Redefining Economic Growth – The Road Ahead

Brief History:

Long back, a group of travellers were wandering around in search of productive land. Their villages were destroyed in a recent flood. They gathered whatever they could from their houses and abandoned the villages. After a few weeks of search they finally found a suitable land mass where they could dwell and cultivate crops. The band of around 100 villagers quickly start building huts and arranging for basic amenities to make this strange place, their new “home”. Years passed by and the once 100 group of first time dwellers in this city rose to around 10,000 In the beginning everybody knew each other and also who was good at what occupation. Someone may be good at construction, other may be at agriculture or handling livestock, etc. It was mandatory for at least one kid in the family to get basic training in one of the core occupation so that he/she can take care of family later. The kid would grow up to be the house leader and was responsible for any important decision within family in consultation with other adults. This arrangement made sure that no house is left out of growth cycle as at least one member of each house had a representation in the economic system of city.

However, over time this system started facing problems. As city grew in size and population, aspiration of people also went uphill. Although existing system was able to provide a decent life as well as sufficient time for friends and family, people wanted more. This lead to people adopting unethical means to gain out of existing system. The law and order which earlier required very nominal man-power gradually began to demand more. Thus came need of police, judiciary, revenue service, etc. All these additional services essentially didn’t create any value in system but became necessary to preserve a normal environment for society to live and thrive. Over time this system was increasingly adopted into multiple cities across the world.

Introduction:

Fast forward to present times. Today we have a system of economy consisting of multiple stakeholders like government, private player, police and defence forces, judiciary, etc. Each and every entity that consume from the value creation by economy is a part of it. But if we look at the value addition, it is much lower and on a decreasing trend in past many decades. Almost all developed countries in the world spend a huge sum on military spending. In a way it seems appropriate to maintain a line of defence against any external threat but at what cost. Moreover it is the anticipation of threat from other countries which prompt even higher military expense. Within country also a huge sum of money is invested in these non-value creating activities.

According to website www.usgovernmentspending.com , for year 2016 total government spending is expected to be around 35% of USA GDP and out of this only about 35% is spend in education and health sector which create some real value in life of people. A very large amount of remaining is spend on non-value creating activities. Although we measure growth of any country in term of economic growth or GDP growth, we fail to take into consideration what percentage of it is still going to non-value creating activities.

 

Economic growth- Value definition

A very basic principle of science is that matter can’t be created or destroyed. It only changes forms. So when we are talking about economic growth, doesn’t it mean that in absolute sense overall economy “value” remain same. What basically happens is transfer of wealth or “value” from one person’ to another. Wall Street works on this very principle. One person’s gain is other person’s loss. But this is surely no value creation. A value creation activity will be something which can uplift the masses at large and not concentrated to select few. For example, consider invention of electricity. It changes the way of life for everyone on the planet. So much so that now we can’t imagine life without it. But in recent decade we can’t claim any invention which has impacted the life of people at large and truly help raise standard of living for everyone on the planet.

According to popular estimate, the richest 1% of world population holds 50% of world wealth. As per an article published in www.forbes.com , “85 richest people in the world have as much wealth as the 3.5 billion protest”. Imagine the number, it’s roughly 12 times US population. Clearly there is a huge gap between rich and poor and it doesn’t seem to get narrower any sooner. As a result, there is growing retaliation from the poorer section of society whether it is at individual level or country level thus requiring more expenditure in terms of law and order maintenance and defence. Seems like an endless loop, isn’t it. Let’s consider this situation from demand and supply principle. I have some packet of chips which some people want to buy. Now all of them have lot of wealth. My original cost of production was around $10 and even if I get $12-$13, I will be more than happy to sell as it will easily give me enough profit to take care of my needs. However, buyer being rich want to compete on the price for exclusive usage and can even pay $20 to $30 if others are competing for same. Even they are also aware that its cost is much lesser but they can afford to pay more just to get what they want. However, any dollar paid above say nominal $12-$13 is essentially not adding any value. This money can very well be used in other activities and doing so would also keep price in check. After all poor people also need some packets of chips, right?

The above situation suggest that we should fixed price of commodities and no one should be allowed to charge more than a certain limit. But one can argue than that it will give no incentive to people to earn more which will lead to lower production of goods and services. This will incidentally retard growth since there is no point working more when we can’t get more out of that retained earnings. For example if I earn $1000 a month and all the commodities are prices at say fixed premium of 10% , I may get all of them at say $900/ month. Thus I don’t have any incentive to earn more and neither did the producer of those good has any incentive to use innovative methods to producer more since he/she won’t be able to derive any additional benefit out of same.

But this is just one side of the picture. If we look at last century, it is filled with many great discoveries which changed the way of life of masses and not some limited wealthy section of society. Unlike present day innovation focussing excessively on services, back then the focus was on creating tangible meaningful products which can uplift society. Be it electricity, steam engine, telephone, sanitation, irrigation, etc. Humans created machines and process which actually uplifted living standards of society and not merely make it comfortable which seems more as the focus of current service driven economies of the world. Thus one can argue that a lot of economic growth in past few decades has been defined more in terms of non-value creating activities whereas in true sense we might have not progress that much. What we measure as economic growth is essentially the growth in GDP after adjusting for inflation over the years. But this metrics doesn’t take into account what proportion of this growth is on account of value creating activities and how much is actually due to non-value creating activities. If we compare today’s economic growth w.r.t. to growth during early ages like during invention of steam engine or electricity , we can easily deduce that in those times most of the economic growth was on account of value creating activities and that of today’s are mostly due to non-value creating activities. This is analogues to the concept of Theory of Constraint (TOC) proposed by Dr Goldratt. TOC propose that a system can be as efficient as its slowest member popularly called as the bottleneck. In terms of economic growth we can see value added function as the bottleneck function of any system which in this case is economy of any country. No matter how high economy or its growth is, its actual result is only as good as the output of its bottleneck function, the value added function. The other function will be only optimal if we can increase the output of bottleneck function.

Based on the issues so far, it is apparent that there is a fundamental flaw in measurement of economic growth. Since this fundamental flaw has been in practise for so long that it has practically become a norm for common public as well. Most of the people, companies or governments sole focus for economic growth is measure in monetary terms. The softer aspect of growth which mostly add to value creating functions have been grossly ignored. Thus this problem need to be tackle at two level , one at the country level and other at individual level. Here by individual, I am referring to people, companies, or any organization operating in a country.

Value creation at Country Level:

Let’s say you want to by a car worth $20,000. To do so you have to earn this much amount in your job, business, etc. Thus current system of trade doesn’t take into account how that money is earned. But what if government has declared certain activities which are actually value creator and not just another form of service or something which is essentially not creating value. Now the price of car cannot be paid merely by money earned like we do right now. A part of money should come from value creating activities as well. It is possible that some people might be engaged in activities that are not in the government declared list of value creating activities. To cover this, the list should contain certain amount of volunteer or CSR activities, completion of which would be converted into value-money. Thus in effect any item price would be in terms of X amount of normal money and Y amount of value-money. This will prompt industry to work towards value creation and not just plain monetary expansion by any means necessary.

Value creation at Individual Level:

Companies as well individual presently are focused on economic growth based solely on monetary growth. Due to this a common mentality of measuring a person success in terms of money is in practice. Even after government enforce changes as mentioned above the result will only be visible when change happen at individual level. Thus the fundamental belief of “money can buy everything” need to be changed. This will partially be possible based on initiative taken at government level. However status of people and their wealth need to be measure in a combination of value-money and non-value money. Companies can adopt this metrics in their promotion and recruitment scheme as well. The idea is to replace the money-minded mentality to value-money minded mentality in people and companies at large.

Conclusion:

Dalai Lama once said “Man surprised me most about humanity. Because he sacrifices his health in order to make money. Then he sacrifices money to recuperate his health. And then he is so anxious about the future that he does not enjoy the present…..” This phrase very effectively capture the irony of economic growth as well. We have been so much obsessed with economic growth as monetary or GDP growth, that we have fail to acknowledge what value this growth is actually adding to our lives. The solutions suggested are surely difficult to implement but then its results can dramatically improve the way of life as we see it. With option of value-money by volunteer and CSR service, even the poorer section with less skill have a decent shot in earning and buying products. There can be a dramatic decrease in criminal activities as those won’t fall into value-function. Surely there are some problems with this model like how to properly list value-function, how to ensure people stop innovating and start doing CSR kind of activities only, etc. A very holistic discussion in this regard is required to frame a workable policy but the key idea should be intact. We need to create value driven growth and not just economic growth.

Vaibhav Gupta

NA

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