Life is good: economic growth, war, and $1

The unfriendly face of economics is the bland incantation “economic growth”, which, following the “show, don’t tell” principle, means “more stuff”. Sounds a bit unpalatable, does it not?

We’re in measurement-problem-land again, unfortunately. I think a careful normative economist would define “economic growth” as either an increase in the resources (of whatever type) at people’s disposal, or some development that helped people get the things they liked (whatever they are). Unfortunately, again, we get stuck a little on what we can measure, using the amount of measurable stuff like income, goods or services to proxy what we’d really like to achieve.

On top of and related to that, there’s the diverse backlash against “materialistic” economic growth. My own belief – for what it’s worth – is that it’s a bit weird that economic growth ascended to such dominance as a policy goal. Being anti-growth is something different entirely, though; by any definition, the role of growth is radically different for the world around me than for the poor.

This recent Economist article argues forcefully that the world is headed in a historically pleasant direction. It’s too rich in detail to do justice to here, but among other things it offers a version of the most compelling defense of economic growth: some people are really, really struggling. It stretches empathy to its absolute limit to try to imagine the most crushing poverty in the world, and if that sounds like a cliché, tough.

“In China 25 years ago, over 600m people—two-thirds of the population—were living in extreme poverty (on $1 a day or less). Now, the number on $1 a day is below 180m. In the world as a whole, a stunning 135m people escaped dire poverty between 1999 and 2004. This is more than the population of Japan or Russia—and more people, more quickly than at any other time in history.”

I remember vividly the slow, horrifying process of understanding what $1 a day means. No jargon: it means that the amount of stuff – any stuff – that a person living on $1 a day can afford is equivalent to the amount of stuff I could afford to buy if I had one US dollar in my pocket every morning, and nothing more. It’s not about exchange rates or the price of stuff or anything like that: it’s real That’s very close to being literally unthinkable.

Yes, the figures quoted in the Economist article are averages, and yes, measurement is a problem. But still:

“A World Bank study of 19 poor countries concluded that every 1% increase in national income per head translates into a 1.3 point fall in extreme poverty… The result [of economic growth] is that the number of very poor people in the world is falling fast—even though many critics continue to believe that the poor have not really benefited from growth. In 1990 those on $1 a day accounted for more than a quarter of the population of developing countries. By 2015, on current rates, the proportion of very poor people should have shrunk to 10%. Moreover, these monetary measures probably understate the real gains from things such as lower child mortality, safer water, literacy and other social achievements. A rich man appreciates his extra cash but this does not compare with what a poor family gains from seeing an infant survive childhood or learn to write.”

If you tell me you oppose “economic growth”, you’d better be damn specific. I doubt anyone opposes this. This is the variety of difficult that led Robert Lucas to famously declare that “Once you start thinking about economic growth, it is hard to think about anything else.” Here‘s a nice quotation about that quotation:

“The Nobel laureate economist Robert Lucas once said “Once you start thinking about economic growth, it is hard to think about anything else.” Non-economists, especially those associated with the environmental movement, regard this as evidence that economics is a form of brain damage, a cancer on our earth. But rural Chinese peasants surviving on less than a dollar per day do not regard economic growth, or Wal-Mart factory jobs, as a cancer.”

There are a lot of “development economists” out there these days, and it’s easy to be facetious and question the real value in what they do, but goodness, they’re dealing with issues whose importance is overwhelmingly difficult to comprehend. I hope they find success.

Not, of course, that economic growth is ever all that matters. The Economist article concludes with the argument that the incidence of war is declining, representing another huge boost to the wellbeing of people around the world. The picture presented there is slightly less rosy than on poverty, but still unusually optimistic. I like the big-big picture view of global trends; putting the modern era in the broadest historical context is a great way to make our problems seem petty and life seem good.

The war talk reminded me of the excellent book “The Bottom Billion” by development economist (the label is mine) Paul Collier, which is a kind of synthesis of much of his, and related, research into the causes of extreme poverty. From the FT review of the book:

“About 80 per cent of the population of developing countries lives in countries whose populations are becoming better off. Billions live in countries that are developing very swiftly. But almost a billion people – 70 per cent of whom live in sub-Saharan Africa – are in economically stagnant or declining countries. In all, 58 countries are in this desperate condition. Yet, as Collier remarks: “An impoverished ghetto of 1bn people will be increasingly impossible for a comfortable world to tolerate.”

Collier argues that these countries have fallen into one, or more, of four traps from which it is virtually impossible to escape. These are the “conflict trap”, the “natural resources trap”, the trap of being “landlocked with bad neighbours” and the trap of “bad governance in a small country”.”

Among other things, Collier investigates the link between conflict and poverty. His book is, to me, a triumph of realistic but fundamentally optimistic policy debate founded on careful, broad scientific research. The world is moving in the right direction, argues the Economist, and Collier and his kind are desperately throwing the line to the most impoverished, the most vulnerable. Think of this next time you read the words “economic growth”. Whatever it is, it need not be the ultimate goal of human endeavor, but is it an evil?

Economics or finance?

From a fun baseball story about a minor league player selling shares in his career:

“Newsom has decided to use that economics degree he got from Tufts, and along with two friends he’s started a new company called Real Sports Investments. It’s a company that allows baseball fans to invest in minor league baseball players by purchasing shares of the player.”

Being from Britain, it reminds me of those human interest stories you sometimes read about a father laying a bet that their son will one day play soccer for England (here’s merely the first example I got from Google). More to the point, how is Newsom’s economics degree helpful?

The short answer is not at all. The study of economics isn’t “business”, or management, or whatever you call the skills and knowledge that would be useful in setting up or running a company. It also isn’t finance, so it can’t help him understand how a stock market works.

What’s the difference between economics and finance? A good starting point might be this, from Brian Hollar:

“Finance typically focuses on maximization of wealth. Economics focuses on the optimization of subjectively valued goals. Conceived of in this way, finance is a specialized subset of economics.”

That gives the correct impression that finance is the one that’s interested in the study of the management of money and assets. I might go further and say that finance is arguably vocational; I don’t think economics courses hold a great deal of value for aspiring investment bankers (perhaps one of the commonest misconceptions held by undergraduate economics concentrators) – finance courses are the ones that will teach them how asset markets work. Economics, being more of a method than a body of knowledge, is not really vocational at all, even though students of economics will certainly develop other applicable skills like data analysis, applied math and writing. Economics probably uses optimization rather than “focusing” on it.

Just to complicate matters, the unfortunately named field of “financial economics” is, as the name might suggest, something of an intersection of the two. Financial economics is the application of the economic method to the particular case of the trade in money and assets like stocks and bonds: how do financial markets and the trade of assets affect the allocation of resources? How does the financial system affect the decisions made by people, companies, governments? Financial economics, being part of economics rather than finance, fits Hollar’s definition of “optimization of subjectively valued goals”; it’s again a descriptive tool rather than practical training or a recommendation of a course of action.

Finance and economics are terms often used interchangeably in the press. I think the best illustration is the word “socioeconomic”, which to my mind really means “sociofinancial” – what’s your social status, and how much money do you have? If we start using “economic” to mean the amount of resources a person has at their disposal, the nuance of the word as signifying the allocation of resources is obscured.

I always wondered why The Economist magazine has a composite section for “Finance & Economics”. It might be worth emphasizing the distinction between these two concepts a little more cleanly. In an ideal world we might even have a third word: economics for the economic method, finance for asset markets and a shiny new one to talk about the “world economy”. What does “America’s weakening economy” really mean?