Human Politics – the long read

Wealth and money are not the same

Wealth is whatever allows people to flourish. As well as food, water, shelter and other consumables, it includes good health, effective relationships, a sound emotional state and the rewards that come from thought and feeling – love, creativity, ideas and a sense of wonder. Coupled to this is the time to enjoy all these positive experiences.

Money is a device for storing wealth, although it can only store the types of wealth that money can buy. In general, the wealth stored in money is only released when it is spent, which means that storing too much of it deprives people of the benefits that wealth can bring. There is, however, one exception: saved money provides the real wealth of reassurance and anticipation – the knowledge that future desires and needs can be met, even if insufficient further wealth becomes available. The desire for reassurance transcends generations, since people wish to pass the security of stored wealth to their children.

Stored wealth, therefore, has real value, but that value may be less in the future than the immediate benefits it can bring. For example, high – and rising – house prices provide a mechanism for storing wealth for the future, but the immediate cost of that saving is huge. Quite apart from the interest payments, which transfer wealth directly from house buyers to lenders, many additional benefits in the form of goods, holidays, leisure time, improved health – even successful relationships – may be lost when money and time are diverted away from spending that contributes to human wellbeing.

A successful economy, therefore, needs some stored wealth to guard against the unforeseeable, but should not store so much that it makes itself unnecessarily poor. What is more, it should make sure that the wealth that it stores is actually worth something when the need arises. Storing money through high house or share prices is a complete waste if those prices fall just when the help is most needed.

Higher prices do not create real value

In the way the economy is measured, higher house prices are recorded as an increase in national wealth. That phrase “higher house prices”, however, actually means higher land prices, since rising house prices rarely reflect the cost of building them. This increased wealth, therefore, is not real: a similar effect could be achieved by spontaneously adding 15% to all the prices in the estate agents’ windows. The people who own a house get richer, while the people who would like to do so are suddenly poorer, which makes it a zero sum game.

For as long, however, as people believe that higher land prices are increasing wealth, government policy will seek to push prices up. And not only land prices: banks create new money when they make loans by lending far more than they have on deposit. Governments allow this because they want these loans to create as much measurable wealth as possible. Instead of investing in plant and equipment – or even people – to make new goods, the easiest way to do this is to increase the price at which existing goods can be sold. The process is called “adding value”, even though much of that value is no more real that the value created by higher land prices.

For example: it is much easier to borrow money from a bank to buy a container-full of goods cheaply in a low-wage country than to make the goods in a local market. Consumer goods sell in western markets for ten, twenty or even more times their purchase price through a process of value-adding that does not change the goods themselves but merely distributes and markets them. Distribution and marketing have some value, but for goods imported from the Far East into Europe and North America they make up most of the value in money terms.

For every winner there’s a loser

All this transactional activity is a quick and effective way to boost GDP, but instead of creating real wealth it only transfers it from producers and consumers into the hands of middlemen – importers, distributors, marketers, financiers and investors. More effective still is to conduct transactions that involve no material goods or useful services at all, which is why so much bank activity is focused on financial markets.

In these markets the activity of trading stocks, shares, currencies and other, ever-more-complex, financial instruments is a huge business. This business “adds value” because investors pay for the services in the market to make themselves wealthier. But, unlike a real service such as a haircut or a training session, which improves the condition of someone’s life in absolute terms, financial services only improve someone’s circumstances relative to others. For every winner in a financial transaction there is a counter-party who has lost out. It is true that the impression of win-win can be created when asset prices rise. But eventually the bubble will burst, and the price is paid by others through their pension benefits, their jobs and their taxes.

GDP growth is dependent upon money circulating more and more rapidly round the economy, irrespective of the amount of new, real wealth that is introduced. Success in these circumstances means accumulating and storing away more of that circulating wealth as it flows past. The more wealth one already has, the easier this becomes. Governments facilitate this circulation and tolerate the inequality and social costs it creates because their number one priority is to encourage the sort of transactional activity that GDP measures.

The real wealth of wellbeing

Suppose, however, that GDP measured real, productive wealth, and not just circulating money. Might that not have a positive effect on government policy, encouraging it to look beyond money-making to the wealth of productive tasks that people do for themselves? Instead of focusing on paid work – trying to engineer an economy in which everybody does as much paid work as possible, even though it may be poorly paid and not particularly useful – people could focus on creating value for themselves and their community, and only take as much paid work as was mutually beneficial.

The counterpart to this proposal is that money should flow to people directly to enable them to participate in economic exchange. That is why the way wealth is measured is so central to deciding how money is created and distributed. Proposals for a basic income, whereby everybody receives a fixed sum of money wealth sufficient for their basic needs, should be seen not as a means of wealth distribution but as a way of giving people access to the money they need to make use of the wealth-creating capacity they already have. Instead of building up corresponding mountains of debt and inflated assets, money should be seen as a catalyst for liberating people’s potential to do what is valuable and useful for themselves and others.

The effect upon enterprise of such a development is equally electrifying. At present, enterprise is mostly focused on accumulating wealth from others, but a new framework for money would make it far more difficult for investors to take their profit at others’ expense. If people cannot be obliged by circumstances to take unrewarding, inefficient and exploitative work, a powerful stimulus is created to invest in more efficient methods, matching technological developments with the best use of productive human ingenuity.

Outcomes, opportunities, reforms

Effective economic policy should be directed at increasing human wellbeing, or the capacity of people to live flourishing lives. Central to this is the nurturing of the global eco-system – reducing harmful emissions, avoiding pollution of air and water and ensuring the sustainable use of land and mineral resources. Desired outcomes are a cleaner, healthier environment; sustainable prosperity for all; better mental and physical health; effective human relationships; less wastage of time and resources. It’s not difficult to see how these would make life better for everybody, if they could be achieved.

To achieve these outcomes, appropriate opportunities must be created. The social institutions of education, company law, trade agreements, civil administration, commercial working practices, finance, tax, etc. have all to be framed with wellbeing in mind. This process is driven by the market, which creates the opportunities best suited to achieve its pre-determined goal. At present, in most national economies, this goal is not human wellbeing but maximum wealth-creation in money terms. It is justified by a market-inspired belief that the wealth, once created, will find its way to where it can most effectively be used.

Attempts to correct the failures of this approach with market regulation are largely ineffective, because they do not address the market’s purpose. Once clear in its objective, a market will simply navigate its way around any regulation that gets in its way. That objective, however, may be anything: the market works it out from the conditions that give rise to it. Regulation after the event may not redirect it, but a reforming of the conditions that frame it may set it on a different path.

Conditions at present favour money-wealth creation without regard for the quality or distribution of that wealth. Banks are empowered to create almost unlimited capital for the purchase of assets, companies are required to accumulate maximum shareholder value, land, although a finite human resource, can be held without charge as an accumulating asset and governments undertake to rescue anybody who cannot look after themselves. With that framework, it is not surprising that the richer are getting rapidly richer, while the capacity of governments to fulfil their open-ended commitment to everyone else is increasingly in question.

Creating the conditions in which people may flourish

Changing conditions means reforming expectations. The asset value of land should be held collectively. Corporate privileges should serve a social purpose. Money should be issued by governments to provide liquidity, not by private banks to finance asset purchases. Governments should not bail out the needy; instead, everybody should receive their basic requirements in money-wealth to allow them to participate in the market. These expectations do not regulate the market; they simply frame a different world in which the free market does not naturally default to monopolistic or asset-based positions.

What is more, each of these reforms is mutually reinforcing, creating a positive feedback loop that tends towards the conditions in which a new economy can thrive. Changing the way that money is created removes the excess of borrowed cash that is flooding the housing market and fuelling financial speculation by limited liability corporations. Control of money creation allows governments to target liquidity in support of the basic income. Lower land values mean that more wealth is available for productive commercial investment, while also ensuring that the basic income need not be so high. The basic income frees people to make use of affordable land to produce more of the wealth that they need for themselves, while also creating opportunities to risk time and effort in productive entrepreneurship. Reforms to company law remove the pressure to extract short term, allowing them to focus on the long-term productivity that underpins the basic income with real, transferable wealth. And so it goes on…

Why measurement matters…

There is a strong case, therefore, for advocates of all of these reforms to make common cause in a unified campaign, but there is also a single underlying theme that will make the introduction of such reforms both more likely and more successful. This theme is the way in which wealth production is measured. By including all money transactions, GDP measures both what is useful to and destructive of the real wealth of wellbeing. Meanwhile, it takes no account of all the useful, productive work that people do for themselves and others. Often this is far more productive than any work for which they receive money payment.

At the heart, therefore, of the movement to create the conditions for an effective, people-centred economic marketplace must be a united campaign to go “Beyond GDP”, either by replacing it completely or changing fundamentally the way that it is measured. The effect of such a change is to validate unpaid work, which underpins the basic income that helps make such work possible; to strip speculation out of the economy by attaching no value to the trade in land and other speculative assets; to return money to its appropriate function, providing liquidity for the productive exchange of wealth-creating capacity; and to focus corporate activity on the production of measurable new wealth, rather than the accumulation of wealth produced by others.

The proposal is not a new one. Both the United Nations and the European Union have had “Beyond GDP” on their agendas for several years. It has proved a fertile field for academic research and it’s catching on in many part of the world in practical ways. In almost every case, however, it is seen not as an alternative to GDP but as a bolt-on extra. The vested interests in GDP – that is to say, the vested interests in not reforming the economic status quo – are so deeply ingrained in business and politics that no serious political campaign has been attempted.

Such a campaign is now more urgent than ever. It must be international in scope, since GDP is an internationally accepted measurement. The starting point is to draw together all the people, groups and organisations currently campaigning for economic change, to whom the reform of GDP is directly relevant.