The problems with economic activity.
The question arises, is the goal of the economy to provide living standards for the benefit of the people, or must the people sacrifice their living standards in order to benefit the economy?
Bizarrely, as with the example of ‘low wages by design’ in Australia below, it can be the latter, and in voting for the ‘economy’, populations can actually be voting for their own oppression.
In two economies of identical structure and levels of productivity, increased economic activity is positive. However, simply adding more ‘steps’ or intermediaries will increase economic activity. Maximising economic activity is also easiest to achieve in an environment with lower wages, and higher corporate profits.
Economic activity can be such poor measure of productivity, that in fact an increase in economic activity, can even be detrimental to productivity and the average standard of living, and simply lowering productivity will increase economic activity.
Many activities that generate economic activity without any productivity, such as gambling and consumption of of alcohol or cigarettes, are not only against the best social interests of society, but even against the economic interests of all society.
Governments can focus on their own share of the bottom line, as well as the share of prosperity enjoyed by major political donors, even without doing anything to increase or even maintain overall prosperity. This can a ‘growing economy’ where most people to get poorer, and total prosperity is reduced.
Economic Activity Vs Productivity
Economic Activity: The Concept, The Strengths and Weaknesses.
There is a small change between the concept in theory and in practice, as highlighted by the first two explanations of the term I found online.
Economic activity is the activity of making, providing, purchasing, or selling goods or services. Any action that involves producing, distributing, or consuming products or services is an economic activity.Market Business News.
Definition: Economic activity is a set of actions that produce, trade, sell or distribute goods or services with the involvement of monetary transactions. An economic activity groups similar endeavors that provide products or services to institutions or end consumers.My Accounting Course.
The slight difference is the second specifically states the requirement for the involvement of a monetary transaction. While this is a requirement for ‘economic activity’, it is often overlooked that significant and important activity can occur without the involvement of a monetary transaction. The amount of economic activity is in fact the value of the monetary transaction.
Measuring all economic activity totalling the monetary transactions values for all economic activity provides as simple metric that can measure and compare the value of economies. If all else is equal, then if the total economic activity doubles, it can be assumed the total value of the economy doubles.
Another strength, is employment opportunities are created. For example, if no parent is allowed to spend time with their own children between 8am and 6pm, then many childcare jobs would be created. Every economic activity creates employment, but on closer examination, not all employment is beneficial for society, and in some cases can even mean a lowering of the standard of living.
A limitation is that requirement for a monetary transaction, and the use of the value of the monetary transaction to measure the value. Significant productivity can occur without any monetary transaction, and simply decreasing or increasing the size of the monetary transaction does not change the real value of the activity.
For example, if a power company raises prices, then the economic activity increases even if the same power is produced and consumed. While schemes to adjust for inflation can be used in some circumstances to try to compensate for changes in price alone, there is no solution to the reality that the monetary value has at best an imperfect correlation to the value of the activity to the society.
Enemies of Economic Activity Can Be Socially Desirable: Good things can be bad for the economy.
Enemy #1 Unpaid work: Over 43% of work is not counted.
From an economic activity point of view, unpaid work is of zero value.
From this perspective, if you drive your relatives to an activity it is of no value at all, but if you become and uber driver and drive some people the exact same route, it is then part of the economy and an activity that is now economically essential,
In the US, men spend 165.8 minutes per day on unpaid work, and 331.7 minutes on paid work. For women it is 271.3 unpaid vs 240 paid minutes. In total, 45% of all time worked is unpaid.
For governments seeking to grow the economy, and easy path is to simply have work done currently as unpaid work change over to paid work. This increases the economy with no additional work done, but does increase taxes and the chance for corporations to become involved and earn a profit from work currently out of their reach. Despite the bonus for government and shareholders, as there is no additional wealth so individuals are economically disadvantaged, and the impact can also be negative from a social perspective.
For example, if parents spend time with their own children that is of zero value, but when children are in before school care, after school care, or day care, that is economic activity. As an additional bonus, if parents are now with their children, they could work extra hours. Even if the parent is in an economically worse position as they earn less additional income than the cost of care, economic activity in increased!
Further, there if there was a rule that no-one could do their own gardening or cleaning, and was required instead to garden or clean for their neighbours for payment, then each person in the neighbourhood could then do the same amount of gardening and cleaning, but economic activity would significantly increase!
Enemy #2 Efficiency Gains.
Imagine a factory where a product originally requiring 100 hours of labour at $10 per hour to be produced where a new production technique allows the product to now be produced with 20 hours of labour, allowing paying workers $20 per hour. Production cost has fallen from $1,000 dollars to $400 and the company can now decrease prices to increase market share. But every efficiency gain decreases the economic activity! Even if twice as many products are produced and workers have an increase in pay, from and economic activity perspective, every step is a reduction in economic activity.
Enemy #3 DIY
Across the country, their are hardware stores providing people tools to ‘do it yourself’ in place of paying an outsider. The problem is, this often results in projects being completed at a lower cost. It does not matter if more projects are completed, because such projects are all unpaid work that does nothing at all for economic activity.
Enemy #4 Charity Work.
In many societies, people undertake volunteer work to assist charities. For maximum economic activity, this should be banned, with charities requiring only cash to be donated, and then all work could be paid work increasing economic activity.
Enemy #5 Automation and Modernisation.
A society where clothes must be sent to the laundromat will have increased economic activity over a society where people have access to washing machines they can use themselves. The invention of the domestic washing machine, and generally most other appliances, reduce economic activity. The modern refrigerator killed of an industry of producing and distributing ice.
The invention of the loom was a classic blow to economic activity that gave rise to the term ‘sabotage’.
Boosts To Economic Activity Are Often Non-Productive and Can Be Counter Productive.
Boost #1 Paid Non-Work.
An effect highlighting the potential incongruencies of using monetary transactions to determine real value, consider how replacing all free parking at railways stations with paid parking would deliver a boost to economic activity. Simply making people pay more for costs they already incur with no added benefit will increase economic activity.
Now consider if a rule was added requiring all commutes to and from work to travel a minimum distance. With this rule, if you live withing 10km of you place of work, then you are required to travel 10km to a point 10km from your place of work, end that journey, and then being a new commute to your work. Think of the increased economic activity! Those on public transport would have a longer, and more expensive journey, increasing economic activity. Those who drive would require more fuel and generally increase motor vehicle running costs, all driving up economic activity.
In both of these example, people now have to pay more for activities that may be required for work, but that will not increase their ability to get work done, but will increase their contribution to the economy.
Boost #2 Inefficiency.
Another way to boost economic activity is find a less efficient way to do things. Imagine a rule requiring all freight to be transported by wheelbarrow. There would be a boost to employment, and their could even be ancillary business such as production of ice to keep perishable goods cold for the far long period of time required for transport. Even better, some perishable goods would actually perish, raising the price of these goods, and the lower yield would increasing the cost of producing and getting the required amount of goods to market!
There are times when inefficiencies that generate employment can benefit society, but generally there are better ways to invent employment than either generation of artificial inefficiencies or forced conversion of unpaid work to paid work.
Boost #3 Outsourcing.
Companies moving to outsourcing boosts economic activity, as it turns what was previously an internal transaction, into a monetary transaction. The more monetary transaction steps in the chain from raw materials to finished goods, the greater the economic activity from the production of the finished goods. Take a car. A vertically integrated company such as Tesla would generate far less economic activity when producing the same car, than a company that outsources manufacturing, and ideally has the manufacturing plant use subassemblies that are again outsourced.
There is nothing inherently wrong with outsourcing, but does not mean it makes sense to consider operations more valuable solely because they use outsourcing.
Failures in the name of economic activity.
Australia, 2013-2022: Low wages by design.
There are several graphs of how in Australia, corporate profits have been rising, while the share of GDP enjoyed by the average citizen as measured by wages, has been falling.
Of course, as expected, the ‘left’ were shocked and outraged.
Perhaps enough of the population were also upset, as that government lost power at the next election, in the end, should anyone be surprised?
It stands to reason the stock exchange is a measure of the economy, and stock prices are driven by corporate profits, then it stands to reason that corporate profits will benefit from low wages, which will lift stock prices and the economy.
The economy benefits from the people getting the smallest share possible.
Just as Scott Morrison wants to see more women get into parliament (but not at the expense of men) and wants to see housing affordability improve (without house prices actually falling) the prime minister is all in favour of stronger wage growth – but not at the expense of higher profits. Unfortunately for Australians struggling with the rising cost of living, they can’t feed magic pudding to their kids.
The share of GDP flowing to workers has declined steadily since the Coalition came to power, from 53.2% in 2013 to about 50.6%. To put that decline into context, if the wage share of GDP had remained steady since Tony Abbott came to power, Australian workers would be taking home an additional $49bn in their pay packets this year. To put that in perspective, we only spend $51bn on the entire aged pension.Low wage growth in Australia didn’t happen by accident – it’s the system working as intended
Others have also reflected on this:
Overall, I have not found a single example of any reporting which questions the basic premise that low wages benefit the economy, or any suggestion that perhaps an economy that metrics measure as benefitting from the people being poorer needs new metrics.
Japan, 2022: Government promotion of increased consumption of alcohol.
Tokyo (CNN)The Japanese government has been hit in the pocket by an unusual problem — its young people aren’t drinking enough.
Since the pandemic began, bars and other premises selling alcohol have been hit hard by Covid-19 restrictions, causing sales — and liquor tax revenues — to plummet in the world’s third-largest economy.
The government’s solution? Launch a contest to find new ways to encourage young people to drink more.
The “Sake Viva!” campaign, overseen by the National Tax Agency, invites participants to submit ideas on how to “stimulate demand among young people” for alcohol through new services, promotional methods, products, designs and even sales techniques using artificial intelligence or the metaverse, according to the official competition website.
“The domestic alcoholic beverage market is shrinking due to demographic changes such as the declining birthrate and aging population, and lifestyle changes due to the impact of Covid-19,” said the website, adding that the competition aimed to “appeal to the younger generation … and to revitalize the industry.”Japan wants young people to drink more alcohol. It’s just not sure how to convince them
Boosting an economy by allowing people who want to consumer alcohol to indulge: why not? But to try to get encourage people to consume alcohol in order to increase economic activity seems very questionable to me. It is not like Japan is alone in this, as in Australia laws that were proven to reduce hospital admissions and violence were overturned in order to increase economic activity.
Covid-19 And Economic Activity: Highlighting Anomalies.
The Lost Of Output: Lost Productivity.
Lockdowns hit not just the economy, but also hit real productivity the economy hard. Generally, when those who cannot work from home are forced to remain at home, the cost to society is very real, and highly problematic.
Without Loss Of Output: Continued Productivity, But Reduced Economic Activity.
Next is the double edged sword, where there is loss of economic activity, without loss of productivity. Consider the case when some people find they now can work from home. Working from home, even when work is of the same standard, reduces economic activity as:
- There is less travel to and from work, consuming less fuel, and requiring less public transport.
- Some people may make their own coffee and lunches instead of paying others to make coffee for them.
This raises some complex questions as to whether people who have discovered they can work from home, should be be permitted to work from home. On one hand, fuel supplies will lose revenues and some jobs, a percentage of baristas and lunch cafe staff would also lose their jobs, and any loss of jobs is undesirable. But on the other hand, does this mean we should be forcing people to travel even longer on their commutes, as this would increase fuel sales and jobs in transpoer, and result in more meals away from the home creating even more jobs?
Of course the problem with jobs that result from people being forced to spend unnecessary time travelling to and from work is that is simply unproductive, and is effectively taxing the people who are doing the extra travelling in order to transfer part of their money to those in the generated jobs. In reality, if we are going to tax those people who already do have the jobs more, it would be better to also not rob them of their time, and to use the money to fund jobs that are productive, so the wealth of society is actually increased. The problem with Covid-19 is it brough the change too quickly to properly adjust, rather than the change being undesirable in the longer term.
A Jump To Our DIY Future.
An enemy of economic activity is DIY activity, and technology and robotics is taking to the world further to DIY. With ever improving technology and ‘tools’, people can do more themselves.
If you Do It Yourself, then you don’t pay someone to do it. Lockdowns saw a huge increase in DIY. Everything from cleaning, gardening, cooking, making coffees and cakes through to baking bread. This results in loss of income for cleaning services, gardening services, restaurants and cafes, cakes shops and bakeries, but without necessarily anyone going with cleaning, gardening, meals, coffees, cakes or bread. There was in fact a boost in sales of household and cleaning appliances, gardening tools and equipment, cooking appliances, coffee machines, and home break making machines.
Unlike reducing unnecessary commuting, most of the lost economic activity was actually necessary, and simply that which was necessary still happened in moved from paid to unpaid. There is still the reality of lost employment, even if the ability of people to handle tasks on their own shows not all of that employment is really necessary. Some tasks becoming DIY is a genuine replacement, while for other such as food, the result is mixed. Fast food may be no better than what is made at home or simply stops being eat in fast food, but not many people can replicate fine dining.
Still, much of the lost employment that could be replicated by people doing it themselves is a preview of the future, as robotic vacuums, robotic mowers, better automated gardening tools, and every improving household appliances are all targeted at moving more and more tasks to do it yourself.
Addressing Climate Change Harms The Economy, Even If Living Standards Rise.
Moving To Solar and Wind, Has No Good Outcome For The Ecomony.
The two hotly debates possiblies are:
- Either, the unreliability leads to a requirement for a similar level of alternative power generation to remain in place as there would be without solar and wind, so there is more infrastructure to generate the same power.
- Or, use of solar and wind, with storage or widescale grids or other solutions, allows sufficient reliable green energy for enough existing generators to be scrapped, such that costs can decrease.
There are many advocates for both the possibilities. While that the suppliers of fuel to technologies that could be replaced by solar and wind are some of the fiercest advocates for the ‘prices will rise’ argument gives rise to some suspicion, lets for the moment look at both possibilities.
The Problem If Solar and Wind Increases Power Costs.
If costs are increased, then there would be an increase in economic activity. More infrastructure for the same outcome is a boost. You would think this could keep governments happy. However there are some clouds looming:
- Fossil fuel consumption would still decrease, decreasing economic activity.
- Fuel companies and power plant companies would lose profits, and these companies are part of key stock market indexes, and also key political donors.
- There is still the threat of home solar or even wind, completely erasing some power consumption from economic activity.
Despite the potential benefit to economic activity from higher prices, there most traditionally influential parties are disadvantaged rather than advantaged. If home solar or wind could be banned, and it could be ensured that existing power plant companies could own the new energy generation, perhaps if fossil fuel companies could be compensated this would be tolerable, but in the end, even for this option, there are too many ‘ifs’ and in reality the economy would possible look worse even with rising prices.
The Problems If Solar and Wind Decreases Costs.
Of course, from the perspective of the economy, this would be far worse. Economic activity could even decline due to other factors if prices rose, but if prices fall, there could even be deflation and a severe hit to economic activity.
Not only do those same key companies that are part of economic indicators and can play a vital role in political donations suffer a losses in revenue and value, but operating solar and wind requires less operating staff than. for example coal fired power plants, so there could also be job losses.
The Evil “Do It Yourself” Of Home Solar or Wind.
Predominantly home power generation is solar, but wind is also possible. Individuals generating their own electricity changes it from being an economic activity to merely a productive activity. This type of DIY is almost as cruel to economists as explaining how exponential growth must eventually end. Jokes aside, this could remove a significant amount from economic activity, and without adjusting how data is collected, it a strong motivation for some governments to resists. The activity is no longer taxed, does not add to stock indexes or pay shareholder dividends if people generate their own electricity. Most stand alone dwellings and many low rise apartments have the potential to generate all the power they need provided they add batteries. The amount that can be removed from the economy is significant.
Electric Cars Will Lead To Reduced Economic Activity And Widescale Job Losses.
Tesla and Chinese Electric Vehicle factories can build an electric car with 10 hours of labour, while companies adjusting from building internal combustion engine vehicles such as VW need more than 30 double the hours per vehicle. The relative simplicity of building electric cars can transform manufacturing and electric vehicles are much simpler to build than internal combustion vehicles and have less moving parts and less wearing parts.
While in China Electric Vehicles are already available for lower prices than conventional vehicles, in most markets in 2021 EVs are in most categories are still more expensive, however, by 2025, it is expected all electric vehicles will be lower priced than other vehicles.
Further electric vehicles need less maintenance, and last longer than internal combustions vehicles.
Once the R&D costs of the transition start to be recovered, costs in every area go down. Great for the consumer, and even for businesses, but a real hit to economic activity. Job losses will also be very real, especially in Japan where stalwart Toyota warns of 5.5 million job losses and is trying all it can to resist the electric vehicle transition, and instead promoting hybrids which combine all of the parts of both internal combustion and electric vehicles resulting in greatest complexity and the most jobs and highest costs, or hydrogen cars as a delaying tactic.
Does Flawed Measurement Matter? What Are the Alternatives?
What Is Measured Is What You Can Improve.
Successful measurement is a cornerstone of successful improvement. How do you know if the changes you are making are leading to improvement? Simple: you measure. Measurement doesn’t have to be difficult or time-consuming. The key is to pick the right measurements, so that you can see results quickly and adapt your interventions accordingly, putting less strain on resources and more focus on outcomes.Institute For Healthcare Improvement
The same principle applies everywhere, improvement requires measuring what you want to improve. Improving economic activity is not a worthwhile goal for society.
Stock Market Indexes Reflect Only “The Big End Of Town” .
The main alternative measure of economic success is the stock market. Again, as with economic activity, if all else is equal if the stock market rises, things are going well. But as with economic activity, the metric can produce problematic distortions. As stock market indexes are all based on the a small number of the very largest companies results, driving small companies out of business to advantage the larger companies would also drive up the stock market.
It turns out, both these measures of the economy are open to indicating favourable conditions, even when for the average person, things are headed in the wrong direction.
Both policies to maximise stock market indexes, and economic activity, benefit big business who are best positioned to make large political donations over the average citizen.
Wellbeing Economies: A Metric For The People .
Initially: Scotland, Finland, Iceland, Wales and New Zealand.
These countries have worked to finds a more worthy goal. Norway and Canada also have began come onboard.
Instead of metrics better aligned with major lobbyists, there is hope that at least some governments want what is best for the people. And not just hope, action has commenced.
Some societies have realised that chasing metrics in order to further privilege those who can afford to have influence is just not a fulfilling life.
Conclusion: Good News, There Is Hope, There IS A Better Measure For Prosperity
I am not aligned in any way with the wellbeing economy movement, and did not even know of the website prior to starting my exploration of the problems with current metrics and looking for alternatives.
When you do it right, “its the economy stupid” is not just about winning votes by fooling people, but by winning votes by helping people.
- 2022 Nov 11: Added Australia ‘low wages by design’ example.
- 2022 August 21: Added Japanese youth alcohol example.
- 2021 November 30: Added wellbeing economies.