Tuesday, March 15, 2016

Towards a Measure of National Wealth

I’ve emphasized in class that we’d get better macroeconomic decision-making if spent more time looking at national wealth and less time looking at GDP.

Do note that this is not because we don’t have data on national wealth. But we do have is not as accurate as GDP, and no where near as commonly used.

Someone in class mentioned that Josh Price had talked about measuring national wealth in class. I talked to Josh, and he was referring to a paper entitled “Sustainability and the Measurement of Wealth” by Arrow, Dasgupta, Goulder, Mumfor, and Oleson.


First a note about Ken Arrow. He’s huge in economics. He won a Nobel Prize. You usually win these when you are old for work you did in your 30’s. Arrow won his over 40 years ago for work he did in the 1950’s. This was mostly about how to generalize the idea of equilibrium from supply and demand, including the first proof that perfect competition is Pareto optimal (which is the basis for doing so much supply and demand in principles of micro).

Just because Arrow wrote it doesn’t make it great. But it’s a pretty good sign.


The idea of the paper is that economic growth is sustainable (forever) if national wealth per capita is persistently increasing.

They look at 5 countries. Here’s what they find:

… Our results show that the United States, China, India and Brazil are currently meeting the sustainability criterion, although Brazil meets the requirement by a narrow margin. Venezuela fails to meet this requirement as a result of substantial depletion of natural capital and negative estimated TFP growth. In the United States and India, investments in human capital prove to be very important contributors to increases in per capita wealth; in China, investments in reproducible capital dominate. Accounting for improvements in health dramatically affects the estimates of changes in per capita wealth. We estimate the value of health capital to be more than twice as large as all other forms of capital combined.

Now, this isn’t weird to an econmist, but it might be something you haven’t thought about before. The biggest component of national wealth is the value of citizens themselves. Educate them and they’re worth more. Keep them healthy and they’re worth more. And young peoplle are worth more than old people because so much of their productivity is in the future rather than the past.

For example, I personally might earn the equivalent of $4,000,000 (in constant 2016 dollars) over my lifetime. So, in some sense, if we went back to 1985 we could have said that I was a piece of capital with a net present value to society of $4,000,000 (the value of my leisure might be half of that more added on top). Now compare that to the other capital I have: a house worth about $250,000, a $30K car, a retirement account, and some other stuff that’s just not as significant. In short, if we just count up the physical stuff we see, then we’re missing most of the wealth.

What this means is that the most important things that countries do is keep their populations alive for a long time, and keep them productive for a long time.

And if we want to find the wealthy countries around the globe, we need to look for the ones that are capable of nurtuing citizens through a lifetime of productive work, and putting them in a position where they can work when they are old (but don’t have to if they don’t want to).

1 comment:

  1. I just read a new interview with Ken Arrow. He's 94 now, still working, and still the youngest person to ever win a Nobel Prize in economics.