LONDON (Nov 7): If the enterprise of economics aims to teach us how best to create and maintain wealth, you would hope it would at least have a means to measure it accurately. Unfortunately, as of yet, it doesn't even come close.
When people want to know which countries are the richest, they typically look at measures of production or income. The International Monetary Fund, for example, tracks annual gross domestic product per person, adjusted for the purchasing power of the dollar.
Qatar is on top, with about US$146,000 as of the end of 2013. The US comes in ninth with US$53,000, narrowly beating Hong Kong and Saudi Arabia. Countries with vast natural resources or big financial centres occupy most of the upper positions.
GDP, however, is far from an ideal indicator. It reflects the flow of goods and services a nation produces in a single year. It says nothing about wealth, which is the total store of value that a nation can use to create future income and well-being. Wealth includes physical buildings, machinery, minerals, fuels, clean water, healthy ecosystems, skills, education and good government institutions.
Estimating wealth with GDP is like trying to guess how much money is in a bank by counting how much goes in and out in a day. Oil-rich countries such as Qatar, for example, might be living well but gradually depleting their natural-resource wealth. Lower-income countries such as China might be building infrastructure that will pay dividends for decades to come.
Nations do a horrible job of accounting for how much they have, as opposed to how much they make. As Oxford University researchers Kirk Hamilton and Cameron Hepburn noted in a recent review of efforts to measure real wealth: "Investors would not accept corporate balance sheets of a quality akin to those of many countries."
Measures of GDP actually provide some insight into how much wealth goes uncounted. As Hamilton and Hepburn argue, wealth ought to generate a return, just as stocks and bonds pay dividends and interest. So if a country can be expected to make, say, US$3 a year on each US$100 of assets, then a GDP of US$30 billion would indicate total wealth of US$1 trillion.
Actual national wealth accounts -- following the United Nations System of National Accounts, which has been in place since 1947 -- produce much smaller numbers. This is unsurprising, given that they ignore such things as human capital, social cohesion, institutions and the immense non-commercial value of natural resources.
The work of creating better measures is decidedly unglamorous, and yet perhaps nothing is more important. It entails finding ways to count the value of intact ecosystems in the natural recycling of wastes and in maintaining soil integrity. It requires quantifying the depletion of capital through the extraction of exhaustible resources such as minerals or fossil fuels, or the destruction of renewable resources such as fisheries or forests.
The economists and scientists doing this work might turn out to be the heroes of the future. Imagine how politicians' focus on the short term might change if voters paid attention to up-to-date measures of real wealth. Governments that failed to invest in education, health or infrastructure -- the investments that create wealth in the longer term -- would be rightly seen as wealth destroyers, and would be embarrassed by international comparisons.