Hello!
In my last post I discussed the operation of a thneed factory in order to illustrate the difference between growth in stock and growth in production. In this post I want to explore this a bit further. (Throughout this blog I use “standard of living” to refer to material wealth, and “quality of life” to represent intangibles such as working conditions and environmental health).
The factory in question , you will remember, produced thneeds at a steady rate of 10,000 a year. Since thneeds last 20 years or so, for a while after the construction of the factory the total stock of thneeds steadily increased. But after twenty years, the thneeds made in the first year wore out and were recycled to be replaced by new stock. From then on the total number of thneeds in circulation remained constant at 200,000 thneeds.
What I did not tell you is that, in the neighbouring district, another factory has been set up, but these goods are of inferior quality, and last only 10 years. To compensate for this, the factory workers work twice as long, and produce 20,000 a year, (incidentally generating twice as much smoke). Twice as many thneeds are produced as before, but after just 10 years the old ones start to wear out, and so the stock in circulation remains steady at 200,000 thneeds, as before.
Let us assume that the factory capacity is such that everyone has as many thneeds as they can use (the factory is sufficient to meet everyone’s thneed, if not everyone’s greed). Everyone has enough thneeds, and everyone is happy. This steady state economy is what most people have experienced through most of history, interspersed with brief exponential explosions when new resources are tapped, or new discoveries made, followed by collapse.
So , the citizens of both districts have the same stock of thneeds, the same material wealth, although those in district 2 are working twice as hard to produce garments of inferior quality, and generating twice as much smoke. But here is the thing. The second district is producing twice as many thneeds a year (and wearing them out twice as fast), so if we use GDP as our measure the economy in the second district is twice as successful!!. If the first district were to start making poor quality thneeds and working twice as hard, they would obviously be materially worse off – but their economy would grow by 100%! And if the second district were to cut the hours in half and produce better garments – their economy would shrink by 50%!
There is no connection between GDP and the stock of goods in the country, real wealth. The rate of production in both cases has remained constant, so there has been zero growth in Domestic Product (GDP) throughout. To repeat; it is possible to double GDP without having any effect on standard of living, while simultaneously seriously eroding quality of life.
The focus on trying to achieve an unsustainable exponential explosion in activity, regardless of its effect on wealth or quality of life, as the fundamental driver for all decisions affecting our society is so bizarre and so destructive, it cries out for explanation. How did GDP come to become the holy grail of economics? I would like to suggest two possible answers (other explantions must wait for future posts).
The first explanation is that GDP growth can bring a short term financial advantage to those who grow first. Let us suppose that the price of a thneed is the same in both districts. In district 2, the factory is selling twice as many thneeds, and the workers work twice the hours and so have twice the income. Of course over the course of 20 years, they have to buy twice as many thneeds, so their cost of living (in terms of thneeds) has also doubled. But in the short term there is a direct financial incentive for the owner of the factory in district 1 to change to making lots of poor quality thneeds like district 2, because in the short term it will double her income – it is only in the long term that it becomes apparent that she has also doubled her cost of living.
But for me, perhaps a more convincing explanation from a historical point of view is the rise of technology.You see, before the invention of the thneed machine, thneeds were knitted by hand, a labour intensive process. The thneed machine halved the human effort required. What happened next is crucial.
In district 1, the factory was run by a cooperative. As a result, by general consent everyone was kept in employment, but their hours were halved, and so their wages were also halved. The new factory-made thneeds only cost half as much (because the labour cost was halved), but the IMMEDIATE consequence was that in the SHORT term, the workers were worse off. In the long term the new technology meant that everyone could enjoy the same number of thneeds, but work half the number of hours. Technology had been used to increase quality of life.
In district 2, half the workforce was sacked. Consequently, half the working population had the same wage as before, but thneeds cost half as much, so their standard of living doubled. The other population had no wage and could not afford any thneeds at all.
So they set up their own thneed factory, and took business by reducing the quality and increasing output, enabling them to reduce the price. In response, the first factory did likewise, in a race to the bottom. In the end one factory went out of business, and the surviving factory was by this time employing the whole workforce – on twice the hours. The advantages of the new technology had been defeated by the short termism inherent in competition.
This parable has a number of morals; firstly that GDP is not a measure of wealth, let alone quality of life; secondly that technology can be used to improve everybody’s wealth and quality of life, but at the cost of short term pain; thirdly that competition and capitalism do not inevitably lead to a better world. I will explore these ideas, and more, in future posts.