The case to broaden GDP to GPECS

Gross Domestic Product (GDP) is the leading  (defacto) measure used within macroeconomics as a proxy for performance outcomes of an economy. It is used by economists and politicians of all persuasions to purport economic success. 

For most countries it’s the major measure used to determine social health or wellbeing. If it’s going up, then the general assumption is everything else is improving too. However, it has long been known that GDP is simply a measure of transactions and has severe limitations and in some cases its use is more damaging than not.

Many key goods, including peacefulness, environmental protection , social cohesion, general wellness and family bonding, are not measured in GDP because they do not involve transactions. In fact, GDP includes pollution, crime, the health costs of cigarettes and environmental disasters as ‘growth’ because they generate spending.

GDP only counts human activities that involve the exchange of money, without any consideration of the social value of those exchanges, or even the concept of a national wealth. Worse it does not even take into account population growth , so under certain circumstances GDP can be growing while everyone's "slice of the pie" is actually going backward.

For this reason I have come up with my own measure to guide macroeconomic outcomes for an economy, this is something I branded as GPECS.

• sustainable Growth
• Productive gains
• Employment
• social Calm
• Self Sustainability

The reason I use this measure is because it fits my overall ideology of how the economy should support a nation. It is not a "new" idea, more an expansion of drivers of functional finance.

It provides a multi-disciplinary view of macroeconomic policy, which in my opinion gives a far better measure of economic success than any single metric can.

For example, the misrepresented Keynesian idea that digging holes and filling them back in or building bridges to nowhere fails the GPECS test. It may create employment and social calm, but unless those holes and bridges are needed to increase productivity then it fails the productive gains and sustainable growth tests. This is why, although I consider myself a chartalist , I am very much against scatter-gun stimulus programs.

So what are the key markers of an economy with a high GPECS rating? Well you would hope to see the following:

• Low growing real household incomes;
• Low levels of inflation;
• Improving productivity;
• Relatively low levels of private sector debt with business investment making up a large proportion of credit.
• Low unemployment;
• Low crime rate and high well-being metrics;
• Fiscal policy that provides equity to the citizenry and captures sovereign wealth.
• Long term investment that removes external national dependencies (see below).

GPECS will be talked about more in future posts, but just to clarify a few definitions above. 

Productivity

Productivity is the key to greater wealth, as an individual, a nation, and a world. Productivity is doing more with less. It is that simple. Unfortunately people often equate productivity with economies of scale and population growth, which leads to a poor understanding how economic growth really occurs.

If a farmer selectively breeds his crop so that the next generation of plants yield 5% more grain, with no further inputs required (no more water, fertiliser, harvesting time etc), then he has made a 5% productivity improvement. The output in terms of grain is 5% higher for the same inputs.

Productivity gains flow through the economy, allowing us to produce more goods over time. When other farmers follow this lead, we find that marginal land can now be used productively. We find that fewer people need to work in agriculture, because each farmer is producing more food. This frees up labour to be employed elsewhere in the economy, producing other goods to satisfy our desires.

Productivity gains normally come from two sources. The first is in the form of new inventions and innovations in the methods of production – a new engine design, a new breed of plant, a new manufacturing technique or a new material. Innovation in the methods of production is THE key driver of our prosperity.

A second way that productivity improves is through economies of scale. Even in the absence of new technology or innovation, we can produce more output with less input by specialisation of labour, and larger and more efficient capital equipment, to achieve economies of scale

So in an economy aiming for higher production you would expect to see a number of key things:

• Incentivisation in the tax system to support business investment in research and development, and therefore a proportion of business profits being re-invested to support greater production.
• A high proportion of private sector debt being used for business investment in non-financial assets.
• Key economic metrics targeting output per unit worked.

External national dependencies

A national dependency is a key input into the economy, the clearest example being energy. A country that is dependent on another nation, or a group of other nations, to provide key economic inputs is always at risk of external shock. A fundamental driver of long term economic success is the removal of these externalities either via developing their own internal capacity to deliver them, or developing alternatives via research and business investment.

The king and his coins

Imagine you are the king of a country of a million people. Your aim is to protect your countrymen and ultimately make your country a stronger, wiser, and more successful nation. However to do this you have estimated you need to keep a standing army of 50,000 men. In order to feed, house, arm and cloth these men you need to acquire all sort of services including farming, building and manufacturing services all of which would take significant resources away from your army’s core function, protecting you and your country.

Being a smart king you come up with an ingenious plan.

Firstly you explain to your people that you will provide them with protective services, attempt to better their lives and enforce the rule of law, but in return you will require some of their services. Secondly, at the end of every month you give each of your soldiers 50 small circular pieces of wood with your crest on them and decree two laws in your land. Your first law is that anyone found counterfeiting or destroying your wooden pieces will be judge breaking your law. Your second law is that every person of adult age in the land must return 100 of your small wooden pieces back to you at the end of every year, failure to do so will be judged against your law.

You may now have a sense of what a “token” is in the context of chartalism. Your small valueless wooden “coins” are state money, and by issuing them and then demanding them back under both an agreement to provide state services and penalty you, as the state, have given them value.

In doing so you have created a mechanism in which you can alter the behavior of the populace of your country because in order to get these coins people must first provide goods and services to your army. However, because you have demanded these coins from every adult in the land, people who are not directly providing services to your soldiers would still have to acquire them, directly or indirectly, from someone who has.

Obviously the king needs to make sure that the amount of coins available to the populace matches the price, demand and availability of services. Give the soldiers too many coins then some will probably overpay for services which means the demand for coins will fall with fewer services being provided. Give the soldiers too few coins and the populous will be unable to meet your demands to return them. There is no point throwing people in jail for no reason. So to maximise the effectiveness of this agreement the amount of coins in circulation must be at just the right level to maintain services to your soldiers depending on the size of your army, the size of the adult population and many other factors such as how large the harvest was that year.

There are many implications flowing from this example but to explain the basics of chartalism you really only need to understand one point. If you were concentrating you would have noticed that these coins are valuable to everyone except the king. To the king, the issuer of the coins, they are completely valueless because he can create and issue, or collect and destroy them at anytime. What is valuable to the king is services provides by the populace to his army which will hopefully keep it strong enough to defend him and his people against threats. As long as the king’s populace is satisfied enough with the services he provides measured against the threat of penalty then they will continue to provide services to his army. In that regard the “coins” are simply a mechanism to maintain this trade of services between the king and his people.

This example is the basis for understanding fiat money from a chartalist perspective. Modern society and economics may appear more complicated than the example given however, ultimately, the modern economic landscape is defined by the example above. Yes, there are now commercial banks and wonderful things such as financial derivatives and the like, and yes the services provided by the state have moved beyond just protective services. But that doesn’t change the fact that state money and the legal system are still mechanism that supports a very similar underlying agreement between the federal government and its citizens.

We may have moved on from those wooden coins to something a little more sophisticated, but those thin wobbly pieces of colourful plastic in your pocket serve a similar purpose, although after reading the preceding paragraphs you may now look upon it a little differently.




What you may also think on a little differently is the answer to this question.

Do you think the king cared how many coins he had left over at the end of each year ?