Home > Uncategorized > The Fairy Tale of GNP per capita

The Fairy Tale of GNP per capita

from Asad Zaman and the WEA Pedagogical Blog

[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?  read more

  1. Tom Welsh
    May 12, 2016 at 3:23 pm

    It was reasonable to believe in the “trickle-down” theory in 1714, when Bernard Mandeville published his famous “Fable of the Bees”. This argued that if everyone lived an austere puritan life, demand for goods and services would plummet disastrously, leading to a serious depression and all-round misery. But when the good and the great started living it up, having massive parties, and ordering all sorts of luxuries and services, it was good for the “lower orders” as well, since they got work and pay.

    Today’s society is a very long way from that of 1714 England, the most obvious difference being that the bulk of purchases now are made by “ordinary people” (aka “the lower orders” with cars). A few highly privileged aristocrats and merchants can no longer influence overall consumption, as there are just too few of them.

  2. May 12, 2016 at 6:17 pm

    Regarding the quote by Julie Nelson on how learning economics make people accept irrespionsibilioty and greed as normaland acceptable, the physicist Steven Weinberg has a quote ‘without religion, evil would people would be evil and good people would be good; it takes religion to make good people evil’. The bJohn Templeton foundation which funds many scientists, also funds a group studying ‘spiritual capitalism’. (max weber had ‘the protestant ethic and the spirit of capitalism’.

    i dont exactly get the data from oxfam that the poor lost 1 trillion $ while the top 1 percent gained 1 trillion—income, wealth, and over what time period?

    • May 13, 2016 at 1:31 am

      I have added a link to the OXFAM statistics in the post, and also to Julie Nelson. What she says, and I experienced is that Economics also makes good people evil, so qualifies as Religion according to Weinberd. Indeed, there is a book by this name: Economics As Religion: From Samuelson to Chicago and Beyond. From this example, it would seem that there are many types of ideologies which can make good people evil. In fact, Polanyi has an elegant quote about how faith in the newborn creed of the market steeled people to perform an act of vivisection on the body public by creating the labor market.

      • May 13, 2016 at 2:30 pm

        “So qualifies as Religion according to Weinberg”? That may be true, but Weinberg is following the “protestant” fashion of the ENEMIES of genuine religion (i.e. those who wish to impose slavery by claiming rather than earning Man Friday type loyalty in gratitude for the gift of freedom). I doubt he has any understanding of the Christian origin of the latin term, the economic evils Christ was confronted with (read Selby’s “Grace and Mortgage”) and how he actually enabled evil people to become good by way of seeing the truth.

        Not of course that they all took up the opportunity. Even the present Pope is reminding some Catholic clergy they must “serve, not use laypeople”. Again, I’ve no wish to offend Mohammedans in praising Christ. Mohammed himself saw Jesus as a fellow prophet and learned a lot from him. In my opinion our differences stem from Muslims seeing God statically as an undefinable Thing rather than as a continuous Life in which, in a “trinity” of beginning, middle and end phases, its end always renews its beginning. (C.f. Euclid’s theorem showing three points are necessary and sufficient to define a circle). Would that we could pursuade our respective theologians to get together and sort that out, so as to prevent evil economists, wicked money-grubbers and their grubby political stooges being able to persuade the naive it is not themselves (the detractors) but religious communities (other than their own) which are evil.

      • May 13, 2016 at 6:55 pm

        AZ—thanks. I also came across the oxfam study. its on inequality.org in ‘recent reports’ (a project of the institute for policy studies in wash dc).
        . one thing i don’t like about many studies like this is rather than showing the actual income or distributions (eg percent of income or wealth that is owned by the 5 quintiles, 10 deciles, etc.) they tend to show only how much of the growth in income/wealth over a period of time went to the various quintiles, deciles…
        I also dont exactly know why the bottom 50% of world population lost 1 trillion$ in wealth (which comes to a few 100$/person/yr. Was it natural catastrophes? Appropriation of land and assets by the wealthy—land takeovers, getting people into debt, or depreication. In USA many people lost alot of wealth in the recent ‘crisis’ but alot of this was ‘paper money’—my family’s house for example appreciated from a value of 70G (thiousand dollars) to 1 Million dollars over a period orf 25 years but it was never renovated and actually nearly on the verge of falling down—this was due to the trend for urban areas to become popualar, plus a housing bubble. Abandoned ‘shells’ of houses which noone would buy became hot properties selling for 100G since they could be fixed up for cheap–often using low wage nonunion immigrant labor, turned into multiple condo units and sold for more than 1 Million G. But during the crises alot of these houses lost from 1/5th to 1/3rd of their values since there was an oversupply and also people who thought they were wealthy due 401 k plans or owning stock, lost alot of that. It was all an illusion.

        The other thing is because world population is still growing in many places, even if there is economic growth it may not exceed or keep up with population growth.
        I don’t think these details really change the basic qualitative features of OXfam and other analyses. There is concentration of wealth, alot of poverty in ‘undeveloped’ coun tries and even deveoped ones (relative poverty), etc.

        dave taylor—what exactly is ‘genuine religion’? maybe yours?
        Weinberg like many scientists is a fairly hard core atheist/materialist (other related ideo,logies include sam harris, richard dawkins, michael shermer (though he’s agnostic—a term i use for myself though with hesitation since alot of agnostics like shermer i dont want o be associated with—he’s an economic libertarian), christopher hitchens, etc.
        i think these types, like religious types, really are personality differences—and who knows where they originate from–genes, environments, etc.

        the idea that various theologians will get together and sort things out seems to be as likely as sunni and shi’ite muslims will, pro-abortion and gay rights religious and anti-gay and abortion christians will, that trump and hilary clinton will, that all sorts of economists will, and that china and the usa will, and peace will reign on earth . possible, but not likely today..

      • May 13, 2016 at 9:11 pm

        Mart, as an apprentice scientist I was once involved in creating a new name, and my mentors aimed to make it as meaningful as possible. Genuine ‘religion’ for me, then, is what was about at the time the word was coined which makes sense of its parts: ‘re’ meaning again, ‘lig’ short for a ligament or tie, hence voluntarily retie what had been untied. Which makes it pretty well a code word for the story of Christianity, wherein God showed he deserved our grateful service by Christ acting out his self-sacrificing love, and forgiveness of the failings even of those who killed him, and his reality by the otherwise impossibility of Christ rising from the dead.

        I think you may be confusing style of religious observance (preference for which I agree tends to be personality related) with religious TYPES. Allowing the modern use of the word ‘religion’ as a bucket-word, these distinguish theological (God-centred, family-oriented) types like Judaism, Christianity and Mohammedanism, wisdom-based types like Buddhism and Confucianism, nature-based allegory (Hinduism) and a fair number of morality based ones perpetuating specific aims from good practices (e.g. Quakers and Salvation army) to elitist economic and political conveniences (e.g. caste-oriented Brahminism).

        Pre-Reformation, it was understood the word ‘catholic’ means “for everyone”, and that it takes all sorts to make a world; so the church was full not only of local parishes but of specialised “orders” meeting the needs of others in different ways. What we have had since has been these specialised orders fragmented into isolated communities, which Adam Smith portrayed as competing for bums on seats.

        Apologies for rabbiting on, but It’s all become so horribly complicated. I fear you are right, Mart, about getting our mainly self-defensive religious leaders to agree on anything; but if we don’t start trying today, for sure we won’t succeed tomorrow.

  3. May 12, 2016 at 8:14 pm

    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.

  4. May 13, 2016 at 1:56 am

    Vic this is a nice summary — Piketty also pointed out that a brief period of prosperity misled people about the inherent inequality generating nature of capitalism. The million dollar question of WHY must always be answered on two fronts: The IDEOLOGY which enabled social change and the institutional structure. I think that Keynesian theory which encourages governments to create full employment was responsible for prosperity, and laissez faire which says that there is a natural rate of unemployment, and nothing can be done about it– was the culprit behind the economic failures that you have documented. I have a post on how economic theory itself is a key causal factor which explains economic outcomes:
    The Power of Economic Theory

  5. May 13, 2016 at 6:59 pm

    Herman Daly and quite a few other people have developed alternative metrics or social indicators to GDP—eg the GPI—genuine progress indicator. It modifes GDP by assigning values to inequality, ecological impacts, etc and substracting them from GDP. According to GPI since the 80’s or so while GDP has been rising, GPI has been flat or going down—ie more is not better, but worse.
    .

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