Who creates wealth - and who benefits?

Tweet

 

There’s something very American in the idea that a politician seeking high office should publish a book setting out his or her core beliefs. And in the case of Kemi Badenoch’s effort, the content appears to be quite American too. Her call for the deployment of ‘common sense’ as a core principle is superficially reasonable; the problem is that, in the real world, much of what passes for common sense, particularly amongst politicians, is either untrue or else based on unstated preconceptions and ideology.

Take, for example, her statement – absolutely central to her proposed economic strategy – that “business, not government, creates growth”. It sounds obvious, it is widely believed – and it’s total claptrap. At its simplest, economic growth is just a way of describing an increase in economic activity, or GDP. There are three common but different ways of measuring GDP – they all produce (or should, within the bounds of the assumptions and estimates used) the same answer. One starts by measuring output, another by measuring expenditure and the third by measuring income. All three are ‘blind’ to the question of whether that output, expenditure, or income are in the public or the private sector. And it takes only a moment’s thought to understand why that should be. If only the private sector added to GDP, then the act of nationalising a train company or a water company, for instance, would mean that suddenly all that economic activity vanished from GDP calculations – and vice versa, the act of privatising a company would instantly add to GDP. It’s obviously nonsense. Since all spending by one person or organisation ends up as being income to another person or organisation, it follows that on both those measures, every penny spent by government adds to GDP – and an increase in government spending adds to growth. Badenoch’s core tenet is simply wrong: complete and utter tosh.

There is an argument, of course, as to whether government spending is the best or most efficient way to increase GDP. The UK’s history of publicly-owned enterprises isn’t an entirely positive one, to say the least, although whether that’s an inevitable concomitant of public ownership is a question too complicated to be examined in a few words. That isn’t the argument she’s making, though.

She’s not alone in her belief. As suggested above, there’s a fairly widespread belief that somehow the private sector creates wealth and the public sector consumes it. I’ve long wondered whether, or to what extent, that belief is based on confusing two different meanings of he word ‘wealth’. But the private accumulation of wealth and the creation of new wealth in the economy are not at all the same thing; the first might be measured by looking at the bank balances and assets held by individuals, the second is measured by GDP. It is perfectly true that the private sector does more to achieve the first of those, but it’s also true that wealth can be accumulated by some with no overall increase in the total GDP. That goes to the heart of the current economic malaise felt by the many – wealth has been concentrated in fewer and fewer hands. It’s also true that an increase in GDP – the measure by which many politicians, including those in the Welsh Government want to have their success measured – doesn’t always make the many any better off.

The measure on which we should be assessing the economic success of a government is neither the increase in private wealth, nor the aggregate increase in national wealth (GDP), it is the extent to which the wealth generated by economic activity adds to the economic well-being of the population as a whole. Dogmatic assertions about how wealth is created aren’t the right starting place.