Our most serious single problem is that a lot of people don't think we have a problem. It's true that we have some unemployment, they say, but the economy is strong. Most people think that if the Gross Domestic Product is increasing we're doing well. That's the mistake I call the Numbers Game.
It stems from the work of Alfred Marshall, who was professor of economics at the University of Cambridge about 100 years ago and who is considered by some to be "the father of neoclassical economics." Marshall helped to develop a radical new concept of wealth first proposed in the 1760's by Francois Quesnay, a physician at the court of Louis XV.[1]
In a day when most people thought wealth could be measured only in silver and gold Quesnay said it was the result of production. In his view the only true "production" was agricultural and he said craftsmen and artisans only modify goods that have already been produced. We think differently now, but Quesnay's insight was the first step in the development of a new view of the world.
Adam Smith took the next step in his classic book The Wealth of Nations, published in 1776. He said the source of wealth is labor and that the wealth of a nation is the material goods that everyone, rich or poor, uses or consumes in his or her daily life.
Unlike Quesnay, Smith included the work of craftsmen and artisans in his definition of wealth but he did not include intangible goods -- such as a singer's song or a lawyer's brief, for example.
More than 100 years later Marshall argued that anything useful must be counted as be wealth, and that anything that people are willing to pay money for must be considered useful. He once summed up his position up with the statement that "a lawyer's brief is just as real as a sack of potatoes."
That statement recognizes a very important principle -- the potential value of ideas and other intellectual goods -- but it can lead to a dangerous fallacy. If two things are equally real some people might think they are interchangeable, but that's not so. Marshall himself did not make that mistake, but others do.
We can see the economic difference between a lawyer's brief and a sack of potatoes if we consider the possibility that in some years either the farmer or the lawyer will produce more than usual. If the farmer produces a bumper crop of potatoes our cost of living will go down. If the lawyer produces more briefs than usual, our cost of living will go up.
The more potatoes we have the better off we are, but too many lawyer's briefs would be a disaster.
The differences between a lawyer's brief and a sack of potatoes are far more important than the similarities but Marshall's idea led to an interesting possibility. If all goods can be measured in dollars and cents then the state of the economy can be measured by one number. That number, which we now call the "gross domestic product" or "GDP" is the sum of the cost of all the goods produced in a year.
But the Numbers Game is not based only on Marshall's idea. Two American economists helped develop it and that's ironic, because both of them saw the fallacy and tried to resist the trend.
In 1932 economist Simon Kuznets worked for the U.S. Commerce Department and, when the US Senate asked for an estimate of national income, he was assigned to prepare it.[2] The number he produced was called the gross national product and, when he presented it to Congress in 1934, he said that it could not be taken as a valid indicator of the welfare of the nation.
The second major contributor to the game was economist Wassily Leontiev of Harvard University, who developed the "input-output" measurement of national accounts that helped the US build the amazing production machine that won World War II. During the war Britain and Canada adopted Leontiev's system and, partly because it worked so well, most of the industrialized countries of the world have since adopted it.
Kuznets and Leontiev could be called the fathers of the GDP but they are not happy fathers. Kuznets' accounts were prepared to satisfy the US Senate and Congress and Leontiev's system was developed to help plan a war economy that was managed by a central government. Neither was intended to reflect or manage a civilian economy, and both Kuznets and Leontiev knew it.
In 1962 Kuznets argued, in an article in the New Republic magazine, that national accounting in the US needs to be re-thought.[3] He won the Nobel prize for economics in 1971, but most economists still ignore his concern about the GDP.
Leontiev, who also won a Nobel prize in economics, also deplored the trend to mathematical economics. In a letter to Science magazine he wrote --
"The King is naked ... but no-one taking part in the elaborate and solemn procession of contemporary U.S. academic economics seems to know it, and those who do don't dare to speak up."
later in the same letter Leontiev writes that --
"page after page of professional economic journals are filled with mathematics formulas leading the reader from sets of more or less plausible but entirely arbitrary assumptions to previously stated but irrelevant theoretical conclusions"
.......and later....
"econometricians fit algebraic functions of all possible shapes to essentially the same set of data without being able to advance, in any perceptible way, a systematic understanding of the structure and operations of a real economic system"[4]
This is the opinion of a Nobel laureate who is recognized as one of the leading lights of economics!
Norbert Wiener was one of the great mathematicians of the 20th century and the inventor of the science we now call "cybernetics." He was not an economist himself but he saw the attempts of economists to use mathematics, and considered them ridiculous.
-- "just as primitive peoples adopt the western mode of denationalized clothing," he wrote, "and of parliamentarianism out of a vague feeling that these magic rites and vestments will at once put them abreast of modern culture and technique, so the economists have developed the habit of dressing up their rather imprecise ideas in the language of infinitesimal calculus ... any pretense of applying precise formulae is a sham and a waste of time."[5]
Scientists and mathematicians know that no one number can tell us much about the state of the economy but the simplicity of the idea suited politicians and the media and, meaningless though it was, the GNP became the standard measure. We now use a slightly different number, the "gross domestic product" or "GDP" but the difference between the two is not significant in this context.[6]
The most obvious problem with both the GNP and the GDP is that they count all money transactions as positive factors, even though some are obviously negative. In 1993 the bombing of the World Trade Center in New York added hundreds of millions of dollars to the GDP of the U.S.A. In 1995 the bombing of the Murrah Federal Building in Oklahoma City added even more.[7]
The "benefits" of the two bombings include the cost of funerals for the 174 people killed and hospital treatment for the more than 1,400 injured, tens of millions of dollars to replace the damaged property and more tens of millions for the investigation and the trial of the men who set the bombs.
A few years later the destruction of the World Trade Center in the attack of 9/11 triggered two wars that have increased the GDP of the United States exponentially. If the GDP were a valid measure, Osama Bin Laden would be considered an American hero.
According to the American Lung Association diseases caused by auto exhaust cost the US $40 billion a year.[8] That's an addition to the GDP, but not one that Americans want. After the Exxon Valdez oil spill, company officials told the world that it had added more than a billion dollars to the economy of Alaska.[9]
Crime and disease both contribute to the GDP but that does not mean we want more of them. In Canada Paul Bernardo, who raped at least 14 women in the Toronto suburb of Scarborough and who kidnapped, tortured, raped and killed two teen-age girls in St. Catherines, increased our GDP by the tens of millions of dollars it cost for the police investigation of the rapes and kidnaps, the cost of medical and psychiatric treatment for the victims who survived his attention and the cost of his trial and the media frenzy that accompanied it.[10]
And he is still contributing because a "special" prisoner like Bernardo needs protection from other prisoners and is very expensive to maintain. If you believe in numbers, Paul Bernardo was and is a productive member of society.
My examples are grotesque but they are real, and they prove the point. Any system that counts terrorist bombers and sadistic psychopaths as positive economic factors is obviously worse than useless.
But if we deal only with numbers, we can't see that. The potatoes that Marshall spoke of are real and so are lawyers' briefs but we all know that we can eat potatoes and that we can't eat lawyers' briefs. With a bit of thought we can see that one is a benefit and the other a cost, but when we count only numbers we don't think about what they mean.
Because we don't think about these things we believe the economists, the politicians and government officials and the media analysts who tell us that bigger numbers are good news. That sounds right, and we want to believe that things are getting better.
THE ILLUSION OF NUMBERS
Belief in numbers is ingrained in our culture. About 2500 years ago the Greek philosopher Pythagoras thought that numbers concealed some kind of magic and even today some people believe in the "magic" of numerology. Nearly 400 years ago the French mathematician Rene Descartes had a dream in which "the angel of truth" told him that the ultimate truth of the universe could be found in mathematics.
In the modern world some people assume that anything that is based on mathematics is "scientific." The numbers may not mean much to us but we assume that others understand them and that people who understand the numbers must understand whatever it is they refer to.
That's the mistake philosopher Alfred North Whitehead called "the fallacy of false concreteness." Because something sounds exact, we believe it is accurate.[11]
An economist who juggles numbers can say thus and so and if anyone questions him he has pages and pages of mathematical calculations to prove his point. Because the math is impressive, few people will question his premises.
But numbers alone mean nothing and, by counting only cash values, the GDP denies the distinction between what educator/philosopher Ivan Illich describes as cost value and use value. In real life something that has limited use may be very expensive and something that is very useful may be cheap.
Consider the relative values of a diamond ring and a glass of water. The ring has great cost value and the water very little, but the ring has no practical value and the water is a necessity of life.
Use value is vital, but in the world of the Numbers Game it is not considered. Our belief in numbers creates a series of problems.
One is that if money is the only measure, then money is the only thing that counts. All other measures -- including truth, honor, beauty, honesty and so forth -- are irrelevant.
That's a problem because we are social animals, and the one thing we all want is the approval of our fellow humans. If the one thing we all approve is wealth, then many people will seek wealth at any cost. In the world of the Numbers Game a person's social position is not based on his or her worth to society, but only on the money he or she can take out of it. A drug dealer can be a folk hero and a professional boxer or hockey player may be considered more important than a poet, a philosopher, or a scientist who develops a new vaccine or a new crop that feeds millions.
And if money is the only measure then things that are free are worthless. Through most of the past century businessmen and governments ignored the use value of clean air and clean water, and assumed that pollution was progress. They also assumed that a tree had more value after it was cut up in a sawmill than when it stood in the forest.
The costs of pollution and deforestation now get lip-service recognition if not real concern, but other economic problems created by the Numbers Game are generally ignored.
One is that goods with high use value often have low cost value, and vice versa. In a society that counts only numbers, the government and the economy will favor cost value over use value.
A millionaire who wants to build a baseball stadium will probably get help from the government and support from private business. A farmer who wants to develop a new crop will probably not.
the Numbers Game pretends that we can measure everything by cost value, and forget about use value. Because we believe that, the truth about our economy is hidden in a blizzard of meaningless numbers. People who believe in numbers can ignore the beggars on our streets, the families that eat out of food banks, the personal bankruptcies and other miseries of a dying economy.
They like to think the numbers are real, and that our falling dollar and the misery they see on the streets are an illusion. In fact the numbers are part of an artificial construct that bears no significant relationship to reality, and the misery we see now is just a taste of the misery to come.
But there is a way out. As we said before, our most serious single problem is that a lot of people don't think we have a problem. If we all knew that we have a problem, we could fix it.
Is that idle dreaming? Maybe, but I don't think so. Human beings are social animals, and the one reward that we all desire is social approval.
If money is the only standard then we must expect that many people will do whatever it takes to get money. If we can set another standard then some, at least, will look to the other standard for their rewards.