The Stock Market is not the Economy, the GDP is not the Economy

50 percent of American households own zero stocks. 80 percent of stocks owned by American persons are owned by the top 10 percent. I think that is the 10 percent wealthiest, not the 10 percent by highest income, although I imagine relatively few fall into one category but not the other.

Which brings me to my second point: GDP, or income, are also not the economy. Thinking in systems terms, the GDP is a flow, while capital assets, tangible or otherwise, is the Stock that income and spending and depreciation and breakdown expands or contracts. This is a stock in the way a reservoir is a stock of water, not a financial instrument.

Education, housing, savings, durable and consumable goods, health, community bonds, scientific research, and infrastructure are all examples of capital assets. These do not equate to the growth in GDP, since GDP is a measure of money or value flowing into the ‘nation’. A washing machine in your basement is not flowing into or out of the ‘economy’, it is sitting there providing an unmeasured value at the cost of utilities until it exits your capital asset pile by breaking down or being replaced.

The GNP lumps together goods and bads. (If there are more car accidents and medical bills and repair bills, the GNP would go up.) It counts only marketed goods and services. (If all parents hired people to bring up their children, the GNP would go up.) It does not reflect distributional equity. (An expensive second home for a rich family makes the GNP go up more than an inexpensive basic home for a poor family.) It measures effort rather than achievement, gross production and consumption rather than efficiency. New light bulbs that give the same light with one-eighth the electricity and that last ten times as long make the GNP go down.

GNP is a measure of throughput– flows of stuff made and purchased in a year– rather than capital stocks, the houses and cars and computers and stereos that are the source of real wealth and real pleasure. It could be argued that the best society would be one in which capital stocks can be maintained and used with the lowest possible throughput, rather than the highest.

Although there is every reason to want a thriving economy, there is no particular reason to want the GNP to go up. […]

If you define the goal of a society as GNP that society will do its best to produce GNP. It will not produce welfare, equity, justice, or efficiency unless you define a goal and regularly measure and report the state of welfare, equity, justice, and efficiency. […]

Seeking the wrong goal, satisfying the wrong indicator is a system characteristic almost opposite from rule beating. […] In seeking the wrong goal, the system obediently follows the rule and produces its specified result– which is not necessarily what anyone actually wants.

Thinking in Systems: A Primer, 2008, page 139-140

Donella H. Meadows, edited by Diana Wright, Sustainability Institute

(Posthumous)

8 thoughts on “The Stock Market is not the Economy, the GDP is not the Economy

    1. I think the idea is that the GNP (or GDP as I’ve seen in all recent publications I can recall, although that largely means The Economist) is not a measure of available wealth, but spending (someone must sppend for someone to have income), ‘throughput’ as she calls it. How many iPhones are sold does not directly affect a generic person’s assets or income or quality of life, except insofar as they own Apple stock, or iPhone prices ruse or fall. 1000 disposable cups create more GDP than 1 ceramic one, especially if the ceramic came from Goodwill or a yard sale. Wasteful, pointless, tax evading and corrupt entities are common enough in both the public and private sector in China. What is the negative value contribution of Beijing smog to GDP? To quality of life? Income lost, premature death, doctors getting paid? Incidentally, China’s wages are at or near what is called ‘middle income country’ these days, so new factories are increasingly locating elsewhere. If a bank in Oregon goes under, assuming it doesnt take down bash a large chunk of the rest with it, do I find myself with more or less opportunity? More or less quality of life? More or less free time and friends? [Rambling] The GNP is a single number. A single number is not the economy. Monetary units are ultimately phantoms, albeit phantoms people (and computers) affirm and reinforce trillions of times a day. By the way, my parents subscribed me to The Economist from about 2005 to 12/2017.

      In Banker to the Poor, one of the agreements Grameen clients signed onto eventually was to install composting (?) toilets. Cheaper than a ubiquitous plumbing system and flush toilets to the nation, I think. But the gain in sanitation and health about the same. And at much less cost than 50 function musical Japanese loos.

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      1. But in news, to the public, GDP & GNP is held up as a counter of potential prosperity for a country, right? So what you are saying here (which i am not disputing) is the unknown reality of what we take to be the case? In England we’ll say the GDP is up & that seems to imply we’re doing better, that things are on the up. But what you’ve put here is saying that isn’t the case. Am i understanding correctly?

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      2. Right. The stock market figures are from NPR. Havent quite finished reading Thinking in Systems, but I’d highly recommend it. I read Emergence, Chaos, and The Hidden Connections (3 different books) during or after high school, but not recently, since most of my books got sold at some point.

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      3. Sneaky media. i am woefully unlearned in economics, because i am pretty sure i have discalculis. But i wouldn’t mind reading some good texts. Maybe when i return to England i’ll get my mitts on some of these texts.

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