The most common way of measuring how productive an economy is at any given time is Gross Domestic Product, or GDP. It is, in short, “How much work got done”. Work by people, by machines, by nature (such as filling a hydroelectric facility with rainfall to make electricity and boating).
For a very long time, folks have known that GDP “has issues” in measuring “good vs bad” work.
For example, if I go break a window, then someone fixes it, that is an “addition” to GDP. Yet, my net wealth did not go up. I had a window, and I still have a window. As an economy, we have less net wealth. Where before we had 2 window panes of glass (one installed, one as ‘parts inventory’) we now have only 1. Furthermore, the time spent putting in that window could have been used putting a window into a new home instead.
While it’s obvious to the average Joe or Jane that running around breaking and fixing windows does not add to our wealth (and in fact consumes our wealth) the GDP number is blind to that fact.
Then politicians (having taken, if we are lucky, one intro Econ class) look at GDP and ask “How can we increase it?” and commence to hire folks to run around breaking windows…
Mayor Readies Detroit Demolition Plan
Details Come Tuesday In State Of The City Address
POSTED: Monday, March 22, 2010
DETROIT — Detroit Mayor Dave Bing is preparing to unveil an ambitious plan to demolish thousands of dangerous abandoned houses across the city in his State of the City address Tuesday evening.
The mayor has said in the past that the city must be downsized to reflect its loss of population.
One step along that path is to tear down empty, abandoned and dangerous homes in neighborhoods across the city.
Bing To Layout Detroit’s Demolition Plan
The city has $40 million available for the demolition project. As a cost of $10,000 per house, that means 4,000 homes will be torn down.
To find out if your home is in the demolition zone, click here.
Yes, you can “click” to find out if your home is in the demolition zone… Nice of them to provide that service, eh?
The mayor envisions clearing out large swaths of the city that could be turned back into fields or farmlands. The smaller residential areas will allow essential services like police and fire to respond more quickly. Residents still living in those areas that are being cleared out might resist an appeal to have them move.
Brown said the city must be ready for that.
“We could give them a new home in a viable neighborhood that’s worth five times the value of the one they’re living in now for instance but we’re going to have to give people incentives to move into viable neighborhoods,” Brown said.
Even if the demolition program proceeds as scheduled, it will only address housing. The city is also challenged with abandoned schools, businesses and commercial buildings that will also have to be torn down.
Frankly, I lay a lot of this stupidity at the feet of the “Creative Destruction” meme.
Creative destruction is a term originally derived from Marxist economic theory which refers to the linked processes of the accumulation and annihilation of wealth under capitalism. These processes were first described in The Communist Manifesto (Marx and Engels, 1848) and were expanded in Marx’s Grundrisse (1857) and “Volume IV” (1863) of Das Kapital. At its most basic, “creative destruction” (German: schöpferische Zerstörung) describes the way in which capitalist economic development arises out of the destruction of some prior economic order, and this is largely the sense implied by the German Marxist sociologist Werner Sombart who has been credited with the first use of these terms in his work Krieg und Kapitalismus (“War and Capitalism”, 1913). In the earlier work of Marx, however, the idea of creative destruction or annihilation (German: Vernichtung) implies not only that capitalism destroys and reconfigures previous economic orders, but also that it must ceaselessly devalue existing wealth (whether through war, dereliction, or regular and periodic economic crises) in order to clear the ground for the creation of new wealth.
From the 1950s onwards, the term “creative destruction” has become more readily identified with the Austrian-American economist Joseph Schumpeter, who adapted and popularized it as a theory of economic innovation and progress. The term, as used by Schumpeter, bears little resemblance with how it was used by Marx. As such, the term gained popularity within neoliberal or free-market economics as a description of processes such as downsizing in order to increase the efficiency and dynamism of a company. The original Marxist usage has, however, been maintained in the work of influential social scientists such as David Harvey, Marshall Berman, and Manuel Castells.
So, just remember, that when someone talks about the need for “creative destruction” they are leveraging off of a communist idea to justify economic destruction in the hope that better things can be done afterwards. As you know by now: “Hope is not a strategy. -E.M.Smith”…
So we have a large number of folks who have heard the phrase “Creative Destruction” and think it is somehow part of valid economics. That it is more than just a “thought toy” of Marx, Engles, Shumpeter, and Sombart.
But re-read that one key sentence:
“development arises out of the destruction of some prior economic order”
When you hear that, remember that it comes right out of the Marxist play book.
Net National Wealth
There is another metric. Net National Wealth. This is typically phrased in terms of money.
National (net) wealth also net wealth (in Singapore), national net worth, gross national wealth (GNW) is the total sum value of monetary assets minus liabilities of a given nation, also National wealth” refers to the total value of wealth possessed by the citizens of a nation at a set point in time. This figure is an important indicator of a nation’s ability to take on debt and sustain spending, and is influenced by not only real estate prices, but also by the stock market, human resources, technological advancements which may create new assets or render others worthless, national infrastructure and exchange rates. The most significant component by far among most developed nations is commonly reported as household net wealth or worth and reflects infrastructure investment, a figure regularly reported by the Federal Reserve of the US. National wealth can rise and decline, as evidenced in the US following the 2008 financial crisis. In resource rich nations, hydrocarbon reserves can vastly outweigh the value of infrastructure.
In terms of “National Wealth” it is pretty clear that breaking windows to replace them or tearing down functional housing does not add to the nations store of goods and wealth.
(So, for example, why doesn’t Detroit find a way to attract new citizens? Perhaps by having “tax free economic zones” near those empty houses? Then capital would flow in to build net wealth, homes would be desired, population increase and a larger tax base formed… Net wealth would be created, instead of destroyed. Perhaps because that does not fit with the “creative destruction” Marxist dialog?…)
Toward Net Wealth Creation
As a minor aid to politicians who have no clue how an economy works, and less clue about how wealth is created, I’ll provide a bit of a “roadmap” to wealth creation. But I’m not going to focus on monetary counters. I’m going to look at it in terms of “Physical Wealth Creation”. What is the PWC capacity of any plan you put in place? Is it a net POSITIVE PWC, or a NEGATIVE? That is what you ought to be asking. Not “how many windows can we break in a day”…
Things that create physical wealth. Generative / Creative.
These are sectors of the economy that, at the end of the day, result in something you can sell. It’s really a pretty simple question to ask. At the end of the process in an industry, do I have more “stuff to sell” or less?
In many ways, the most obvious. I plant one kernel of corn, and I get 2 ears of corn with a few hundred kernels on each. I have a net increase in “stuff I can sell”. This process is a wealth creating one. (Though, in fairness, one must look at total resources used in the process to see if it was a NET wealth creation. That is why running as a capitalist enterprise subject to profit and loss forces matters. It prevents calling something a ‘net wealth creator’ when it is run so badly that it consumes more wealth than it creates… So planting Corn in the Mojave Desert is not as bright an idea as planting it in Iowa. And using Iowa corn to make gasoline, instead of feed for pigs and chickens, is also not so great an idea; so needs “subsidy”.)
Mining & Refining:
You dig up some rocks, and turn them into something of value. Copper. Iron. Diamonds. Coal. Even just a bucket of salt. At the end of the day, you have something you can sell.
The building, especially of factories and manufacturing facilities, results in something that has increased your net wealth. Building houses, schools, and government buildings is a bit “stickier” as a question. Living in a home tends to consume it (over about 50 years), and a government building such as a Police Station is not exactly going to have a large market. But, in fact, they have a wealth value. They could be reused for something else, if desired. They could be sold. I have an office in my home, for example, and create net economic benefit from that office. But we are starting to see just a bit of the “ambiguity” that creeps in to some of the goods as you get further from the clear cases of ag, manufacturing, mining… Still, at the end of the day, a structure is an embodiment of wealth.
As distinct from the USE of the manufactured goods. At the end of your factory line, something comes out that you can sell. You have created something of worth. It increases your wealth to make more “stuff”. We can “break it down” into sub-categories that have more, or less, total net-wealth creation in them if desired. So, for example, a “Tool Maker” would be at the top of the heap of “net wealth creation” as those tools go on to create even more increase in net wealth. At the bottom of the heap would be Movies and Munitions. Yes, a movie can make a lot of money. Yes, you can sell bullets and bombs for a lot of money. But in the case of the movie, when used, it consumes time that could be spent making added wealth. The creation of the movie is an increase in wealth, but the watching of it reduces wealth, to the extent power is consumed, seats worn, etc.; while removing potential labor time from wealth creation. Bombs pretty clearly reduce wealth in their “consumption”…
So I’d rank them more or less like this:
Writing and Printing (as it comes in two forms – one that increases wealth via knowing how to do things, the other consumes time as a diversion)
Movies & Music recordings production (note: as distinct from the consumption of them)
Consumption goods (such as coke and cosmetics)
This list is just an example, but you get the idea. To the extent our society makes more tools and materials, we have a faster increase in national physical wealth than if we are making weapons and movies.
Power Generation & Fuels:
In many ways one of the most foundational of net wealth creators. It lets us drive all our other tools and factories. So we can drill for oil, use natural gas or uranium to make electricity, turn garbage into fuels. It’s a very long list.
But at the end of the day, you have something you can sell. Especially for fuels, that is obvious. For electricity it’s a bit less clear to see. We can’t see the electricity, but it is real. We in the USA buy large quantities of electricity from Canada. Also, while some electricity is used to drive TV sets and lawn mowers; very large quantities are used for refining Aluminum and building cars.
So power generation and fuels fabrication / refining are key parts of the wealth creation process.
As one of the hardest categories to put in this list, we have “logistics”. Note that this is not just “transport”. Transportation is often an important part of logistics, but transport can also be a country drive to see the sights with nothing to sell at the end of the trip…
Logistics is focused on getting things where they need to be, at the time they need to be there, so that manufacturing (or consumption) may happen. Steel is shipped to the car makers. Actors fly to the filming location. Joe and Jane Sixpack drive to work. The pipeline delivers the natural gas to heat homes, and the natural gas to make plastics.
At this point we start to hit the “need to divide” even more strongly. That same “commuter car” can be used to drive to the beach and play. That same natural gas company delivers a product making material to the chemical factory and delivers the gas that gets burned in the decorative fireplace in the livingroom. So you can’t just put “gas company” here. Only PART of the gas company.
In planing things like rail systems, bus lines, and the other “transportation infrastructure” that politicians like to fund; that distinction is often lost. We get “bridges to nowhere” and even “busses to nowhere” with no one on them and we get airports built near a senator’s home, but not useful for logistics. You simply must ask “Who will move what on this transport system; and is that creating or consuming net wealth?”. It is NOT enough to ask “Will jobs be made?” or “Will construction happen?” or even “Will busses cost less than private autos?”. Those are largely “how many windows can I break?” questions…
A nice “light rail” line that connects lots of free parking near suburban homes to a set of office and manufacturing facilities is part of the “logistics” of getting workers to where they can create net wealth. Empty busses on suburban streets running too and fro and taking 2 hours to carry me to the grocery store are rather useless.
OK, at this point, I think we’ve got enough examples of “wealth creators”. Time to move on to the other extreme.
Things that consume national wealth. Consumptive
This is a VERY large group. Please note that I am not saying that these things are bad, evil, wrong, suboptimal, etc. The whole GOAL of most economic activity is to end up with enough “stuff” left over that you can do more of these things. This is, most often, the “stuff” we really want. It most definitely is a “goods” to go out to dinner and a movie. But, at the end of that night out, you have nothing of value to sell. Your money has gone away to someone else who cooked that meal and ran the movie theatre and cleaned the floors and seats. It was an act of consumption not wealth creation.
So we do want these things. It’s just that if all we do is ‘make’ this class of stuff in our effort to increase GDP, we end up impoverished as we squander our Net National Wealth. You simply can not make an economy out of “these bits”.
As it’s a large group of diverse things, I’ll list some for “flavor” but it simply can’t be an exhaustive list.
Watching movies, TV, plays, entertainment:
We are consuming power and facilities, not creating.
Cleaning, washing cars, janitorial:
Yes, we like things to be clean. But at the end of the day you do not have something of increased value. You have just gotten back to “even” from the negative act that lead to the need to clean.
A similar “getting back to even” if you are lucky. We consume surgical trays of sutures and tubing, drugs and bandages. When you get a broken arm set, or even new eyeglasses, you do not have something of value to sell at the end of the process. As valuable as those glasses might be to you, and as much as they might help you at work, they are simply not an increase in net wealth. (Benefit, yes… but the wealth creation comes AT that job, not from the act of buying glasses). So we consume medical care.
Vacation and Sports:
A much more clear example. Spend a week at the beach. Not much to show for it at the end of that time. Fun, yes. Profitable? Not so much… Watch a football game while drinking beer and having a Polish Dog with Kraut and Mustard. (Health food ;-) as we saw before…) It’s fun entertainment, but at the end of the day neither the fans nor the football team has made something to sell. (As distinct from the process of making a DVD of the game and selling that as a “highlights” disk. So you can see why I make the distinction between manufacture of movies / DVDs / CDs and the performance of the material that goes into them).
Restaurants and dining out:
Pretty clear that “in the end” it’s not an increase in wealth…
Trash Disposal and Recycling:
Yes, it’s a “bad thing” if the stuff stacks up, but not a lot to sell comes out of moving it to the dump. Recycling does eventually result in salable materials, but at a net cost, not a profit (thus the ‘deposit’ on cans and bottles…)
All those hair cuts and nails trimmed. Tanning salons and fitness trainers. All are things we enjoy. All are consumption activities. This is a broad list that includes things like tax preparation, legal services, career advice, etc. They may be helpful to you, but they are net consumers of time and “stuff”.
I’m sure folks have been soaked in the idea of education as “investment”. The notion of “human capital” and of “increasing personal worth”. I’m all for education as a benefit. But just like a good suit and a nice haircut can help me get a job and are not a ‘salable wealth’, so for education. We consume time and facilities. We are kept OUT of other activities (such as mining or making tools) that would increase net national wealth. We hope that at the end of it all we will make more money. But for every MD or JD minted, there are a few tens of thousands of “Liberal Arts” and “Education” degrees issued. Also, “Hope is not a strategy. -E.M.Smith”… So we consume education services and we hope that in the end we can make back more than it consumed… (Don’t like this one? Need I point out the number of “wealth creators” who have founded companies without college degrees? Woz eventually got his, but AFTER he was up to his eyeballs in wealth he created… Don’t get me wrong, my Econ Degree was a nice thing to get; but frankly was useless at work. I’d have created more “net national wealth” going directly to my first job – customer service – out of highschool.)
If it really bothers folks, I suppose one could indulge in a “food fight” over the relative merits of the different degrees and sort them into “wealth creative” and “not”… Engineers vs poets and business majors vs sociologists… I just don’t see the benefit of the food fight. Easier to say “Being an engineer creates wealth, becoming one consumes wealth”.
The Harder Cases
OK, I think the “Generative / Consumptive” contrast is pretty clear.
I just note in passing that governments seem hell-bent on pushing / subsidy for many consumptive processes as “economic stimulus”. We get cities fighting over sports teams and all the restaurant and party business they will bring. (And they forget the net consumption of wealth aspect). We have massive subsidies for “infrastructure” that builds bridges to nowhere and funds busses of empty.
Far less common is funding to increase power generation or to support manufacturing.
Typically, taxes are applied to agriculture (land), production (labor), and manufacturing (profit / capital gains). Extractive / mining industries are heavily taxed.
At every turn, government discourages production of national wealth and encourages the consumption of it. Sometimes via direct condemnation and bulldozing…
But there are some activities that are more “neutral” in character. The don’t create wealth, but just move it around. They are “distributive” or “re-distributive” in nature. There are also activities that protect life, property and wealth. They are not creating it, but are preventing the destruction or theft of it. We would be better off (more wealth creation) if we did not have to spend time and treasure on these things. But we don’t have that choice as much as we would like.
So I add those two “buckets” as well. It would be better to move effort into wealth creation and out of these areas; but you sometimes don’t have that choice.
Internet security and firewall tech
Preventative / Public Health Medicine.
I think it’s pretty clear that A LOT of government money flows into this area. We are in many cases being “protected to death”. Obamacare is being pushed based in part on the notion that the Preventative Medical spending can reduce the money spent on consumption of medical services later. (Note that both the preventive and the consumptive medical care are wealth consumers).
All those “drug crimes” from the “war on drugs”? All those prisons full of folks being fed, cleaned, kept warm and kept unproductive along with all the guards watching them (and eventually getting pensions). Not a scrap of it contributing to ‘wealth creation’.
As it can be sold with the banner of “protection” or “safety”, governments fund much more police and fire service costs than are really justified, IMHO. We need more sprinklers in garages and fewer firemen. More private security agencies and fewer cops on the street. And we need a whole lot less Military Adventurism…
Macy’s and Walmart make it comfortable and easy to “get the goods”. They cut the costs of traveling to a dozen small shops or having UPS deliver to your home. But in the end, all they do is distribute goods to where they are desired. They do not result in more stuff to sell at the end of their process. They do not create wealth, just move it about. While this is a benefit, it is not a creation of new wealth.
Trading does not create wealth. Even a stock IPO does not create wealth. Selling bonds, trading corn futures. The whole lot of it is just moving the wealth around in the form of financial instruments. Insurance too. The massive quantities of money washed through various forms of insurance is just moving money and wealth between different groups of people and sometimes from one point in time to another for the same person ( various kinds of annuity). Real Estate sales too. It’s just redistributing where the wealth is, not making new added wealth.
Taxes and Government Services:
Pretty clearly the government does not create wealth. It takes wealth from some folks and gives it to others as “transfer payments” (social security, medicare, federal retirement pay) and it uses some of the money to buy services (such as road repair or PSA Public Service Announcement advertizing).
In some cases the “service” has a benefit (such as Air Traffic Control), in others, much less benefit can be shown ( various boards and agencies that long ago stopped being of any importance). Does the FDA really make drugs safer than a very strict liability law? Or does it just make the process more indirect? Is that a “protective” function? Or just a transfer of taxes to folks reading drug test result reports? Is the TSA really providing any net increase in “protection”? Even if it did, is that “service” creating any net wealth? Pretty clearly having the “Porno Patdown” does not result in much of value you can sell… In other cases, like Amtrak, you do get a transportation service, but the costs are high and, at the end of the day, it was a consumption of wealth, not a production.
Even things like the Federal Highway System are a bit questionable. I’d likely count them as a net asset. Clearly they can be sold (as many governments have started doing, selling off the taxpayer funded investment to private companies who then charge us to use the roads we already paid to build…) So I’d say that Highway Taxes do result in wealth creation. Just at rather low efficiency. Is it a NET wealth creation? Much harder to say (but I think so).
But when looking at government expenditures, by far, the largest parts are Transfer Payments (medicare, Medicaid, welfare, food stamps, crop subsidy) and Military / Defense. Shortly to include “debt service” as interest on the national debt balloons out of sight and the rest of the medical industry as nationalization proceeds to the inevitable conclusion.
So exactly which of those things create net national wealth? None of them?…
That is, IMHO, the core of the problem.
Government goes out of the way to tax and punish net wealth creation (or even the possession or transfer of it – i.e. death taxes and capital gains taxes and property taxes and…) while at the same time paying large sums to increase wealth consuming activities.
From the local city building sports stadiums, to the wars abroad, to the consequences of the “war on drugs”, to welfare and Medicaid payments, and even to the massive government education industry. All along the way, wealth destruction and consumption are subsidized while wealth creation / possession is discouraged or destroyed.
“Creative Destruction” indeed…
So is there any hope that we can find a way to change the perception that “any job is a good job” and “government must make jobs at any cost” (even at the cost of our national wealth)?
Can we get government to realize that it needs to focus on polices that create wealth, not just redistribute it?
Can we put a spike in the notion that having all the mining in 3rd world countries and shipping all the manufacturing to China and India can leave us with a “service economy” that creates wealth?
Can we stop attacking our energy creation infrastructure and demonizing logistics and transportation?
In the end, can we just get Government to get the hell out of the way and let the productive parts of the economy produce?
Sadly, I think not.
People can be incredibly hard to ‘retrain’, and we’ve got a generation that has grown up thinking that “Creative Destruction” is a good thing, that digging holes to fill them in is “job creation”, and that “service industries” are wealth creators, not just redistributors. I fear it will only be turned around after all the creation has gone, and the redistribution and consumption have wound down the remaining National Wealth. Perhaps, with luck, we won’t have to hit rock bottom before we decide to put a cork in that particular bottle… but a study of other addicts shows that is usually not the case. And make no mistake about it: Our political class is addicted to the notion of “spending to make money and jobs”. If Quantitative Easing didn’t make that clear, and if QE-2 didn’t drive the idea home, then the fact that they are talking about maybe doing a QE-3 ought to make it very clear.
In the mean time, I think I need to see if MY town has a web site up listing where they will be bringing “Creative Destruction” to a neighborhood near me… If only the Feds would have such a place where you could see what they plan to destroy next…
Perhaps after a generational change we can focus on PWC Physical Wealth Creation and not just on GDP as re-distributing the deck chairs on our Titanic Economy.