My trouble with GDP. Or, why @UmairH’s #Betterness is one of the most important essays you’ll read this year.
It raises important questions about economics as we know it, and about how firms are set up to create value.
Reading it raised a couple of very obvious points on how we measure value today, and what’s needed to build a better future. For Umair’s take I would suggest reading the book itself, and also dropping by his HBR blog.
What I want to explore here is a key point that’s troubled me for ages now. The notion of GDP, and what our metrics of “prosperity” are based on.
Now, basically, GDP is Gross Domestic Product — i.e. the total amount of output produced by a nation. And GDP/head is a metric that I was taught to use as a kid to compare the prosperity of countries. GDP per person being the total amount of “stuff” produced per person in a country.
What troubles me about this is obvious, I suppose.
GDP per person gives me a number that every person in a country must theoretically consume in order for the economy to break even.
So if the US has a GDP/head of $50,000; it implies that every person in the country needs to be consuming $50,000 of stuff every year for the national economy to break even.
That is, for companies to make money — and therefore to pay the bills, hire employees — every employee needs to spend $50,000, just to keep the cycle going.
Now, if you look at the bifurcation in how firms have evolved over the past 50 years, you’ll see the bifurcation into ideas and executions.
Some kinds of firms leverage innovation and ideas — basically “brands” to make money, and other kinds of firms leverage scale and low cost manufacturing / back-end services to make money.
A similar kind of extrapolation can be made in how we structure employee remuneration within firms.
This altogether accounts for factors like growing income inequality, and then you realize that most people likely don’t have $50,000 to spend on stuff every year.
Which is how you move from (1) industrial to (2) service economies, and then further make the transition into (3) credit economies.
Because if the majority of people can’t spend $50,000 a year, you’re going to have to extend lines of credit to get the “poorer” people within the populace so that they can consume their “required share” of GDP.
But at some point, the difference between debt and equity gets so large for people that they simply can’t be lent to under proper rules. So we move up to the next level of credit economies — welcome sub-prime lending and CDOs.
And today we’re talking about the app-economy, micro-manufacturing, collaborative consumption, as the next stage of the economy.
We should remember that these are all still systems that require consumption. And the right balance needs to be found between profit and value, regardless of which system we choose.
Remember, economies, institutions and firms alike are not structures, they are systems. Which means they are not entities, but tendencies.
The system we have today tends towards maximizing output (corporate/institution-level sales and profits) and maximizing consumption (individual-level consumption).
In a system of limited resources, only one of those can succeed, unless we find the aforementioned balance. And all this against the backdrops of decrepit politics and the challenges of environmental sustainability to boot. I can’t say there are any easy solutions here, but evolving businesses as they exist today is probably not the right answer.
For Umair’s suggestion on how to tackle the challenges of tomorrow, read Betterness. And then figure out how you’re going to restructure the firms you run or work for cognizant of the trap we’ve built for ourselves. I’m going to do the same.
On the non-competitive game theory wiki, there was an interesting quote by Clinton from 2000
“The more complex societies get and the more complex the networks of interdependence within and beyond community and national borders get, the more people are forced in their own interests to find non-zero-sum solutions. That is, win–win solutions instead of win–lose solutions…. Because we find as our interdependence increases that, on the whole, we do better when other people do better as well — so we have to find ways that we can all win, we have to accommodate each other….”
Nice thought, but extending credit lines seems to have been the answer to this, and that’s categorically not it.