Tag Archive for 'GDP'

Why do we need money?

Here’s a question for you: if I was to give you money for reading this post, what would you spend it on? $100,000 to be exact. Imagine what you could do with that money? Now hold that thought, because I’m going to ask you again after you walk through this thought experiment.

Our economic system is designed to make us think that making more money is a good thing. Society is measured on GDP which is based on the concept of aggregate demand. What we spend reflects what our demand at all price points are for the good and services in an economy, thereby allowing economists to measure the value of the economy (or better said, to price the value of gross domestic product). So if more aggregate spending makes a bigger GDP, then more personal spending is considered wealth.

And bingo, that’s why we have a materialistic society. But without going into the value judgement of that, let’s dig deeper. Because to spend, it means you need money. Money you generate from an income. (It’s why you want that pay rise.) The more money we can make, the better off we are…we are made to think. Because after all, more money means more spending. And more spending results in a enthusiastic nod from the economists that society has a more valuable economy.

Let’s break this down now: what is money? When it all boils down, money is an agreement in society, to represent value (because money itself has no real intrinsic value outside of the raw materials). Therefore, with money, you can exchange that value with something else of value. Which brings me to the question behind this post: what value does money allow us to purchase?

I mean, buying a car is value — but what are we really buying? It is the convenience enabled by this transportation? It is the dignity generated from being associated with an asset?

What value does money purchase?
As humans, we are governed by two instincts: survival and procreation. If we lived in caves with no food stores, we would spend every waking hour trying to generate sources of food. And because all living beings have a life cycle that eventually ends, we’ve developed an instinct in procreation, which I believe is ‘survival’ in a different sense: of the genes, the kind, the species we are. These two instincts are at the core of value that we purchase with value, but there’s more.

We no longer live in caves. We’ve freed ourselves from this burden of daily food generation to enable our being — which in itself reflects a fundamental concept, which is “time”. Significant, because we remove this burden by purchasing time — we go to restaurants and we purchase tomatoes from the super market, buying outputs from the labour of other people who did what we would have done ourselves (what’s stoping you from growing a tomato in your backyard?). But what’s even more significant, is that as we generate value elsewhere in society so that we can then purchase other people’s time (which we would have otherwise had to do ourselves), we end up having more available time. And humans then ask: what next?

Given we have senses in hearing, touching, seeing, smelling and tasting — by activating our senses, we give a sense of purpose to what we do with our available time. Which is why we seek an ‘experience’. The pursuit of experiences give us, at their base level, a sense of sensory fulfillment.

I believe a final super-category outside of survival, procreation, time and experiences  is power. Because without power, we cannot control our behaviour. We cannot determine how we use our time. Power enables us to shape our environment in a way which further aligns with our goals in survival, procreation, and stimulating our senses. Without power, we can’t use our time. Freedom in my eyes — one of the key dimensions to success in life — is a combination of time and power: the ability to do what you want whenever you want.

Applying those thoughts
You go to the doctor to ensure you are healthy: that’s survival. But you go to the dermatologist to clear that awkward (but harmless) skin imperfection on your face: that’s your desire to remove an impediment to your status in society, which amongst other things, can impact your ability to procreate. You purchase a car so that you can experience more in life, buy time so that you can do more, and give you a rush due to the sensory excitement of driving — but potentially also to have status which will lead to better procreation opportunities.

In my eyes, of all the things I mentioned above, the ultimate of all value is survival and procreation. To say purchasing time is the ultimate, is not true because it’s simply a means to an end. But time, despite this, is probably the most significant of all the factors for what we purchase. If you dedicated you life to one goal, arguably you will be able to get access to that prize. But it could take years, require other people to assist — purchasing access provides value. Think of how advertisers purchase space in publications: they purchase access to an audience that has taken many years to develop by the mast head. (But if the company, like how Apple has, invests in building its own brand and audience — the need to advertise and access those audiences becomes less necessary.)

I mean hey, who needs to purchase more time when you can survive, procreate, and have your senses stimulated with the power to do so as you please? Well, of course we wil always feel like we need more time: because we will never get enough of a good thing. And which is why time dominates our purchasing decisions.

What do we need money for?
Now let’s me ask that question again: if I was to give you $100,000 for the labour you went through to read this post — what would you spend it on? And when you’ve answered that, is money necessary for you to achieve that?

If money is the goal in your life, then maybe you’ve drunk too much cool-aid from the economists who have mistakenly identified the basis of aggregate demand. Which is done on the assumption that humans have unlimited wants and are only limited in achieving them due to scarcity in supply. And short of disputing the fundamental problem in our society, which is based on an inappropriate theoretical understanding of what us human’s desire in life, just remember this one indisputable fact: money purchases value, but money doesn’t create value (in the ultimate sense).

Benjamin Franklin made the observation that time is money, which as a cliche, is to mean your time is valuable like how it is to making money. I wonder though when he said it, he actually called it out for what it really is.

Misinterpreting Kuznets

For years I’ve been thinking that something just doesn’t feel right with the world. It started with when I joined PricewaterhouseCoopers in 2005 and would observe how we’d always be ‘growing’ by 15% a year. Little things didn’t feel right like despite growing, people felt strained; and who cares if we grew that much? Growth in business is justified on the basis of economies of scale whereby the bigger we got the more efficient business was, but fresh out of university, I couldn’t help think about the other side of that theory: diseconomies of scale, where the bigger we got the more *inefficient* we were.  And if we grew, what would that mean? A pay rise? Well, it better because if my salary grew below the inflation rate, I’d be effectively getting paid less. Our society was set up like this never-ending tread mill. Make more money, get to spend more money; spend more money, need to make more money.

Two years I go, I admitted I didn’t know the answer but I knew the end goal was “happiness”. And instead of measuring success based on wealth, I’ve come to appreciate success comes from wellness. We don’t just want an increased standard of living, which related to the definition of wealth, is about the accumulation of capital and generation of income. No, what we human’s want is quality of life, which like the concept of wellness, is about allowing us human’s to be at our optimum.

And I’m not the first to realise that.

The US Congress commissioned Simon Kuznets to create a system that would measure the nation’s productivity in order to better understand how to tackle the Great Depression. Despite this, he immediately said not to use it as a measure for welfare. He invented the concept of GDP to do this, and had this to say in his very first report to the U.S. Congress in 1934: “…the welfare of a nation [can] scarcely be inferred from a measure of national income…”. In 1962, Kuznets stated: “Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.”

Everyone knows GDP has weaknesses. First of all, it doesn’t count the things that can’t be measured. Externalities like pollution, which during my university days a decade ago were justified as not being included in the economy because they couldn’t be measured, simply were ignored in economics as if they didn’t exist. (And thank God Australia is leading the way with the carbon tax, to help correct this fundamental flaw in economics.) But also just as problematic, is the fact unpaid labour isn’t counted.

Why does this matter? Because policy decisions are being made, and it biases activity that can be measured. Spending money on pollution cleanup, is seen as a much better way to operate than preserving the environment which doesn’t lead to income. This simplistic way of measuring not only will divert wealth creation (as true costs are not measured, distorting appropriate decisions), but it also doesn’t discriminiate on the inputs to production so that true quality of life value is created rather than just standard of life which chases income generation.

As this great piece six years ago by The Atlantic states:

Politicians generally see this decay through a well-worn ideological lens: conservatives root for the market, liberals for the government. But in fact these two ‘sectors’ are, in this respect at least, merely different sides of the same coin: both government and the private market grow by cannibalizing the family and community realms that ultimately nurture and sustain us.

I think what we need to do is realise, that wealth creation and its associated metric GDP, is simply one dimension to us being happy as humans. A second is our health, because without being alive and able to enjoy life, then what’s the point? What value is there in society if you’re dead before you get to contribute to it? And so with that, why isn’t life expectancy considered a core part of the measurement of our society’s progress, equal or even above what GDP is?

A third however, is something I know but still can’t place my finger on yet. I don’t know what to call it, other than perhaps the pursuit of happiness. When we manage to feed ourselves and keep a roof on top of our heads, then what? We need to be engaged in the mind, always looking to grow internally. We want to learn and experience the world, and always feel like we are progressing. Life’s a journey to Ithaca, where we “pray that the road is long”. And the science backs this up: our dopamine levels are at its highest at the signal of a reward (as opposed to simply the pursuit and then the actual achievement of it).

This is not me trying to push a solution to a problem that doesn’t exist. The problem does exist and it matters: we’re using growth as a proxy for our progress, and yet damaging the environment that keeps us alive which is one side affect of this approach. Our whole system of measure is GDP growth which is fundamentally predicated on the basis of a rising population, but in the next 50 years we’re going to see the western world’s population stagnate which will de-accelerate GDP growth. What are we going to do when we stop growing? We’re operating on a house of cards.

Most pressingly, we are now experiencing one of the biggest financial crises of our collective conciseness with our political leaders unable to decide or able to execute a solution to get out of the mess. Which is ironic, because the concept of GDP was invented the last time we experienced global economic turmoil.

It makes you wonder that maybe the solution isn’t just action, but an entirely different way to how we see ourselves.