What is measured is improved. Economic progress is currently measured using GDP (Gross Domestic Product) and PPP (Purchasing Power Parity). In this article, we will discuss how the methods of growing GDP and PPP simply grow the debt. We will then describe three alternative measures that grow the economy without growing the debt.
Table of Contents
- 1 Modern Methods of Economic Growth
- 2 Failure of Modern Economic Methods
- 3 Genuine Methods of Economic Growth
Modern Methods of Economic Growth
GDP Grows Through Individualism
A modern joint family of 6 people needs one refrigerator, one microwave oven, one washing machine, one dishwasher, and one each of many such appliances. But if that joint family is split into 3 family units, then each of them needs one of everything. Then the total number of household appliances bought and sold can be dramatically increased.
The question is: How do you break a family into many units without them realizing that it is all being done for improving consumption? The answer is individualism. Children in lower- and middle-class families in Western countries were taught to rebel against their parents, seek independence, and start working earlier so that they can become a separate family unit quicker. Women in lower- and middle-income families in Western countries were incited to purchase washing machines, microwave ovens, dishwashers, and vacuum cleaners by portraying their housework—cooking and cleaning—as demeaning labor.
Individualism was an instrument for generating economic growth in Western countries. The economy grows when you tell people about their rights, how their rights are being denied by others, how women have been denied their freedom by men, and how children deserve to get more from their parents. Just tell people more about their imaginary, non-existent, invented rights. They will start demanding those rights. If those rights are fulfilled, then consumption will grow. If they remain unfulfilled, then they will rebel, start independent lives, and then consumption will grow. It is a win-win option for growth.
Children could be denied their “rights” because they were children. But how would you deny women their “rights” as they were adults? Drive for systematic consumption targeted women toward greater individualism than men and children. One such method of women’s empowerment was making divorce easier and more favorable to the woman so that she had greater incentives and lesser penalties for divorce. In the US, 75% of divorces are initiated by women. The dominant reason cited by women in these divorces is that they feel they are being held back by the marriage and expect more from life.
Since divorcing transfers wealth to a woman, it improves her lifestyle, and cheaply gotten wealth is spent quicker on consumption. Meanwhile, the man is working to regain his previous wealth status just to find a woman who will also divorce the man if he was unable to meet her growing demands. Divorce data bears this out—in the US, 50% of first marriages, 60% of second marriages, and 70% of third marriages end in divorce. The probability of divorce increases with successive marriages.
As the family breaks apart, an overwhelming number of children are living either in single-parent households or are abandoned by the parents in the care of the government. This naturally leads to excessive government expenditure on child care. Similarly, there are expenses for the care of elders and social security for the unemployed. They too are the results of a unified family breaking apart.
If people are not individualistic then divorces will reduce, children will have a home, the elders would be cared for by their children, and there will be a safety net for the unemployed people within their larger families. Divorced women, abandoned children, elders, and unemployed will then not be government liabilities. That will drastically cut government spending, the rising levels of government debt, and the taxes on people paying for others. What family members don’t do for each other is pushed onto the entire society through taxes. How is that a solution? It just makes the government’s burden unbearable. But all this is good news for the GDP. More individual family units, less sharing, more consumption, more borrowing, greater debt, and even greater demands—everything contributes to GDP growth.
GDP Grows Through Innovations
Reality is too complicated to fit into oversimplified mechanistic models of reality created by modern science. Every single theory created by modern science to date has been indeterministic, which means that everything created using such models will have unintended consequences. Sometimes you get lucky and get a good outcome as a result of unintended consequences. But most times, the unintended consequences are bad. As you try to fix these bad outcomes using a mechanistic model, you again fall into the trap of unintended consequences—which are rarely good surprises and mostly bad ones.
A mechanistic solution to a problem creates new problems, which create the need for more solutions, which then create more problems, and the cycle of problems and solutions perpetuates endlessly. If we combine this with individualism, then a competitive race to create mechanistic solutions to problems ensures that their unintended consequences would be neglected in the race to be first to market, which will accelerate the pace of problems created by such solutions. The person who is early to the market due to ignoring the unintended consequences is rewarded while the person who is late to the market due to worrying about unintended consequences is punished. The market rewards the careless and punishes the diligent. As this process normalizes, the number of unintended consequences grows.
People call this innovation. It grows GDP because for every solution there is a new problem precisely as a result of using an indeterministic mechanistic model of reality. Innovation creates new jobs because for every solution there are always more problems to be solved. However, eventually, we run into two issues: (a) most solutions for unintended consequences have so many problems that it gets harder to solve them, and (b) the alternative of discarding the previous solutions and starting from scratch (called disruption) becomes extremely rare because we have to throw away the previous solution to reap the benefits of the new solution, but the costs of such replacement are greater than its benefits.
This is called the Law of Diminishing Returns—as time passes, better solutions are harder to find, and the gap between the cost of a solution and its benefits diminishes. The GDP which was previously growing rapidly now begins to decelerate. Over time, the cost-benefit curve of innovation becomes negative. That means, there is no incentive to innovate because the solution is overall worse than the problem.
Many people talk about how innovation and disruption lead to GDP growth. But we don’t find anybody talking about how to produce economically viable innovations and disruptions. Nobody talks about the scenario when innovation and disruption stop because every solution is worse than the problem. Even if long-term benefits of the solution exist, short-term costs and losses hinder it. As innovation stops, new problems and solutions are not created, people go underpaid or jobless, and the economy crashes.
GDP Grows Through Indebtedness
Individualism creates demand and innovation creates supply. However, since supply is always behind demand—after all, you must have something to buy before you can buy it—therefore, lag between supply and demand has to be plugged by the investment of effort, time, and resources. These cost a lot of money, which is when the role of capital becomes extremely important to produce GDP growth.
The necessity of capital to plug the gap between supply and demand produces a financial industry of banks, stock markets, bond markets, stock and bond brokers, instruments of investment that package together stocks and bonds, and so on. This financial industry is then treated as a contribution to the GDP. In the initial phases, a little time, effort, and resources lead to innovation, generate demand, and result in GDP growth. Over time, as the pace of innovation slows—because it is harder to find cheaper and better solutions—one has to pour more money to grow the GDP. This is when the financial industry grows rapidly precisely because the main engine of growth in innovation is continuously declining. Even a small innovation generates a lot of market hype and investment because everything else is worse.
Even as this money is poured to buy effort, resources, and time, the rate of innovation is falling, and all the financial investments made to generate disruptive innovations only produce a diminishing return. Any investment into innovation comes either out of past savings or future debt. If investment gives no return, then either the past savings are destroyed or future debt is accumulated. The extra money poured into the innovation now results in inflation—i.e., more money is needed to buy the same goods. Inflation naturally reduces the capacity to repay the debt due to the decreasing return on investment.
This is called a debt trap—prices are rising as the repayment of debt is falling. Under a debt trap, there are only two scenarios—(a) either the lender goes bankrupt, or (b) the borrower goes bankrupt. Either of these scenarios entails the other because if the borrower goes bankrupt, then he cannot repay the lender and the lender goes bankrupt. Likewise, if the lender goes bankrupt, and the borrower has wiped out his savings, then without the lender giving the borrower money, the borrower is also bankrupt.
Financialization of the economy means continuously investing in innovation through debt, pushing the burden of the debt to the future, under the misguided assumption that innovation will always come through such an investment. As innovation slows, investment in innovation increases, the debt grows, and the returns decrease. Most people taking debt have already wiped out their savings. They are all growing the debt, borrowing from the future, and hoping that investment will grow the GDP.
Debt is the answer to the problem of individualism—government borrows for child care, the care of elders, and social security for the unemployed. Debt is the answer to the problem of innovation—businesses borrow to innovate which doesn’t produce proportionate innovation. Debt is the answer to the problem of inflation—people have to borrow money to survive. Thus, every problem becomes more debt because debt is used to postpone the problems of individualism, innovation, and inflation.
Failure of Modern Economic Methods
Current Ways to Size an Economy
Two methods—called GDP and PPP—are presently used to “size” an economy, defined as the monetary value of transactions between buyers and sellers, neither of which is an accurate measure of prosperity. Let us try to understand the distinction between GDP, PPP, and prosperity through an example.
The cost of insulin for a diabetic in the US is $210 a month, while it is $50 in India. If the same number of people were using insulin in the two countries, the contribution of insulin to the GDP (Gross Domestic Product) of the US would be 4x that in India. But if the measure of prosperity is consumption, rather than the money paid to consume something, then, the alternative measure called PPP (Purchasing Power Parity) can size the economy based on consumption rather than the price of consumption. Then, the notional contribution of insulin to India’s GDP would be 4x because it is being measured in $.
GDP and PPP often diverge significantly for all countries except the US because the economies are being sized relative to the US $ (owing to the US $ being the global reserve currency). For instance, India’s GDP is currently at $3.4T but PPP is at around $11.7T. In comparison, the US GDP and PPP are both $30T. The PPP value (i.e., the value by consumption rather than the price you pay for it) is over 3x of GDP.
Now, imagine a scenario where people did not have diabetes, and hence did not need to buy insulin. Without diabetes, the US GDP will contract 4x faster than the Indian GDP. And yet, this declining GDP and PPP would be greater prosperity because we do not need a solution to a non-existent problem.
GDP, PPP, and prosperity do not correlate because (a) an increase in GDP is not always an increase in prosperity, and (b) a decrease in GDP is not always a decrease in prosperity. By artificially inflating prices, one can grow the cost of consumption while worsening prosperity. By removing a problem, we can reduce consumption and thereby the GDP and PPP of consumption while improving prosperity.
The Illusion of Growth Under GDP
When GDP and PPP increase due to borrowing, then an illusion of growth is created under which I owe you a million $ and you owe me a million $, factually we own nothing because our assets equal our liabilities, but notionally we can talk about owning 2 million $. We can expand this problem into a debt cycle of three people—A owes to B, B owes to C, and C owes to A—1 million $ each. Factually, they own nothing, but notionally we can talk about owning 3 million $. Each person in this debt loop can spend each other’s money until one person in the loop defaults. If A cannot repay B, then B cannot repay C, and C cannot repay A. If one person in a loop defaults, then nobody can repay and the spending stops. This is how a debt-ridden economy always teeters on the brink of one default leading to total collapse. Until that collapse occurs, there is a high GDP economy. When it occurs, the GDP goes to zero.
This came to light in the 2008 financial crisis in which the banks had (a) insured their liabilities through insurers, and (b) deposited their assets with the insurers. This system of investing in your lender creates a mutually assured destruction scenario. For instance, as the insurers paid the banks the insurance, they became bankrupt, and the banks lost their financial assets invested with the insurers just because they had claimed insurance. Mutually assured destruction is the problem created by a loop of debt. If one entity in the debt-loop defaults, the other entity goes bankrupt, which then bankrupts the defaulting entity. This is why governments had to recapitalize both banks and insurers, thereby, transferring the entire debt burden to the government, as the government inserted itself into the debt loop.
Debt Eventually Kills an Economy
Now, if the government prints money to repay its debt, inflation increases, people borrow more to survive, and which further increases the debt. Meanwhile, innovation is declining, and individualism is increasing, which is also increasing the debt. This is the vicious cycle of debt in which debt becomes the solution to the problem of debt. When the solution to a problem is that problem, then the problem will continuously increase until the day comes when the government cannot repay the debt. On that day, the entire cycle of debt will stop because the lender of last resort has defaulted on its payment.
Many people say that the government can never default; it can go on printing money. This is true. But it is also true that high-inflation currency cannot be used to buy real goods from other countries because nobody wants to hold a rapidly devaluing currency. Endless money printing works if everyone uses the same currency. But in comparison to currencies that are not suffering from the problem of debt, the devaluing currency is unable to purchase goods. If an economy doesn’t have input goods, then it cannot have output goods. Then the GDP goes to zero because the currency loses its purchasing power.
When there is more than one scenario leading to GDP decline, and avoiding one scenario exacerbates another, then it is hard to predict which scenario will eventually lead to GDP decline. It is also impossible to rule out a combination of scenarios leading to such a decline. We can only predict the decline.
Genuine Methods of Economic Growth
Alternative Measures of Prosperity
If we talk about real prosperity, then we have to come up with new measures that depict the true well-being of society. For instance, we can talk about a society that solves problems without creating new ones. That requires a model of innovation not suffering from the problems of mechanistic models. A non-mechanistic solution is not indeterministic and it doesn’t have unintended consequences. Thus, if you solve a problem, you don’t create a new problem, to feed the cycle of problems and solutions.
Then we can arrive at a new measure of prosperity where consumption reduces because there is no need to solve the problems created by previous “solutions”. For instance, a society in which divorces don’t exist doesn’t need to pay for expensive divorce lawyers. A society where mind and body diseases are reduced doesn’t need to pay as much for expensive medicines. That would be a lower GDP and PPP economy, and yet far more prosperous. It has minimized its consumption to the genuine needs, rather than inflating it via unintended consequences. We can call the prosperity of such a society a “Genuine Necessity Consumption” or GNC. A GNC number is greater prosperity than a PPP or GDP number.
Similarly, if we talk about how consumption reduces due to family unity because we need less of everything because of sharing it between the family members, then we will arrive at a new measure of an economy which we can call “Family Necessity Consumption” or FNC. An FNC number is many times the value of a GNC number—because after removing the unnecessary expenses, we can further reduce the necessary expenses by sharing the things being bought between multiple members of a family.
Likewise, if we talk about a society that redistributes wealth through charity, thereby eliminating the excessive concentration of wealth in a few hands, then we can come up with a new value called the “Average Necessary Consumption” or ANC where most of the society is prosperous due to charity. Now, wealth is not concentrated in a few hands to create a high GDP or PPP even as most people are getting poorer. When wealth is distributed in society, it circulates more, creating even more prosperity.
Alternative Measures Create Prosperity
There is a generally accepted fact at present that Britain stole at least $45 trillion from India during the colonial period. They are talking about the GDP number—what the stolen wealth meant to Britain, rather than to India. If we talk in terms of PPP, because prices in India were lower than in other places, then the value would be multiples of the GDP. If we talk about a society that solves problems without creating new ones, then we will get a genuine necessity consumption or GNC which is many times more prosperous than GDP or PPP. If we talk about a society that has joint families, then we will get a family necessity consumption or FNC which is many times more prosperous than GDP, PPP, or GNC. Finally, if we talk about a society that redistributes wealth through charity, then we will get an average necessary consumption or ANC which is many times greater prosperity than GDP, PPP, GNC, or FNC. If people talk only about a $45 trillion GDP theft, they are hugely underestimating it by using GDP as a measure.
If people remain stuck to GDP, then they can never know real prosperity because GDP means (a) creating economic growth by solving invented problems, (b) fragmenting the family by individualism, (c) artificially inflating prices by creating monopolies, (d) concentrating wealth in a few hands so the GDP is increasing while poverty is growing, and (e) solving the problems of poverty by increasing debt so that the burden of our misdeeds will be borne by future generations. Anybody who measures an economy as GDP will be a victim of all these problems, which means that the illusion of prosperity will increase while real prosperity will decline. The gap between illusion and reality will grow, which means that whenever someone talks about the reality of regress, someone else will peddle the illusion of progress.
What gets measured gets improved. If we measure the wrong thing—GDP and PPP—then we will try to increase them, and those behind these measures will also spend their time doing the wrong things to worsen their poverty. If instead, we measure the right thing—GNC, FNC, and ANC—then we will try to increase them, and the artificially inflated economies due to reliance on GDP and PPP will naturally deflate and many current economies that are seemingly low on GDP and PPP will come up on top. Everyone can then focus on improving the right measure to improve their economic condition.
Hiding the Truth of Economic Problems
Implementing genuine economic growth requires a drastic change in the conversation about how an economy grows. For instance, we have to reject the concept of individualism, which then breaks the family, leading to abandoned children, divorced women, helpless elders, and unemployed people, which grows the government burden, which has to borrow and print money, which eventually destroys the economy. Likewise, we have to talk about how a mechanistic model of reality is always indeterministic, always produces unintended consequences, and progressively destroys the ability to innovate at low costs. We have to know how the Law of Diminishing Returns is the economic version of the problem of indeterminism where our costs surpass their benefits and to keep innovating, we have to pump more money into innovation, which then increases the problem of debt and crashes the economy.
The reality is that nobody in economic circles wants to talk about the problems created by individualism. They may oppose the increase in taxes, government spending, and the debt burden. But nobody will say that all this is the inevitable consequence of the breakdown of the family due to individualism. Nobody teaching sociology, economics, or politics at present will ever tell you that GDP is artificially inflated because of high divorce rates. Nobody will say that wealth disparities can be reduced simply by creating united families and reducing the spending on redundant supplies. Nobody will talk about how high levels of personal debt are the direct consequence of individualism breaking families apart, increasing their expenses, and forcing their borrowing, which could be easily reversed through family unity.
Thus, the problem continues because nobody wants an alternative solution. This is the ideological commitment to a flawed ideology. The genuine measures of prosperity—GNC, FNC, and ANC—are based on a moral philosophy fundamentally opposed to individualism, mechanism, and illusions of prosperity. Economists have separated prosperity from morality because they don’t want to face moral dilemmas created by their economic theories. When a moral philosophy is neglected, then the economic theory fails to solve economic problems. If we don’t want to accept that prosperity comes from reducing consumption, understanding non-mechanistic models of reality, creating family unity, and distributing wealth to the weaker sections of society through charity, then the result will inevitably be poverty. Rejection of morality in economics will not solve economic problems. It will only worsen them.