OP-ED: About time we start using net national income to measure economic success rather than GDP
Tim WorstallBusiness
The Dasgupta Review, being a report for the British government, might seem a little remote from the concerns of Bangladesh.
However, given that Sir Partha Dasgupta, the eminent Cambridge University economist who wrote it, was in fact born in Dhaka there might be some interest.
Perhaps more importantly, the message of the review is one that is of great moment. Essentially, we should not be using the gross domestic product as our economic target.
Much of the reporting about this project has been breathless in how new it is, something that is not true.
Further that it is all about biodiversity and species extinction, also something not true.
What it really is, is the collation, the putting together, of what economists generally already agree upon.
The need for a 600-page report is to provide the argument, the evidence, the discussion, for those who do not already agree.
In this it is very like the Stern Review from 2006, the one generally thought to prove that something must be done about climate change.
Not really, no, what it is, is that evidence of what most economists already agreed was the solution to the problem -- the carbon tax.
A little historical tale from the financial markets. There was a company called Polly Peck which packaged citrus fruits in Turkey.
As part of those process, they would lend money to farmers at the beginning of the season, to be paid off by the harvest.
Inflation was high in Turkey at the time, 50 per cent a year and more. So, interest rates were high too, 50 per cent and more.
Polly Peck reported excellent profits each year because it had just received 50 per cent interest on those loans.
That was reported in the profit and loss account and everything looked wonderful, the share price rose like a rocket.
The problem with this was that foreign exchange rates move, over time, according to the difference in inflation rates.
They were borrowing in Swiss Francs to finance these loans, inflation in that currency was perhaps 1 per cent.
And 50 per cent in Turkey so, logically, we would expect the exchange rate between the two countries to halve (or double, viewed the other way around) each year.
This meant large losses for the company on the exchange rate as well as those large profits from the interest.
Polly Peck reported the losses not on its profit and loss but as exceptional costs (that is, rather buried) on its balance sheet.
So, the company was really reporting excellent profits and also going bankrupt at the same time as the exchange losses were slightly larger than the interest profits.
Dasgupta's point about nature and its economic value is that our current method of counting success is based just upon that income side and does not pay attention to the capital or balance sheet.
We plunder nature, degrading it, to make income and profit and yet we are not noting how we are destroying wealth in the process of creating those incomes.
This is something that economists would all agree upon.
OK, we might well have to cast it into economic jargon but all would then agree. We should not be measuring gross domestic product, instead, it should be net national income.
The domestic/national distinction is between what happens in a place and what happens to the people of that place.
Normally, there is little difference between the two. So too income and production, closely enough they will equal each other. However, the difference between gross and net is essential.
Say that we cut down the Sundarbans because someone wants to use mangroves as firewood.
A strange thing to do but just imagine. We gain the income from selling the firewood -- we can see that as part of our profit and loss or as part of that gross domestic product.
But we have also lost that capital asset, the Sundarbans.
Along with the tigers, the deer, the crabs, the mangrove forests that protect the land from storms and so on.
We really should be including that on our balance sheet. Or, in economic terms, be counting net, not gross.
This is not a new concern in economics, which is why this is the Dasgupta Review -- it is a review of what is already known and agreed, the settled state of the science if you prefer.
We should, as a company, be counting our economic success by looking at both the income for a particular period and also those balance sheet effects of how we are -- if we are -- consuming natural capital.
This is also why several governments -- my native one in Britain, for example -- have been publishing natural world accounts and valuations for some years now.
Because as far as economists are concerned this is the right thing to be doing. It is rolling it all out into the world of politics and public policy that is the concern, not the base idea itself.
When we do this, we do get some odd results. One of the countries consuming its capital is Norway.
Far more than any other European country in fact which is a little odd when we think of how they try to preserve the environment.
But they are living off oil which is indeed a natural resource and they're not making any of it any more.
The thing that amuses me the most about this -- and many other similar ideas -- is that the environmentalists keep telling us that economics does not understand.
That, in fact, we need new economics to take account of the environment. This isn't actually so.
What is true is that within economics near all of the environmental concerns are not only through about but there are plans, good plans, over what to do with and about them all.
The bit that is not happening as yet is everyone listening to what the economists are saying about these very problems.
Sure, we should not be destroying the environment for short-term gain. Everyone is right that gross domestic product is not the right target to be aiming at.
Here is what we should be doing, net national income.
This has already been worked out, it has been known for decades. All we need is people to listen to the points being made.
Tim Worstall is a senior fellow at the Adam Smith Institute in London