative, but can suffer from deterioration or depletion through human use.’6
In gross domestic product, Dasgupta says, ‘the rogue word is “gross”’. That is because it does not count the depreciation of assets. ‘If a wetland is drained to make way for a shopping mall, the construction of the latter contributes to GDP, but the destruction of the former goes unrecorded.’ If the social worth of the mall was less than the social value of the wetland, ‘the economy would have become poorer – wealth would have declined – and potential well-being across the present and future generations would mimic that decline. But GDP would signal otherwise.’
There are three interlocking reasons why we should think about the stock of wealth in addition to the flow on which ‘growth’ is based.
First, to do so helps societies make better decisions about the interplay between stock and flow, between the present and the future. For an individual, if you know how much money you have in the bank, you know how much you can afford to spend on, say, a master’s degree that may eventually bring rewards (in addition to the pleasure of learning) in the form of higher earnings. At the level of a nation, there are myriad occasions when it would be useful to weigh the advantages of using income to build up capital stock or sweating assets to generate more growth. Free university education, for example, might seem like an unaffordable economic sacrifice, but if you were measuring the stock of wealth rather than the flow, all those additional educated people might look like an increase in your nation’s wealth, not a diminishment of its growth. The same goes for investing in infrastructure, say high-speed rail, in anticipation of future returns on investment. How one accounts for these things matters. In the US independent senator Bernie Sanders and in the UK Jeremy Corbyn, the opposition Labour leader, both want to increase public funding and scrap student fees. Their policies look less radical – and therefore more plausible – from a wealth-accounting perspective.
The second reason for counting assets is that today’s actions have an impact on future generations. Recording today’s national income offers no help whatsoever when making intergenerational decisions. The signal it sends is to maximise growth today no matter what the impact tomorrow. At the extreme, one generation might use up all a nation’s forest cover and all its oil reserves in the interests of double-digit growth and in the expectation that future generations will somehow sort things out. Today a government pushing such policies would point to rapid growth as a justification for its actions. But a wealth measure would show a sharp fall. That would at least give voters pause, by offering a clearer picture of the trade-off. WEALTH FALLS 5 PER CENT does not make quite as good a headline as ECONOMY GROWS 3 PER CENT. Getting a handle on wealth would give present generations the chance to see more clearly what sort of future they were leaving their children and grandchildren.
The third, closely related, reason for considering wealth is sustainability. Put starkly, measuring wealth could help societies avoid collapse. Easter Island, 2,000 miles off the coast of South America, is a well-known example of a once-flourishing civilisation that imploded. It is famous for its mysterious stone-head carvings, which now lie abandoned and desecrated.7 When the island was ‘discovered’ by Dutch explorer Jacob Roggeveen on Easter day in 1722 it was already a barren grassland without a single tree or bush over ten feet tall. Though it was inhabited by Polynesians, once famous for their seafaring skills, the islanders had been reduced to paddling about in decrepit canoes. Many lived in caves and scratched out a miserable living.Yet once Easter Island had looked very different. When it was first settled, in about AD 400, it was covered in trees and bushes and had abundant wildlife, offering its inhabitants a rich diet. By AD 1200 the islanders had started to carve the big heads from stone found in one part of the island and transport them using logs and ropes several miles to the coast to be displayed on giant plinths.
They had felled the trees not only for the purpose of transporting the stone heads, but also for firewood and for building homes and canoes. What could have possibly induced the islanders to cut down the last tree on which the whole civilisation depended? In reality the destruction would not have come about this way. Instead, it would have happened gradually, like the proverbial frog being boiled alive in an imperceptibly warming bath. Easter Island’s civilisation collapsed not with a bang – or the strike of the last axe on the last tree trunk – but with a resigned croak. By the time Roggeveen arrived, its population had fallen to between a quarter and a tenth of its peak, the flora and fauna had been all but destroyed and the civilisation mangled. The islanders, who once feasted on a rich diet of porpoises, shellfish and seafood, had apparently sunk into cannibalism. Their most ‘inflammatory taunt’ was ‘The flesh of your mother sticks between my teeth.’8
Easter Island is the earth writ small, a parable of what can happen to societies if they neglect the wealth on which their livelihood depends. Pointing to a refrain of loggers in north-west America – ‘Jobs over trees’ – Jared Diamond, an American geographer and polymath, says that modern societies are not immune from sudden collapse. Far from it. ‘If we continue to follow our present course, we shall have exhausted the world’s major fisheries, tropical rainforests, fossil fuels, and much of our soil’ in a few generations, he says. ‘Perhaps someday New York’s skyscrapers will stand derelict and overgrown with vegetation, like the temples at Angkor Wat and Tikal.’
Keeping an accurate record of a society’s wealth is not enough in itself to stave off catastrophe. Scientists have been warning for years about the dangers of global warming, providing strong evidence of the link between carbon emissions, raised temperatures and observable and possible future environmental changes. Yet, without the acceptance of the science or the political will to act, all the data in the world is not enough to make societies adjust. Who knows whether the Easter Islanders, had they been in possession of sophisticated wealth accounts showing their practices were unsustainable, would have changed course and saved themselves? And yet measuring must be the starting point. Without that, as a species we may be doomed to repeat the Easter Islanders’ collective suicide.
Dasgupta thinks of it like fish in a giant pond. ‘If the size of the fish population is low, then there is plenty of food in the pond and the fish population grows. If there are too many fish, then they can’t manage on the food supply and so the stock declines.’ Without the intervention of humans, the fish stock would reach a natural equilibrium based on a given supply of food and nutrients. ‘Now come some fishermen. They can catch fish and of course the stock declines. But that doesn’t mean that they’re necessarily ruining the fishery because if the stock declines, then the net output of fish, the reproductive rate, could rise because there are fewer of them. They are eating up less of the food, so they reproduce at a faster rate. But, if you constantly take more, then eventually it collapses.’ Managing a fishery efficiently thus means taking out just the right amount of fish so stocks can regenerate.
‘Think of the biosphere as being like the fishery in a stable state. Then, as we grow, we are living off more of the biosphere’s output and changing the state of the output. And you ask the question, the amount of biomass we are converting for our purposes, how does that compare with the biomass that’s being produced by the biosphere? The footprint is really the ratio of the demand and the supply.’
The methodologies for measuring natural wealth all have their difficulties, but the problem of underpricing natural resources – or treating them as free – demands some sort of response from economists. Why should putting a price on nature help us to see what we are doing and maybe stop us from doing it? ‘Suppose you’re an entrepreneur and you are trying to develop a new technology for producing honey or whatever, or a new type of car,’ says Dasgupta. ‘Are you going to economise in your design on the expensive stuff or are you going to economise on the cheap stuff? Well, you want to economise on the expensive stuff. Now, if natural capital is underpriced, the direction of technological change is inevitably going to be towards more rapacious types of discoveries. It’s very natural. Air is free. Water is free. We know that oil is underpriced because it is not dictated by the fact that there’s this huge externality [carbon] every time you burn a gallon of petrol. And if it’s underpriced, then there will be a tendency for technological change to be slow. In other words, technological innovations are biased against nature.’9
As with the Easter Islanders, catastrophe could creep up on us rather than coming all at once. The gradual destruction of species and biodiversity is one worrying sign. ‘I’m not talking about kangaroos and tigers. I’m talking about the ones you don’t see: all the bugs and the birds, the pollinators and the decomposers. You have a variety of statistics – markets, if you like – which suggest that we are stretching and we have been stretching for some time now.’ It’s all too easy to be optimistic about human progress. ‘We live longer, we eat better, we are taller, we are better educated, we are enjoying goods and services, we travel. But are we short-changing the future in doing that? Are we borrowing from the future? Borrowing from the future by, for example, dumping so much carbon that we are going to be in trouble. The answer, in all likelihood is yes. We are going to be in trouble.’