Economics for Economists

Although few economists might operate a business, they are nevertheless familiar with the concepts behind the well-honed financial tools used to measure and monitor the health and operation of a commercial enterprise. These monetary tools have been developed over many centuries to illuminate the inner workings of an entity whose sole purpose is to take in more money than it expends.

Assets, sales revenue, expenses, profits and losses are measured in great detail by the suite of financials which include:

  • Cash flow
  • Profit and loss
  • Income statement
  • Balance sheet

These outline financial performance over a specific period of time which indicates the trend in business efficiency and profitability. A costing system is more or less a real time representation of the production process and optimizes the fine-tuning of the production process and investment decisions. Possibly a costing system is the closest thing the financial world has to a biophysical model.

With a few caveats, these measurement instruments provide real operational insight into the complete workings of the business and are all the analysis tools necessary to assure its long term survival. That is because the lifeblood, assets, output and goals of the business are all measured in dollars.

But the world of economics is different

The primary tool of the economics world is Gross Domestic Product. GDP captures the value of all the goods and services in a society that have been exchanged for money. It sounds similar to the financial tools used for a specific business but beyond the use of dollars as the medium of exchange, the similarity stops.

The GDP system of national accounts was created to monitor the commercial economy so that an equitable tax system could be established. Its creators, Simon Kuznets was the foremost in the USA, warned specifically and emphatically that the GDP metric should not be used as a measure of economic or social health or used as a tool for national policy development.

The welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GDP.
Simon Kuznets

Being a cash flow metric, GDP can’t distinguish between productive and unproductive efforts. It doesn’t flag any change in social assets, much less environmental ones. Disasters such as hurricanes show up as positives due to all of the paid work they generate, with no accounting for the destruction of public and private assets they involve. Ditto small wars, cancer and traffic accidents, etc.

These events are all “good for the economy” according to the GDP metric which also provides no warning that problems may lie ahead. How would one possibly infer from the graph below that we are now into an era of climate disruption and resource depletion?

Climate, resources, inequality, wars, plummeting fertility rates, debt, deficits; no problem here! The economy is doing great.

It is wonderful to have a high-functioning commercial economy but we need to understand that it is but a small portion of the social and environmental infrastructure that allows humans to maintain sophisticated societies.

The commercial economy is a subset of human society which is a subset of the natural world.

Seeing the complete picture

The biophysical world in which we live is far more complex and extensive than the GDP metric can possibly represent. Biophysical economics – the study of the physical flows and energy within our biosphere – can guide national policy in a way that commercial economics is simply incapable of.

But biophysical economics and social well-being indexes require many different metrics based on different units of measure for which data are difficult to acquire. Conversely, dollars are just so seductively easy to work with.

Our attention is focused on the most immediate and obvious issues such as Covid and climate change.

GDP clearly is very limited in the scope of the information it provides. There is nothing wrong with this as it does the job it was designed to do – monitoring activity in the commercial economy – very well. It is our wide-spread acceptance that GDP is an all-knowing God that is the problem.

For the most part GDP is an excellent tool. However, there is one glaring flaw in the GDP metric and it is a very serious one. In not distinguishing between productive and unproductive effort, it allows monetary Ponzi schemes to thrive. It allows the printing of money and the inflation of asset valuations, principally real estate and stock valuations, to pass as productive economic endeavours when, in reality, they are a tax on the productive by the unproductive.

These schemes divert attention away from the real, productive economy and focus attention on the unproductive pastimes of stock trading and housing speculation. Do you see many ads in the corporate media promoting manufacturing or service startup opportunities? Compare this to the number of day trading, real estate courses and crypto ads.

Picking the Right Tool

It is critical that policymakers base their decisions on the best information and use the best tools to execute those decisions. As a scientist, you have proven, well-grounded tools at your disposal. But as a citizen, you need to be aware that the current tools used to guide our country are completely inadequate and actually quite dangerously misleading. They need biophysical oversight.

Growth is conflated with progress by the Ponzi growth lobby but progress can continue without growth of the commercial economy.

In 1968, Sveriges Riksbank (Sweden’s central bank) established the Prize in Economic Sciences in Memory of Alfred Nobel, founder of the Nobel Prize. The prize is based on a donation received by the Nobel Foundation in 1968 from Sveriges Riksbank on the occasion of the bank’s 300th anniversary. It was not created by a scientific council.

But although scientific methods might be applied within the field of commercial economics (termed “business accounting” in Russia), economics is clearly not a science as it allows itself to influence national decisions far beyond the scope of its abilities or relevance.

Science is self-correcting
Commercial Economics is self-corrupting

Commercial economics is a great tool for analysis that stays within the bounds of the commercial economy. When it strays beyond this realm it loses its relevance and become dangerously misleading.

Economists need to stand up and declare the limitations of their field of study when they are asked to address issues which monetary metrics within the commercial market simply were never designed to illuminate.

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