GDP: controversies
$this->bbcode_second_pass_quote('', 'A') hurricane destroying thousands of homes would not be counted by GDP, but the rebuilding of those homes would be. A good recent example would be the aftermath of 2005 Katrina hurricane, which is poised to become the most expensive hurricane in history. GDP would capture the rebuilding activity and suggest a rising living standard, but we're only working toward restoring what was lost for the most part.
PeakOil is You
Where does growth come from?
Re: Where does growth come from?
by CARVER » Wed 30 Nov 2005, 12:02:52
GDP (or economic) growth does not equal progress. An increase in GDP does not mean a higher standard of living. So if you are after progress and a higher standard of living, you should not try to maximize GDP, because that does have to be the same. We take into account most things that are 'easy' to measure, and we ignore what is difficult to measure, which in my opinion makes it rather useless. And you should not set GDP targets, because then people will focus on achieving GDP growth instead of actual progress, which could result in undesired behavior. We should use our minds and think things through, instead of just trying to make calculations with an incomplete model and base our actions on what the numbers tell us.
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Re: Where does growth come from?
by Wildwell » Wed 30 Nov 2005, 12:55:32
$this->bbcode_second_pass_quote('Doly', 'I')'m trying still to grasp concepts here. Please be patient with me.
GDP is a measure of the total purchasing power of a country. Is this correct?
My understanding of money is that it reflects the cost of human labour. Gold is expensive because it takes a long time to find (and perhaps also because there aren't that many gold miners). High tech is expensive because only a few people have the knowledge and tools to produce it. Potatoes are cheap because they take very little effort to grow, and they grow in lots of places. It's nothing to do with anything like the "intrinsic value" of resources, but just how easy it is for people to get them. Things that are extremely easy to get, like air, are free.
If the total amount of money tends to grow, even when we correct for inflation, it must mean that one of several of these things are true:
1) Population has grown (more labour available).
2) The levels of employment have increased.
3) Specialized skills have increased (because specialized skills are more expensive).
If we want to move towards a sustainable world, population should stop increasing. The level of employment has an obvious limit as well. So there would be only specialized skills to drive growth. The economy could still tend to grow, but a lot more slowly.
How does the price of oil affect the picture? If the cost of transport increases, a lot of things that were transported long distances won't be profitable to transport any more (think of the famous 5,000 mile Caesar salad). This is likely to cause a decrease in specialization, at least in the short term. It makes sense to be a widget-maker if you can sell your widgets all over the world, but if you can sell them only to your neighbours, you probably can't make a living out of widget-making. So, some people (perhaps many) lose their jobs and the jobs they get eventually are less specialized.
So after peak oil the economy must go through a fairly long period of negative growth, and eventually reach stability or very little growth.
Is this correct or way too simplistic?
GDP is a measure of the total purchasing power of a country. Is this correct?
My understanding of money is that it reflects the cost of human labour. Gold is expensive because it takes a long time to find (and perhaps also because there aren't that many gold miners). High tech is expensive because only a few people have the knowledge and tools to produce it. Potatoes are cheap because they take very little effort to grow, and they grow in lots of places. It's nothing to do with anything like the "intrinsic value" of resources, but just how easy it is for people to get them. Things that are extremely easy to get, like air, are free.
If the total amount of money tends to grow, even when we correct for inflation, it must mean that one of several of these things are true:
1) Population has grown (more labour available).
2) The levels of employment have increased.
3) Specialized skills have increased (because specialized skills are more expensive).
If we want to move towards a sustainable world, population should stop increasing. The level of employment has an obvious limit as well. So there would be only specialized skills to drive growth. The economy could still tend to grow, but a lot more slowly.
How does the price of oil affect the picture? If the cost of transport increases, a lot of things that were transported long distances won't be profitable to transport any more (think of the famous 5,000 mile Caesar salad). This is likely to cause a decrease in specialization, at least in the short term. It makes sense to be a widget-maker if you can sell your widgets all over the world, but if you can sell them only to your neighbours, you probably can't make a living out of widget-making. So, some people (perhaps many) lose their jobs and the jobs they get eventually are less specialized.
So after peak oil the economy must go through a fairly long period of negative growth, and eventually reach stability or very little growth.
Is this correct or way too simplistic?
Too simplistic!
GDP is a measure of economic activity. Purchasing power would relate to inflation. If a country gains 10% growth in GDP, after taking out inflation, then there is 10% more economic activity going on.
Money is a reflection of ‘how much the market will stand’, IE the relationship between supply and demand and is nothing to do with labour. The relationship between supply and demand is reflected in PRICE, or the going rate of exchange. However not everything is reflected in price, for example external costs. And easy example would be a farmer growing crops, using agro chemicals, pollutes a water course because of the run-off of chemicals from the land to the river. Further down stream a water company extracts the water for a town’s supply and has the additional cost of cleaning up the water for human consumption. Yet, the farmer doesn’t (normally) pay for the cost of his pollution to the water company; therefore his activities have produced external costs.
In short economics is the science of scarcity, and the balance of needs and wants.
Labour would relate to the factors of production and the relative inputs and outputs to produce goods and services.
Money comes in many forms such as credit notes, bank notes, gold etc
It has three main functions:
- A medium of exchange, so buyers and sellers can trade
- A unit of account. So everyone knows how much things are worth compared to money. EG what the going rate is of a loaf of bread, new car etc
- A store of value. Obviously you can save it to pay for things in the future. Whereas in the barter system for example, storing a loaf of bread, goat etc presents problems.
Inflation determines the usefulness of money. Measures of liquidity describes how easy an asset can be exchanged for money – money is VERY liquid, more so than gold for example or cheques.
It is important to note too much money supply leads to inflation as it downgrades the purchasing power of people using money. However it should be noted there seems to be a link between real GDP and money supply.
How does oil affect the picture? Through transportation costs in the main, but the price of plastics or construction of roads might vary.
However, it must be remembered that transport is there to allow the economy to happen. Now, another concept that affects all non-private transport is the seat load factor. IE How many seats are occupied in a plane, train, bus etc.
All companies have unit costs, EG how much it costs to run a plane form A-B, how much does it cost to make a loaf of bread. The seat load factor leads to how much profit (or loss) you make. For example, although it depends on the airline, generally if a plane is less than 70% full it is making a loss...from what I understand train is nearer 50% and bus 30% because of lower unit costs. Obviously with the rising costs of oil the unit costs would be increasing, however, the most important factor is: Can the unit costs be covered?
But it gets more complex, transportation tends to have a lot of external costs (which are not reflected in the running costs) and has relative advantages/disadvantages in terms of speed and flow and attractiveness, flexibility, which dictates the ‘price’. IE the relationship between demand and supply and the unit costs, some of latter might not be accounted for as they are external and paid for by someone else.
For example a bus might use less energy than a plane, but it is relatively slow, possibly not as an attractive way to travel – a lot of which is based on perception, which dictates value and indeed price. IE, it might be cheaper for Fred to travel on the bus, but he prefers to take his car, so the bus company might keep fares low to appeal. This is related to the ‘elasticity of demand’. If something is elastic, the price quickly affects demand. Oil is inelastic because people generally need to get to work and shop, especially is society is set up around cars. However at some stage they will switch to walking, cycling, and bus travel or not travel at all and a car firm well sell electric cars. A lot of car travel is extremely discretionary. People tend to travel a lot further than the need to and replace walking and bus travel because human nature tends to lean towards doing things ‘the easy way’. So I guess this is why Peak oil is controversial.
External costs make it more complex. Planes produce a lot of external costs in terms of noise (proven to affect children development around airports), pollution and climate change. Burning carbon at altitude is more damaging than on the ground. In short the ‘price’ of an airline ticket does not take into account these costs, thereby causing ‘market distortion’. This is why environmentalists get quite upset about aviation, because it’s relatively tax free. Airlines can charge prices than don’t take into account the crop failures and flooding caused by climate change.
On the freight side, it is important to note that truck travel (which is relatively energy inefficient) has enjoyed favourable market conditions for a number of reasons.
1) The road network was generally built with public money
2) The majority of tax to support this network is not from trucks, rather cars
3) Damage to roads is almost exclusively caused by heavy vehicles and mostly trucks. The load on axles causes exponential damage to a road surface, in fact an 8 tonne axle load causes 65,000 times more damage than a car!
So why is the transport industry in so much trouble? Well, not accounting for these external costs and competition. For example, truck company A employs cheap immigrant labour (or foreign labour), overloads his truck by several tonnes, and has an illegal set of tyres and other equipment. Truck Company B is owned by a large corporation, its costs can be covered by other economic activities. Truck Company C is a small owner/driver fully legal organisation.
The fuel protests were generally led by C, because of market distortions.
However, trucks are generally believed to be only covering 70% of their costs in the UK, even with the high taxes (road damage, congestion, accidents etc which are paid for by society/road users in general) putting other forms of transport at a disadvantage.
The biggest change on the horizon is the EU is proposing the INTERNALISE those EXTERNAL costs by 2011 for cars and trucks in the form of ‘road pricing’. So costs could increase for say trucks, but make more energy efficient rail and water more attractive as there is a correction in unit costs. A lot of the scaremongering you see going on with truck strikes is because they want competition corrected in favour of small truckers but NOT in favour of say rail and water, which would lose them business.
In the airline industry, the problems are essentially low prices start-ups, who don’t have pension schemes, large labour costs and have stripped out everything they can (say Ryan Air/South West) competing with ex-state owned or older flag carries whose unit costs far outstrip those by the new start ups, hence they are going bust, and the new carriers are able to offer very low cost tickets based on yield management – a tool used to increase seat load factor based on increasing price as the seats fill out as people pre-book. Really the term ‘low cost’ airlines is a misnomer. In reality although one passenger is travelling for £20 another is paying £200 and covering overall costs.
The economy will not go through negative growth if the transport can be substituted, say people using high speed electric rail instead of flying, or go walking more instead of driving. However the substitution is a complex issue. For example, going back to my previous point, most people prefer their cars compared to buses. Therefore, it would take a relatively large price hike in fuel to get people to shift, by which time the price of tickets may be so high on the bus it goes bust as its traditional users travel less and the seat load factor goes down. However, don’t forget that the government can influence things here by using subsidy, which they do in all forms of transport, even car building and indirectly subsidising fossil fuel. It's also a lot easier for bus and train companies to switch to electric or biodeisel than the private motorist. So, at some stage they may be isloated to an extent from some of the really heavy hikes.
A lot of subsidy is based on less environmental damage/social costs but more usually cost benefit analysis – which is quite a simplistic way of calculating if a road or railway etc is built between A and B how much increased economic activity it will bring. For example, if a new motorway was built between run-down Littleton and booming Parksville, additional trade opportunities would be opened up. Although obviously this is an extremely uncertain science..and CBA is often abused.
So in short the issue is very, very complex and I’ve just touched the surface. I’m not an expert in these matters, I’ve just gleaned this by reading up on stuff so others are welcome to correct anything I’ve put above.
Last edited by Wildwell on Wed 30 Nov 2005, 19:14:47, edited 3 times in total.
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Re: Where does growth come from?
by CARVER » Wed 30 Nov 2005, 13:22:18
$this->bbcode_second_pass_quote('Wildwell', '.').. So in short the issue is very, very complex ...
Exactly. Externalities, it's very, very complex to value and measure everything. There are so many connections. But if you ignore them you will get undersired results. It can lead to inefficiency.
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Re: Where does growth come from?
by Wildwell » Wed 30 Nov 2005, 15:10:18
Well yes indeed. The current cost of congestion alone in the UK is calculated to be £27 billion, that's without accidents and the cost of lost GDP with key workers being injured or off work.
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Re: Where does growth come from?
by EnergySpin » Wed 30 Nov 2005, 15:33:45
The problem with the GDP is that it puts everything in the same basket.
So let's say you embark on an ambitious energy infrastructure program which infuses the economy with 100 billion pounds and an equally ambitious prison building program for the same amount of money.
Both will raise the GDP by the same % (Everything else being equal) but which society would you rather live at?
Note that GDP was a pretty good measure when John Maynard Keynes forced it to the world's economies ..... but we should be looking for different indices.
WW is right in the sense that one can have an expanding service economy with a limited material basis.
For example car ownership could very well go down while the access people have to cars remains constant. They key is an IT/finance scheme which "leases" cars for the duration of their use.
Take my case for example ... I owned a Ford Focus and in the year I had it (before giving it to my bro) I drove 2000miles (3200 kms) . 2/3 of them were in 2 pretty length trips ... and the rest of it the usual stuff. The car was sitting idle 23 hrs a day!!!
It would have been more efficient (in terms of energy and materials) to have public transit available (for the 1/3 of my car-miles) and reliable car rentals for the other 2/3. It would have been much cheeper for me and would have ensured jobs in the "Car-service industry" rather than the "private auto industry" .
Such an economy could keep expanding (not for ever but for a long time) to accomodate different types of services.
Before we could make such an economy a reality we need to ensure that IT (especially collaboration technologies) are out there. We really do not need to show up for work the same time, the same day. Stacking the work schedule could even help people with day-time jobs go shopping or go for a coffe with friends in the am rather than squeezing everything after 5. Tele-commuting would also do fine (even though it is impractical for my work).
So let's say you embark on an ambitious energy infrastructure program which infuses the economy with 100 billion pounds and an equally ambitious prison building program for the same amount of money.
Both will raise the GDP by the same % (Everything else being equal) but which society would you rather live at?
Note that GDP was a pretty good measure when John Maynard Keynes forced it to the world's economies ..... but we should be looking for different indices.
WW is right in the sense that one can have an expanding service economy with a limited material basis.
For example car ownership could very well go down while the access people have to cars remains constant. They key is an IT/finance scheme which "leases" cars for the duration of their use.
Take my case for example ... I owned a Ford Focus and in the year I had it (before giving it to my bro) I drove 2000miles (3200 kms) . 2/3 of them were in 2 pretty length trips ... and the rest of it the usual stuff. The car was sitting idle 23 hrs a day!!!
It would have been more efficient (in terms of energy and materials) to have public transit available (for the 1/3 of my car-miles) and reliable car rentals for the other 2/3. It would have been much cheeper for me and would have ensured jobs in the "Car-service industry" rather than the "private auto industry" .
Such an economy could keep expanding (not for ever but for a long time) to accomodate different types of services.
Before we could make such an economy a reality we need to ensure that IT (especially collaboration technologies) are out there. We really do not need to show up for work the same time, the same day. Stacking the work schedule could even help people with day-time jobs go shopping or go for a coffe with friends in the am rather than squeezing everything after 5. Tele-commuting would also do fine (even though it is impractical for my work).
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Re: Where does growth come from?
by MonteQuest » Wed 30 Nov 2005, 20:36:40
$this->bbcode_second_pass_quote('EnergySpin', 'T')he problem with the GDP is that it puts everything in the same basket.
Exactly. The point I have been driving home about conservation.
How much of GDP is wanton, superfulous consumption and waste?
In the USA, I would guess a lot.
Conservation cuts, say 20% out of the consumption. (Just to use a figure)
A 20% drop in GDP would put someone out of work or out of business , right?
Conservation has a price; reduced economic activity.
Someone has to absorb the loss. That cut consumption is somebody's livelyhood.
We need to conserve, but we need to spread the impact evenly.
A Saudi saying, "My father rode a camel. I drive a car. My son flies a jet-plane. His son will ride a camel."
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