Economics for dummies - Part 2

( - and for economists and politicians)

Part 2    What has Value?

When economists, politicians and the press tell us that the economy is going well, and that it is growing, what does that really mean?

The market economy of today is, as we have already seen, based on the assumption that only what can be measured in money in the market is what has value.

This is reflected in how we measure economic status and development by means of the Grand Domestic Product (GDP).

Let us have a closer look. What is included in GDP and what is not?

In other words - What has inherent economical, and political, priority and what has not?

The private sector

In the first place, it is the economic activity resulting from goods and services provided by the private sector of society from different large and small companies and businesses, that contribute to GDP. Their activities generate money.

The GDP does not differentiate between essential products and services and «nice to have» ones, or even directly harmful products and services.

The use of natural resources and commons, including resulting pollution and waste, is also seen as a positive contribution to GDP. Producing products of intentional short lifetime also means a positive contribution to the GDP.

Society has to some degree put regulations to products and practises that are clearly dangerous or harmful. Producing and selling food that obviously results in reduced public health, however, is counted as a positive contribution to the GDP.

The new digital economy has grown very rapidly, and hardly has any limits for growth. Some of the companies providing digital services like, Google, Apple, Microsoft, and Amazon have become the largest companies in the world measured by stock market value. The main source of direct income for these companies is selling advertisements and user data. That means that massive efforts for telling us to buy all kinds of products and services is an important contribution to the GDP.

The new digital solutions, however, also have major effects on society that are not reflected in the GDP. How should we value that very many people get access to useful options that earlier hardly were thinkable? How should we value that many business processes can be much more effective than before digitalization? And how should we consider both the new options, but also the information chaos and questionable effects on society from social media?

Pharmaceutical companies, agricultural companies and entertainment are also growing more rapidly than most traditional industrial companies, as is their contribution to the GDP.

This means that the production of the private sector of society both has beneficial effects and harmful effects. The GDP makes no differentiation between them. Important areas are also left out.

The financial sector

The basic task for the financial sector is to facilitate running business activities, facilitate investments in new projects, research and development, maintenance of human resources, and in short contribution to the long term thrive of businesses.

The financial sector, however, focus more and more on short term profit and speculation hardly related to their basic tasks. It also focuses on financial products making no one responsible.

Both the basic tasks, speculation and financial products are included in the GDP without any differentiation.

The speculation part is increasing rapidly. In many countries the financial sector because of this has become a very important contributor to growth in the GDP. This also further enhances the consequences for society of the assumption that only money matter.

We must have a closer look at the financial sector (see part 3).

The public sector

The public sector is about society’s basic institutions, basic competence, basic research, public services in health, care, and schools as well as all kinds of infrastructure. Well-functioning and competent public institutions and public services and infrastructure are the backbone of a sound society that also provides the basis for the private sector of society.

What results people working in the public sector achieve in doing their jobs providing public services, is of no interest for the GDP. It is only their wages and consumption that are interesting.  Societies have organized different services that might be public (welfare state) or private in different ways. Private services results in higher GDP.

Households

Work and care in the households are not included in GDP. The positive or negative effects of good or bad functioning of households will not affect GDP. Effects can be substantial.

Social bonds, trust, and cooperation

Work supporting social bonds, trust, and cooperation keeping local communities and society at large together and healthy, are not included.

Altogether public sector, households, and social bonds obviously have major meaning for a good life and a healthy society.

For most people, their jobs, and their small businesses, growing GDP is vital if they are left on their own. They are kind of trapped by the economical mechanisms presupposing growth in GDP. Growing GDP means business as usual avoiding the friction and social unrest that more basic changes in society may lead to. It is taking the easy way out.

Society, however, altogether has muscles to make changes taking care of individuals and communities in processes of change that look behind simply everlasting growth of GDP. We must look at the sectors discussed above and their real contribution to a good life for all and a healthy society. GDP and growth in GDP alone, gives very limited meaning.

Such processes of change in society are political. They cannot be solved by market economy alone.