Is
national income good for the soul?
In Central Asia,
when political leaders want to brag, they usually spout statistics about gross
domestic product – the value, when sold on the market, of goods and services
produced by the nation in a year. One
can hardly blame them. Double-digit
rates of growth in GDP have been common in the region since the turn of the
century.
There are other ways to judge our
performance. We may measure how well
that our national economy is doing, per person, in terms of wealth or
income. “Wealth” is the accumulation of
savings, which in turn is unspent income.
Suppose that you made $6,000 in your part-time job this year. Of that amount, you put $2,000 in your
savings account; bought $2,000 of KazKommerzbank stock shares; and spent $2,000
on food and clothes. Then your savings are
$4,000. The stock doesn’t count as
consumption, because you can’t enjoy it in the same way as a cone of ice cream;
it’s just a parking lot for your money.
If you also saved $10,000 from past years, then your wealth is
$14,000. This figure indicates the
lifestyle that you can support in the future.
The $6,000 of wages is your annual income, indicating how well that you can
live this year without dipping into your wealth. Income is a yearly inflow into your accounts;
wealth is a stock, the value of your assets at a given time.
Before The
wealth of nations appeared in 1776, scholars
had thought that the nation’s wealth depended on its gold or silver. Spain
was rich because it had hauled tons of the precious metals from the New World.
We owe our modern notion of national wealth
to Adam Smith, who attributed it to labor productivity – the amount that a
typical worker can produce. If she can figure
out how to produce shirts more cheaply, then we can buy more shirts with given savings. Wealth
increases in terms of what it can buy.
Popes
and Marxists
Productivity shapes income as well as
wealth. A Nobel-laureate economist, Robert
Solow, pointed out that you could produce more cheaply if you had more capital
to work with. (“Capital” is anything
man-made used in production: Machine tools, office towers, knowledge of
accounting.) Nations with more capital
per worker can sustain higher levels of income per person. Ethiopia is poor partly because its
workers have few machines.
Human capital – such as education and
training – are particularly important to growth, noted the Nobel laureate Robert
Lucas. Although this sounds obvious now, it was revolutionary. The classical world didn’t appreciate
knowledge about production and offered no means by which you could profit by
it, wrote Ronald Wirtz. In contrast, Americans
have accumulated human capital rapidly in part because their universities
compete for students. The strength of
private universities in the U.S.
is virtually unique in the world, according to economists Claudia Goldin and
Lawrence Katz.
These perspectives presume that wealth or
income per capita is the most reliable measure of human well-being because they
are material. A 19th-century
pope dissented. In countering Marxists
of the 1890s, who threatened to revolutionize Europe,
Leo XIII defended property rights but added:
"...[I]n the case of the worker, there
are many things which the power of the state should protect; and, first of all,
the goods of his soul. For however good and desirable mortal life be, yet it is
not the ultimate goal for which we are born, but a road only and a means for
perfecting, through knowledge of truth and love of good, the life of the
soul."
In the Sixties, Pope Paul VI reinforced the
point: "Increased possession is not the ultimate goal of nations nor of
individuals. All growth is ambivalent."
Income per capita is merely a means to a spiritual end.
Income per capita is a limited measure of
human well-being because it fails to account for leisure, notes Robert
Forrestal. Over the past few decades,
the entry of women into the labor market has increased. In Kazakhstan, the number of women in
the labor force rose 12.7% in seven years.
Even over the period of financial crisis, 2008 to 2010, the number rose
1.5%. Such a surge into the labor market
may raise income per capita, but at the loss of leisure (see the Notes). “Economists simply cannot tell whether
society is better off or worse off in this case.” But women choose to work, so on average they surely
must gain.
Bhutan’s way
The larger point – that income per capita
does not fully measure well-being – is well-taken. The United Nations measures human welfare
with the Human Development Index, which reflects life expectancy, educational
standards and individual purchasing power.
For example, Costa
Rica has ranked much higher in its human
development score than in its total output per capita. In the early 2000s, Costa Rica placed
76th by total output per capita but 42nd by human development. The discrepancy
occurred because the average Costa Rican lived longer, learned more, and drank
cleaner water than did residents of other nations with similar average incomes. In 2004, the United States placed only eighth
among all nations, in terms of the index.
Norway and Sweden led the
list, reported the Financial Times..
One Nobel laureate economist uses death
rates to analyze economic performance.
To Amartya Sen, the way that nations handle famine, health care, sexual
and racial inequality, and poverty may reflect economic progress more truly
than does income.
Skeptical of income estimates, some nations
have adopted alternative measures of well-being. The tiny nation of Bhutan judges its economy annually
by a measure of Gross National Happiness.
One of its indicators is environmental quality, reported The Economist. Conventional measures of gross domestic
product do not subtract environmental damages; in fact, a rise in pollution
will boost GDP, by increasing demand for health care. To the contrary, Bhutan regards forests – which
cover nearly three-fourths of its land -- as contributing to its Gross National
Happiness. But another indicator of its Happiness,
the preservation of culture, may measure xenophobia. Bhutan
discourages Hindu immigrants from Nepal.
To measure national income, economists sum
up payments to input owners: Wages and salaries, profits, interest payments and
rent. Another approach is to sum all spending
on production, since a tenge of spending is a tenge of income to someone. Total spending is gross domestic product. In developing countries, estimates of national
income may fall short of GDP when people don’t report all of their income to
the tax agency. The difference measures
the underground economy. In Nigeria, Egypt,
and Thailand,
the underground economy has accounted for nearly three of every four dollars
spent, noted economist John McMillan. –Leon
Taylor, tayloralmaty@yahoo.com
Notes
Denote the number of adults in the labor
force as LF, the number not in the
labor force as NLF, total wage income
as WI, and total nonwage income as NWI.
Then income per adult is a weighted sum of the sources of income, where
the weights are the labor force share of all adults and 1 minus that share:
YPC = [LF/(LF + NLF)](WI/LF) + [NLF/(LF + NLF)](NWI/NLF).
Denote the average labor wage as w, a decreasing function of LF, and the
average nonlabor wage as nw, assumed
constant. Then, by definition,
YPC = [wLF + nwNLF]/[LF + NLF]
Assume that NLF is a constant. Then
dYPC/dLF = [1/(LF + NLF)][w + (dw/dLF)LF –
(wLF + nwNLF)/(LF + NLF)].
For simplicity, set nw = 0. With manipulations, dYPC/dLF is positive if
(w/LF)[NLF/(LF + NLF)] > dw/dLF.
An increase in the labor force raises
income per adult if the magnitude of the wage response is less than the ratio
of the wage to the labor force, weighted by 1 minus the labor force share of
adults. This is most likely when the
wage is high and the labor force share of adults is small – conditions that may
describe a resource-intensive developing economy.
Good
reading
The
Economist.
The pursuit of happiness.
December 18, 2004.
Goldin, Claudia, and Lawrence Katz. The shaping of higher education in the United States and New
England. Regional Review. Federal Reserve Bank of Boston.
Q4 2001. On line.
Forrestal, Robert. Economic development for the 21st
century: New measures of well-being. The region. Federal Reserve Bank of Atlanta.
June 1994. The source of the
papal quotes.
Lucas, Robert. Lectures
on economic growth. Harvard University Press. 2004.
McMillan, John. Reinventing
the bazaar. Norton.
2002.
Sen, Amartya. Development
as freedom. Anchor. 2000.
Solow, Robert. Growth
theory: An exposition. Oxford University
Press. 2000.
Williams, Frances. Diversity “must be embraced” to ensure
stability in globalizing world. Financial Times. July 16, 2004.
Wirtz, Ronald A. The new (and improved) economy. The
Region. Federal Reserve Bank of Minneapolis. June 2000.
On line.
References
The statistical agency of Kazakhstan. Labor indicators by gender 2003-2010. Online.
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