Edward Hadas

An American, a Frenchman and a physicist were talking about some unusual weather. “It was twice as hot this afternoon as this morning”, said the American, “the temperature went up from 40 to 80 degrees.” The Frenchman interjected: “That’s in Fahrenheit. In Celsius, it was six times hotter.” The physicist was scornful. “On the only really scientific measure, the Kelvin scale, the increase was a piffling 5 percent.”

Who’s right? Well, all the measures are accurate and it certainly was hotter. But no single ratio – whether twice, six times or 5 percent – captures just how much hotter it actually felt. The feeling of hotness, like the feelings of pain or anger, cannot be measured with genuine precision.

It is the same for the feeling of prosperity – any measure will be arbitrary and quite possibly misleading. Consider gross domestic product, the most common index of economic success. GDP is the sum of spending on everything in the economy, from shoes to shoe-shines, from cars to child care. In comparing countries with each other or over time, GDP is usually adjusted for inflation to calculate what is ambitiously called “real GDP”. It is then often divided by the population, creating “real GDP per person”. This is usually measured in “constant dollars” and, for 2011 in the United States, becomes $43,149 of 2005 dollars.

Economists recognise that GDP is far from perfect. In 2009, a French government commission suggested that it should be augmented by measures of the distribution of wealth, environmental sustainability and “quality of life”. The Human Development Index, which is widely used by the United Nations, combines GDP with life expectancy and years of schooling.

These modifications are welcome, but they fail to correct GDP’s main weakness – that is what might be called the fallacy of precision. The human meaning of prosperity simply cannot be reduced to numbers. Supposedly exact measures generally confuse more than they illuminate.

Nothing stimulates anti-capitalist feelings like large sums of money changing hands in the hope of huge profits. A recent example: the prospect that Facebook could be worth some $100 billion to its shareholders. The website’s users might prefer less advertising and a lower valuation. But no one asked them. This inspired my Reuters colleague Paul Smalera to suggest that Facebook go co-op. Smalera won’t get his way, but he’s right to wonder whether the hunt for shareholder profits makes the world a better place.

In modern economies, most companies are supposed to be run for the benefit of the providers of equity capital, the shareholders, considered co-owners. Cooperatives and mutuals are owned by and supposed to be run for different groups: customers (the Cooperative Wholesale Society in the UK and American credit unions), suppliers (Sunkist citrus growers in the United States) or workers (the Mondragon group of companies in Spain and the UK retailer John Lewis).

The original thinking behind almost all these organisation was idealistic, even utopian: greedy capitalists had polluted the economy. Their exclusion would help promote the best aspects of human nature.

The financial markets rejoiced last week because the U.S. unemployment rate fell to 8.3 percent in January, 0.8 percentage points lower than a year earlier. Back in the real world, the gain looks less impressive. The proportion of the adult American population with a job has hardly changed since January 2011 – it is up from 58.4 to 58.5 percent. That number peaked in 2000 at 64.4 percent.

The decline in American so-called “participation rate” is a serious economic problem. Many blame the cyclical downturn or inadequate GDP growth, but they are too focussed on output. The real issue is input: the supply and the need for labour. This is not just an issue for the United States. But the current shortage of jobs in most rich countries is the latest leg of a long race between technological forces that lead to job destruction and socio-economic forces which provide new kinds of employment.

Over the last two centuries, the contest has been fairly even. The labour savings in field, factory and home have been nothing short of amazing. Imagine that today’s technology and labour skills were available when Adam Smith wrote The Wealth of Nations in 1776. If people today worked as many hours a week as they did then, and for as many years of their lives, and if they consumed roughly the same quantity of goods and services, the unemployment rate would more like 70 than 8 percent.

President Barack Obama thinks taxes can help the government achieve a precise policy objective. In last week’s State of the Union address he outlined a complex set of tax adjustments  to discourage companies from moving American jobs to foreign parts.  In the same speech, Obama also suggested that taxes can be made simple and clear:  “No side issues.  No drama”, he said. He applied that description to the extension of the cut in the U.S. payroll tax rate. It was followed by pushing for “common sense” on a minimum tax rate for the rich. “Washington should stop subsidizing millionaires”, the president said.

The rhetoric may not be entirely contradictory, but it points in quite different directions. If the tax code is written to reflect particular concerns, whether of the government or of influential taxpayers (and non-payers), it will never be simple. And if simplicity is the guiding principle, it is hard to understand why the president wants to add to a U.S. law which already has 9834 sections. 

The current president is not the first person to dream of improving a complex, arbitrary, inefficient and unjust tax system. On the contrary, the history of taxes in every country is replete with efforts at reform, although they come along far less often than desperate measures to squeeze more money out of unwilling subjects. Governments’ consistent need for more revenue and the governed’s equally consistent reluctance to pay helps explain why reformers find progress so difficult.

Capitalism is the name people give to the way the modern economy is arranged. Now that Communism has been discredited as an economic system, there seems to be no real alternative. But the word is misleading.

A capitalist analysis of any economic issue starts with capital, both physical capital – factories and land – and financial – shares and bonds. It is associated with free and competitive markets for goods and labour.  And capitalism has come to designate a system where private property is the norm, with any exception needing some sort of justification. Capitalist analysis usually treats governments and unions as economic interlopers, and ignores the broader society.

That perspective is too narrow. Capital and markets are only two parts of the complex modern economic system. People don’t only matter because they bring their labour to the owners of capital – as in the original, 19th century definition of capitalism. And governments over the years have become regulators and keepers of the monetary order. Moreover, the economy is so closely integrated with modern society that no clear border separates the two. Social forces – such as the thirst for technological innovation, the work ethic and other moral values – play a fundamental part and influence the workings of the purely “capitalist” system.

The cruise industry demonstrates much of what works well in the industrial economy. The debacle of the Costa Concordia – 11 people confirmed dead and at least 23 missing, and a financial loss of as much as $1 billion – shows some of the ways that the economy can malfunction.

The loss of life from the accident off the Italian coast is tragic, and the loss of money is remarkably large for a business that has global annual revenues of around $34 billion, according to Cruise Market Watch. That is not a big business by global standards; airline revenues, as calculated by the International Air Transport Association, are 17 times larger.

Still, the cruise trade is large and familiar enough to provide an illuminating microcosm of the modern economy at work.

“It’s the economy, stupid.” The words date from Bill Clinton’s 1992 presidential campaign, but the basic idea that political shifts are the visible manifestations of hidden economic developments was first articulated by Karl Marx, who wrote before the word “economy” had its current meaning. When he declared, in 1848, that “The history of all hitherto existing society is the history of class struggles,” the notion was truly revolutionary. It has become a commonplace. Pundits ferret out economic causes for everything, politicians strive to present voters with economic good news, and careful studies show that economic trends influence elections.

Like most often-repeated generalizations (“Germans are orderly” or “an army marches on its stomach”) the claim that politics is fundamentally about economics has some truth to it. But I think pundits, politicians and voters would all benefit from a bit of revisionism. It’s not always the economy, and when it is, politicians cannot do much about it in a hurry.

Start with the expert commentators. I’m thinking of the people who confidently declare that the Arab Spring was caused by the increased cost of food. Or the ones who explain the poor performance of Vladimir Putin’s party in the recent Russian parliamentary election as a reflection of stagnating average incomes. The invasion of Iraq? It was the oil, stupid. The rise of anti-immigrant parties in Europe? Look no further than the job market.

By Edward Hadas

The opinions expressed are his own.

Ah, the curse of materialism. The true spirit of Christmas has been obliterated by a landslide of gifts. The crass commercialism which surrounds the experience of holiday shopping, not to mention the returns and post-Christmas sales, has turned this joyous holiday into little more than an exaltation of the worst aspects of our modern consumerist economy.

Or so it is often said. But is the complaint fair? It’s certainly true that the exchange of gifts on a large scale is a relatively new feature of Christmas festivities. In the 1840s, Charles Dickens has the Spirit of Christmas Present take the miser Ebenezer Scrooge to witness joyous celebrations of the feast. Food, drink and good cheer are in abundant supply, but there are no presents.

In the 1880s, hand-made gifts were making the day special for many American children. By the 1920s, a more commercial spirit had triumphed in the land of mass production and the factory-made Christmas was already causing complaints about inappropriate gifts. According to historian William Waits, some businessmen felt a little queasy about advertisements for such supposedly ideal Christmas gifts as a can of paint, a cooperative apartment, potatoes and floor wax.

Something has gone wrong with global warming. It’s not that the world has stopped heating up. It’s that the anti-warming political movement, which seemed almost unstoppable when the Intergovernmental Panel on Climate Change won the 2007 Nobel Peace Prize, has stalled.

Last week’s United Nations climate change conference in Durban ended with little more than an agreement to talk some more about what to do next. Even that was too much for Canada, which has just said no to emission-reduction targets. The activists blame recalcitrant governments and many commentators blame economic distractions. They are probably both right, but I think the activists’ own approach bears much of the responsibility.

While only experts can judge the strength of the scientific evidence for man-made climate change, no technical knowledge is required to be troubled by the way the activists present their case. The willingness to describe knowledgeable opponents as “deniers,” a word previously used only for fantasists about Nazi atrocities, suggests a very unscientific attitude.

By Edward Hadas
The opinions expressed are his own.

Americans are both the fattest people in the world and the biggest spenders on health care. Both those facts can be traced, at least in part, to a common attitude.

First a few numbers. The latest global handbook from the Organization for Economic Co-operation and Development (OECD) shows that 34 percent of Americans are obese by the criteria of the World Health Organization. In health care spending, the United States leads with 17 percent of GDP. In both categories, U.S. numbers are almost twice as high as the average numbers of OECD members.

The extra fat accounts for only a small portion of the extra American spending on health care. Researchers recently estimated that the medical expenses caused by obesity, which is connected to problems such as high blood pressure, heart disease and diabetes, amounted to $147 billion in 2008. That number suggests that even if Americans were no fatter than the OECD average, they would only spend 3 percent less on health care than they do now.