Thursday 1 July 2010

Wealth, profit, and GDP

When I was at business school some years ago, one of the lecturers gave us a little demonstration of the difference between personal and collective wealth on the one hand, and GDP on the other. He took a £10 note from his wallet, passed it to the first person in the class, and asked that it be passed around from one to the other, until, after going through 20 pairs of hands, it returned, safely, to him.

His point was a very simple one, that if we assumed that the only money in the room was that solitary £10 note, then 20 separate transactions hadn't changed the amount of total wealth in the room by a single penny. It hadn't even made any of the individuals in the room any less wealthy or more wealthy than they had been at the beginning (although one bright spark did try to get away with only passing on £9.95 so that he could keep 5p profit…).

But the 'GDP' of the lecture theatre, during that few brief minutes, had been £200. And the fact that some of us worked in the private sector, and others in the public sector, hadn't made any difference to our contribution to 'classroom GDP'. GDP isn't the same thing as personal 'wealth', or even total 'collective wealth' – it's more a measure of how many times, and how quickly, money circulates in an economy.

What would have made a difference, though, would be if we had passed that £10 out through the window to the guy who happened to be cutting the grass at the time. It would still have continued circulating and adding to total GDP, but it would have stopped being counted as part of classroom GDP. And the lecturer as an individual, and the people in the room collectively, would have been £10 worse off as well.

It's an analogy for one of the reasons for the under-performance of the Welsh economy. Any economy with a disproportionate number of jobs in organisations whose headquarters are elsewhere will inevitably end up passing some of its wealth and GDP out through the window.

Interestingly, when the UK government passes some of it back to us, it's always called a subsidy or a handout.


Anonymous said...

Good point well made JOhn.


Anonymous said...

Certainly is a good point- it's a truism that Wales has given more to the UK PLC than it has taken out. People aren't ill and sick for no reason. They've got dodgy knees and bad backs because they worked in the mines and the steelworks, bad lungs because of all the asbestos in industry and manufacturing, and a new generation of underemployed because the UK economy does not operate properly in Wales. The UK does not work for us.

Anonymous said...

lets hope for Wales' sake you will never get anywhere near any position of power concerning business

Anonymous said...

I think Anon 12:13, for all his/her bluster about business, probably doesn't have the "sake of Wales" in mind at all.

He/she'll be the first one to come crying when the out of town development (that great byproduct of neo-liberal economics) kills his small business stone dead. Or when the greed of the banks means his start-up can't get a decent loan. He'll be wondering where the regulation is then!

Spirit of BME said...

As the Pixman fellow says on Newsnight - Hummm...Yes !!!.
You are correct that people should think far more on the power of their expenditure and who in Wales you give that power to.Local traders have the power to spend their profit locally and that is good.
However, your £10 exchange does not take into account inflation and if you were in Germany in the 20`s it would still be £10 (or Marks) but its purchasing power would have been diminished by the time 20 pair of hands had finishes with it. I will not go into the dangers of the £ being a fiat currancy ,which makes everything far more dangerous.

Anonymous said...

I'm a Labour supporter but I get fed up of the party (and other parties) saying that Wales can't pay it's own way. I wish Plaid Cymru would finance a full and proper academic study on the Welsh economy to prove otherwise.

Then I might start taking you all seriously.

John Dixon said...


Would that life were so simple...

The problem is that any study of whether Wales can or can't pay its own way depends on making a number of assumptions. And those of us who want an independent Wales make one set of assumptions, whereas those who claim Wales can't pay her own way make a different set. Not all the assumptions being made are always obvious (and that applies to both sides of the debate). Without agreeing on those assumptions, any 'proof' that Wales could or could not be a viable unit will never be accepted by the 'other side'.

I'd start by making the clear assertion that of course Wales can be a viable nation state if that's what the people want. The question isn't really about 'viability' at all; it's about the level of public services provided and the level of taxation levied to pay for those services.

As a broad brush approach, I'd be prepared to start from a statement that within current levels of economic activity (GDP) Wales could not afford the current level of public service provision within the current level of taxation revenue - and that's what the case for 'non-viability' is really saying.

But if Welsh GDP were to become more or less equal to the UK average, the answer to the question becomes a very different one. There is no fundamental reason why Welsh GDP cannot reach the UK average with Wales as a part of the UK; but there's abundant historical evidence to show that it hasn't happened in practice and that the gulf is, if anything, growing rather than reducing.

So, the question really is this - is the gap more likely to be reduced by a UK government whose primary concern is the overall level of UK GDP, or by a Welsh government specifically focussed on Wales? And that is why the question of 'viability' is ultimately a political one, rather than simply an economic one.