Cadmus

The Evolution of Wealth & Human Security: The Paradox of Value and Uncertainty

10. Service Economy

The emergence of the modern service economy is a natural consequence of the evolution of manufacturing during the 19th century. As the production technology of the Industrial Revolution increased in complexity, the knowledge, expertise and auxiliary services required for design, development, research, manufacturing, testing, maintenance, after sales service and waste disposal increased disproportionately.

Advances in the application of scientific knowledge drove this process of increasing sophistication and complexity. Research and development strove to identify and develop ever newer, cheaper and better quality materials, machines, production processes and products. Thus, over the past century industrial and commercial research functions have grown to involve tens of millions of workers.

While the greatest challenge of the 19th century was increasing supply through higher, more efficient production, the greatest challenge of the 20th century became developing the markets capable of absorbing the increased production volumes and ensuring satisfied customers who would return to buy again. Advertising, distribution management and after sales service became crucial.

While unskilled workers could quickly learn how to perform most functions on the early assembly lines, over time the levels of worker education and skill increased enormously. This required a change in the composition in the workforce of industrial enterprises, a progressive shift from manual labor to trained technicians, engineers specialized in a wide range of subjects, systems developers and analysts, planners, financial, sales and marketing experts. A more educated, higher paid workforce also necessitated greater knowledge and specialized expertise in organizing, managing, motivating, training and developing people.

As firms grew from privately-owned and managed local businesses into regional, national and multinational, publically-owned corporations, the financial expertise needed for raising capital, managing costs, pricing products, negotiating supply and marketing contracts, taxation, dealing with banks and financial markets multiplied.

Topping off these diverse functions was the increasing need for general organizational expertise to manage, coordinate and integrate activities for procurement and production planning, inventory management, strategic planning, new business development, legal services, community, government and investor relations. While Henry Ford is credited with first applying the principles of mass production to automotive manufacture, it was Alfred Sloan at General Motors who introduced the decentralized, multidivisional organizational structure that enabled GM to lead the global automotive industry for eight decades.

The same requirement for a diverse range of specialized services arises at each level of manufacturing from raw material extraction and processing through the multiple stages of component production, subassembly and final assembly, whether carried out within a single firm or by hundreds of different firms in the supply chain.

Thus, throughout the 20th century, the functions associated with production technology (R&D, product design, quality control and manufacturing engineering), organization, human resource management, sales and marketing, and financial management became increasingly important determinates of business success and economic growth. Few of these functions were directly involved in actual manufacturing, yet all of them became essential services without which basic manufacturing could not be undertaken or sustained. In other words, as it became more sophisticated, industrial enterprises progressively transformed themselves into service organizations, which also performed manufacturing functions. Thus, we find today that the vast majority of employees in traditional manufacturing firms are engaged in performing service functions.

What occurred within industrial enterprises also occurred in the economy-at-large. A huge infrastructure of service-related social organizations emerged, specialized in countless subfields of expertise to support expanding industry – government administration, education and training, scientific research, employment, financial, marketing, legal, transportation, logistics management, communication, waste disposal, recycling, banking, insurance and financial services – until these rapidly growing service functions became the dominant driving force for the expansion of the entire economy. The development of the Service Economy is best conceived of as a global process involving the whole economy, in which service functions are integrated into all productive activities, rather than simply the growth of a tertiary sector beyond agriculture and manufacturing.

Simultaneously, the higher productivity, wealth generation and living standards resulting from the evolution of manufacturing stimulated the growth of another range of services designed to meet the growing needs and aspirations of a more prosperous population. The economy developed a second powerful engine, the engine of growing consumer demand. To meet the demands generated by higher levels of prosperity, services related to retailing, travel and tourism, communication, information, education, healthcare, banking, investment, and insurance, legal and other professional services, food and hotel services, media, entertainment, and recreation also expanded exponentially.

Our very conception of what constitutes a basic need changes as society advances. Engel’s law states that services are secondary in most cases because they fulfill only non-essential needs. Before and during the Industrial Revolution, only food, shelter and clothing were considered primary. Today that is no longer the case. Education, healthcare, financial services, computers, internet, and entertainment have become an integral part of modern life, without which it is difficult to survive socially and succeed economically. Services represent the vanguard of emerging social needs and have become essential means for promoting the wealth of nations.

The combination and convergence of these interdependent movements have given rise to the modern Service Economy which we know today. Services now account for 64% of global output and more than 70% of employment in OECD countries.10 These figures underestimate the contribution of services, since in many cases they fail to take into account service functions and employment within manufacturing industries. The cost of growing tomatoes represents only two or three percent of the sale price of a bottle of tomato sauce. The cost of producing and assembling an individual automobile represents only about 20 to 25% of its total cost. This shift to a service economy necessitates a fundamental change in the way value is measured.

11. Measuring Value in the Service Economy

At first glance it may not be apparent how or why the proliferation of service functions should alter in any fundamental way the inherent nature of economic value. But a closer examination reveals that it has profound implications for economic theory and economic measurement. The economic theory and measures of value posited by classical and neo-classical economists were based on the premise that manufacturing is the dominant source of wealth creation. The Industrial Revolution made plentiful many products that were previously either very scarce or very costly. Between the 1780s and 1860s, mechanization reduced the cost of cotton cloth to just 1% of its earlier level.

Therefore it was assumed that any augmentation of production constituted a net increase in wealth. Measuring increases in the monetary value of output, i.e. the flow of production, was regarded as an adequate measure of increasing wealth, i.e. the total stock of economic value. This assumption proved overly simplistic. It failed to take into account the depletion of physical and biological assets (D&P) that occurs during the production process. Overlooking the complex relationship between physical, biological, social, human and financial forms of D&P, it concluded that an increase in the accumulation of financial capital is synonymous with an increase in overall wealth. Some forms of economic activity, such as bottling drinking water, waste disposal and environmental clean-up represent efforts to compensate for the negative aspects of economic activity, rather than net additions to wealth. In addition, it ignored the concept of negative value or value deducted, the fact that some economic activities such as war or extracting non-renewable resource, may destroy or consume rather than generate wealth.

The growth of the modern service economy adds to these deficiencies another and more fundamental problem of measuring wealth – the problem of time. The problem arises from the difficulty in precisely assigning economic value to either a manufacturing or a service activity at the point of sale and delivery. The Industrial Revolution gave rise to measures of the increase in the economic value of the flow of production through various stages of manufacture, assuming that the production process was complete the moment a product or tool was available for sale on the market and that all costs associated with its manufacture contributed positively to wealth-creation. This assumption seemed logical and consistent at the time. Firms purchase raw materials at a given price, process them into manufactured goods, package and deliver them to customers. At that point the transaction is complete and all the costs can be known. Thus, calculating the gross national product at factor cost became a standard measure for production and wealth-generation in a monetarized, manufacturing-based economy.

12. Utilization Time & Utilization Value

Today this concept is no longer adequate. Even in manufacturing, the true cost of a product often depends on its effective performance (value) during a prolonged period of utilization. After-sales service, waste disposal and product liability have become major cost factors even for manufacturing companies, factors which cannot be accurately known at the time of production or sale. This fact was dramatically illustrated by Toyota’s worldwide recall of more than nine million vehicles in 2009-10 – equal in quantity to 90% of total light vehicle sales in the USA in 2009 – which cost the company and its dealers upwards of $4 billion, a cost which was not known and could not be reliably estimated at the time of sale.

Tracing the process back in time to the beginning of the design and production cycle, today the costs incurred in the development of manufactured products commence long before a new product ever reaches the production line, even in instances when the product is never actually produced. The costs associated with research and development, testing and prototyping can be many times greater than the direct cost of manufacturing the product. Pharmaceutical companies, for example, spend billions of dollars annually on medical research to develop new products. The average development time for a successful drug is about 12.5 years. The actual cost of materials and processing to manufacture patented prescription drugs typically represents only five percent of their final sale price. The high cost of that research also results from the fact that the cost of a great many failed research projects has to be amortized against the few successful products that emerge from R&D and come to market. Less than one in a hundred new ideas reaches clinical trials and fewer than 10 percent of these are approved for sale. Of every 250 drugs that enter preclinical testing, only one is approved by the US FDA. Thus, a true measure of value would have to take into account the entire range of costs incurred during the entire lifetime of a product prior to, during and after production.

The evolution of the Service Economy necessitates a change in the fundamental notion of value. When it comes to services, taking into account the costs incurred during the full period of utilization is still not sufficient to arrive at an accurate notion of economic value. Cost, even comprehensive and inclusive cost, is an insufficient index of real contribution to wealth. We need, instead, a wider concept that also takes into account utilization value.

Utilization value refers to the use value of the assets created (stock), rather than the notion of added value (flow). The value added measurement of mining for scarce natural resources considers only the monetarized costs of the activity (flow), but does not fully reflect the reduction in the overall stock of physical D&P associated with the consumption of an irreplaceable resource. The cost of a product does not tell us how long or how well it will serve the intended purpose. The US construction boom that resulted from easy bank credit in the middle of the last decade leading up to the subprime mortgage crisis resulted in a massive increase in the number of residential and commercial buildings, many of which have never been occupied since their construction. People were employed, materials were consumed, but has national wealth really been augmented by this activity, if the buildings themselves are never utilized? What is the true value of a computer or mobile phone or a technical education that is soon outdated and obsolete?

Common sense tells us that our real wealth and welfare depends on the use value we derive from the products and services we acquire and that this use value in turn depends on the period over which they can be utilized. This is true of products as well as services. But as we shall see, in the case of services, utilization value assumes paramount importance.

13. Valuing Uncertainty and Systemic Risk

Economic activity in the modern Service Economy is closely related to the performance of integrated systems. This is true even for manufacturing activities. Products are conceived, designed, engineered, produced, sold, serviced and disposed of by means of systems which are integrated with countless other systems within and outside the manufacturing firm – systems for research, testing, training, monitoring, communicating, transporting, warehousing, servicing, etc. The product no longer exists as a stand-alone discrete unit. It exists as part of a system, like a computer periodically in need of service. This has been true since the introduction of mass production, but it is far more important today. While the cost or value of a discrete product can be estimated at the point of sale, the cost or productivity of the system can only be measured in terms of its performance relative to the entire cycle from conception through production and delivery to final disposal.

While the industrial economy attributes value to products which exist materially and are exchanged, value in the Service Economy is highly dependent on the functioning of result-producing systems, such as systems for delivery of education and medical care. The reference for value is not to the “product” but to the utilization and usefulness of the system. Increasing productivity in the Industrial Economy is measured by the cost of the inputs used for producing products or tools; whereas attempting to measure productivity in the Service Economy by the cost of inputs without reference to specific performance is very close to nonsense. The productivity of a healthcare system depends on its capacity to cure illnesses or maintain a healthy population. The salaries of teachers or investment in school buildings cannot suffice as a proper measure of educational productivity. Assessing the productivity of an educational system needs to be based on an evaluation of the quality of learning by those who pass through it. Thus, while Industrial Economy evaluates the production of wealth in terms of added exchange value, wealth in the Service Economy is a function of utilization value.

This is evident with regard to services such as telecommunications, education, healthcare and financial services. In each of these industries, services are typically delivered over long periods and only a small portion of the cost is associated with the actual delivery of a specific service at a specific moment. The marginal cost of a single phone call is virtually zero, provided that the service depends on the existence of a massive infrastructure of telecommunications equipment, on which the investment and maintenance are nearly independent of the amount of usage. So too, the delivery of educational, medical and financial services depends on a huge infrastructure of schools, hospitals, banks, instructors, physicians, financial experts and administrative personnel. Each of these services forms part of an integrated system, linked with other social systems. In all these instances, the major cost is the cost of establishing and maintaining the system, regardless of the extent to which it is utilized. But its value, its real contribution to wealth and welfare, depends entirely on the extent of its utilization and the usefulness or quality of the service delivered.

Furthermore, in the purchase of services the buyer is primarily concerned with performance over a period of time. This is where risk and uncertainty become crucially important factors. Because a system must operate reliably over time, full evaluation of a system cannot be carried out before or at the specific time of service delivery. It can only be assessed by how the system functions in real time in the dynamics of real life. Whenever real time is taken into consideration, the degree of uncertainty and the probability become central issues. Will our mobile or internet service provider deliver reliable high speed bandwidth all hours of the day and days of the week? Can we obtain emergency services from our healthcare provider anytime and place as we may require? Does the manufacturer of our computers provide on-site service within 24 hours?

Cost in manufacturing is typically measured at the stage up to the point of final sale, whereas in regard to services the actual cost of full delivery may not be known until long after the sale. Because of the extended period of utilization time, the true cost over an extended period of utilization is in most cases not a fixed quantity, but a probability that depends on future events. The utilization value is probabilistic, rather than deterministic. It involves new types of risk and far greater degrees of complexity, vulnerability and uncertainty.

The probabilistic nature of economic value is dramatically illustrated by the recent subprime mortgage crisis in the USA. Between July 2007 and June 2008, rating agencies lowered the credit ratings on subprime mortgage securities by $1.9 trillion. Bad policy and business decisions based on valuation errors occurred on an inconceivable scale. Residential properties in the US declined in value by more than $5 trillion or 32% in a single year. The value of retirement assets and other investment assets dropped by more than $8 trillion. Huge as it is, these losses pale into insignificance when compared with the potential risks of climate change. Both the costs and inherent uncertainty associated with the future impact of carbon-generating industrial activities may be of an order of magnitude higher.

Uncertainty and systemic risk inherent in the modern service-based economy may extend long after the date of sale, throughout the entire life cycle of utilization and even disposal, as the Toyota recalls illustrate. This view challenges the fundamental notion of price based on the equilibrium between supply and demand as an adequate measure of value. And it goes to the heart of the question, ‘What do we really mean by value?’ The ingenious device of equating price with value has served as the basis for the entire development of modern mathematical economics as a science, yet all the major objections to GDP as an indicator of human welfare and well-being point to the inadequacies, gross distortions, disastrous policy measures and catastrophic consequences that can arise from implicit faith in this equation. This perspective highlights the essential linkage between theory and measurement. It reinforces the need for more fundamental reassessment of economic theory as proposed in “Introduction to a Program for the Wealth of Nations Revisited”, published in the first issue of Cadmus.11

Any system operating to generate some future result operates under conditions of risk and uncertainty. To understand the inherent uncertainty associated with contemporary economic activity, a distinction needs to be made between two essentially different kinds of risk – entrepreneurial and systemic. Entrepreneurial risk is a characteristic of all commercial activity arising from the decisions and actions of those involved. But a major portion of the risks associated with the operation of the Service Economy and human security in contemporary society are systemic in nature. Systemic or pure risks arise primarily from vulnerabilities in the social and physical environment, rather than from the actions of the affected individuals. Hurricanes, tsunamis, bankrupt governments, recession, drought, political paralysis in Congress, and war are instances of macro level systemic risks. But the same type of risk exists at lower levels as well. The highly systemic nature of modern economic systems and the increasing technological complexity of its components necessitate an ever deeper economic understanding and control of the vulnerabilities of these systems.

The terms risks and vulnerabilities can generate a fatalistic feeling of anxiety, helplessness and paralysis. But they represent only one side of uncertainty. On the other lies the unstructured potential from which social creativity continuously throws up new opportunities. Far-sighted entrepreneurs, such as Steve Jobs, learn to perceive the opportunities as well as the challenges arising from very rapid technological change and other sources of uncertainty that emerge from this uncharted realm – opportunities for defining new directions, for inventing and stimulating new products and types of activity in the quest for real economic growth and social progress.

The urgent quest for greater security and certainty are prominent characteristics of our age. This is partly due to the fact that people are living longer and must make provision for their maintenance during a prolonged period of retirement. It is also partly due to the fact that our expectations of security have risen dramatically in recent decades with the evolution of the modern welfare state, social security, medical insurance, unemployment insurance and other forms of protection. Since the end of World War II, a silent revolution in social welfare has spread throughout the world. Peter Drucker referred to it as the “unseen revolution” and “the American way to socialism”. Today social security expenditure in Western European countries accounts for more than 20% of GDP.12 Education alone accounts for 5.5% of GDP in the USA. This trend represents a change in social values and an attempt to manage the vulnerability of individuals to systemic risks.

14. Insurance

Insurance is an obvious example of the probabilistic nature of cost and economic value. Hurricane Katrina is estimated to have cost upwards of $200 billion, including $120 billion in insured catastrophic losses. In addition, we should add the significant increase in the cost of home insurance that affected all US homeowners in the years following the disaster. The true cost of the recent tsunami and the nuclear accident at Fukushima may not be known for many years. Human error can be as costly as the most violent acts of nature, as in the case of Kweku Adoboli, a trader in UBS’s risk management division, whose actions recently cost the bank $2 billion.

More than any other industry, insurance illustrates the enormous untapped potential of the emerging service economy as well as the compelling need for redefining basic economic notions of value and wealth. Traditionally classified as a component of the tertiary sector and non-essential need, the role of insurance in modern life has become so vital that it is virtually indispensable. The worldwide insurance industry, which makes up a prominent portion of the service sector, has grown twenty-fold, from $21 billion in 1950 to $4.3 trillion in 2008.13

A multitude of studies in OECD and developing countries have documented a significant long-run causal relationship between the growth of the insurance sector and growth of GDP. A study of 55 industrialized and developing nations by World Bank between 1976 and 2004 found a positive and significant causal effect on economic growth related to both life and non-life insurance.14 These studies confirm that insurance is an agent, and not just a by-product, of growth.15 A well-developed insurance sector is essential for managing the risks and vulnerabilities associated with the functioning and development of every modern economy. It provides long-term funds for physical and social infrastructure, while simultaneously strengthening risk-taking abilities. It facilitates trade and commerce, mobilizes savings, supports loss mitigation and fosters more efficient capital allocation. The contribution of the insurance sector to economic development is positive and exhibits a long-run equilibrium relationship.16 Another study of 77 countries from 1994–2005 found a 1.7 percent increase in economic growth for each one percent increase in life insurance density and a 4.2 percent increase in economic growth for each one percent increase in non-life insurance density.17

As for the society, so for its individual members. The quest for certainty and security are fundamental human aspirations and essential components of wealth and welfare. Yet in spite of enormous social progress during the past two centuries, both uncertainty and insecurity are ever present threats. Soaring levels of unemployment, skyrocketing healthcare costs, longer retirement periods due to increasing longevity, collapsing home prices and wildly fluctuating stock and bond prices are just a few of the many ways in which uncertainty and insecurity continue to impact on individuals and families. They combine to make insurance a primary need for human security and for welfare in contemporary society.

Insurance is a novel social organization devised to promote far higher levels of security and certainty for individuals by spreading the risks over a large population. It is perhaps the clearest example of the economic potential for transforming uncertainty into economic value. In spite of the high growth rates of the insurance industry globally in recent decades, the untapped potential for increasing existing types of insurance is far from saturated. An even greater potential contribution to wealth, welfare and human security can be achieved by extending the principles of insurance into fields where it has not yet penetrated. Creative methods of adopting insurance to education can dramatically accelerate the rise in general levels of education. Innovative insurance programs can encourage talented employees to become entrepreneurs, thereby creating jobs for others.

15. Measuring Wealth and Riches

A fundamental flaw in the prevailing measures of economic growth and national wealth is the implicit assumption that all monetarized economic activity adds to the total stock of national wealth and that this is the sole or primary determinant of the wealth of nations. Since the time of Adam Smith, the value added to national wealth is taken to be equivalent to the sale price of all products, which normally includes the cost of manufacturing and marketing them plus a margin of profit. Thus value added forms the basis not only for measuring the volume or flow of all economic activity as commonly measured by the gross domestic product, but it is also taken as equivalent to the net addition to national wealth. The implicit assumption is that all monetarized activity represents growth and all growth represents additional wealth.

Classical economists, in particular Ricardo, were well aware that the methods employed to account for economic wealth were not comprehensive of the real level of wealth of an individual or a country. Ricardo made a distinction between riches and wealth, one a measure of a person’s capacity to command necessities and enjoyments he seeks and the other, a measure of the value added cost of what is produced. Riches may increase as a result of an improvement in technology that lowers the cost of production, a circumstance in which wealth may decline due to the lower selling price of the product. These distinctions were considered secondary because the main problem during the Industrial Revolution was to identify the most dynamic system for increasing the wealth of nations via the industrialization process. Later economists were strongly influenced by this first formulation of economic theory. Thus, the value added flow of goods became the principal means of assessing wealth.

In the Service Economy, where the industrialization process per se is no longer the prime mover for increasing the wealth of nations, the problem is quite different and the contradiction between wealth and riches much more important. The divergence of the notion of riches from the notion of wealth is associated with what may be called deducted values. Deducted values are associated with the consumption of economic resources by activities that do not add to the real level of wealth or riches, but which add to the costs of the economic system. The rising cost of mining for oil or minerals from deeper in the earth adds to the value added calculation of production, but adds nothing to the real wealth and welfare of society. Rather the excessive exploitation of these resources diminishes real wealth by reducing the stock of resources available for future consumption.

Part of the problem arises from the confusion between economic activity and wealth. Value added is a measure of activity, a flow, whereas wealth is a measure of the total stock of economic value. Current accounting methods fail to take into account the negative impact of monetarized economic activity on forms of D&P, including both human and ecological resources. In recent decades we have seen that the negative impact of economic activity on natural D&P may in some instances exceed the total value added of monetarized activity or even undermine the natural systems which sustain our lives. The same thing is happening today as a result of large scale unemployment and underemployment in OECD countries, which most severely impacts on youth. Total unemployment and underemployment in USA, including discouraged job seekers and people who work part-time involuntarily is estimated at about 25 million people or 20% of total employment.18

Such a system of accounting is equivalent to operating a business without a balance sheet showing its assets and liabilities. A clear picture regarding the performance of a business requires an analysis of the flow of activity reflected in the profit and loss statement, as well as an analysis of changes in its total assets and liabilities. A well-endowed company might conceivably continue operating at a net loss for years on end without visible indications to the outer world, by depleting the entire stock of capital invested or accumulated in the past or by borrowing more and more money it will be unable to repay in future. It is only when we take into account the net stock of assets that we can determine the real level of wealth generation over longer periods of time.

Furthermore the classsical notion of value neglects the contribution of non-monetarized activities to wealth and welfare, which may be equal or even greater in value than the monetarized flow. One need only imagine for a moment the impact of stopping all voluntary, personal assistance and health care services provided by family members, as well as all the unpaid work one presently does for one’s own maintenance, to realize how essential these activities are to our overall welfare and well-being.

Figure 3 depicts the problem of measuring national wealth solely in terms of monetarized value added. The bathtub W represents the real wealth of the nation. The first water tap M represents the flow of monetarized wealth which is assumed to be a net addition to wealth, even when that flow involves remediation for pollution, the rising costs of increasingly scarce fossil fuels or emergency expenditures to recover from a hurricane, tsunami, nuclear accident or war. No distinction is made in this model between positive and negative value, between value added and value deducted. Note that the loss of wealth due to these catastrophes has never been deducted from the tub, but the amount spent trying to compensate for them is regarded as a net addition to wealth.

The second water tap NM represents the flow of non-monetarized, unpaid human activities, which make a fundamental contribution to real wealth and welfare, but are completely ignored by the current system of national accounts. Thus, if every citizen were to insist on paying someone else to perform even the most basic functions relating to their household and personal affairs, M would rise enormously, giving the impression that wealth has also increased enormously, whereas we would only be spending our accumulated savings or foregoing our leisure to work extra hours to pay others to do what we were formerly doing ourselves.

Figure 3: The bathtub of economic wealth 19

Note that this system is also inadequate to measure net additions to wealth arising from technological advances. The average price of a personal computer today in constant dollars may be less than 20 percent of the price in the 1980s, but the speed, storage capacity and functional capabilities of the product itself are thousands of times greater. Similarly, the real cost of international telephone calls may average only one percent of the cost forty years ago, while the real cost of international air travel may have declined by 50 to 75 percent. Thus, while in some ways we have grown poorer in recent decades because we must pay for goods and services that were formerly free, in other ways our real wealth has increased far faster than incomes have risen and even in cases where real purchasing power appears to have remained constant.

Another limitation arises from the fact that many riches are conditioned by our location. Countries with cold climates will always need to develop more sophisticated heating systems than those situated in temperate and tropical zones. In colder climates, more monetarized activities are needed in order to provide artificial, man-made sources of heat that can be stockpiled for winter; whereas in warmer climates, more monetarized activity may be required to provide for artificial cooling. Value added costs in either case may be higher than in the temperate regions in between. Which type of country is richer and which poorer, those that have to spend a lot of money on heating and cooling or those which have no expenditure at all on climate control?

The limitations of the accounting system we have inherited from the Industrial Revolution are nicely depicted by the paradox of heaven and hell applied to the notion of scarcity. In heaven, nothing is scarce because everything is free. Since everyone is satisfied with what they receive, there is no need for economic activity, prices or transactions, which means there is no value added, no GDP and consequently no measure of wealth. In hell, everything is scarce and highly valued and lots of energy is consumed to manage human resources, which means that the value added and GDP derived from obtaining the most basic of necessities for survival are very high, as is the case during war-time rationing. Thus the paradox that less scarcity leads quite naturally to less economic monetarized wealth. The more we acquire all the necessities and enjoyments we seek, the less adequate the current notion of value is for reflecting our progress.

The current system no doubt offers considerable advantages for measuring short term changes in economic activity. The problem arises because economic growth as measured by net value added and GDP is commonly mistaken for a net addition to national wealth and economic welfare. Numerous alternative systems that attempt to measure the real stock of wealth have been proposed, but such measures can only be approximate and will be partly subjective, akin to the estimated goodwill in a company balance sheet.

The choice in future may well be between a system of flow measurement which is quantitatively precise but increasingly devoid of significance, and systems of asset measurement which might be less precise but will be more relevant to the real world. The quantification of non-monetarized wealth components can be achieved through adoption of a multiplicity of indicators. Even problems related to differences in location, climate and life style can be resolved. After all, there are already economic indicators such as the consumer price indices, which are not identical for all countries, designed to take into account differences of this type. This is a crucial topic, as any method of asset accounting would also make possible a better definition of riches and poverty. Such measurements can include indicators that have been developed in many sectors and for many purposes over the past half century. Yet without the context created by new economic theory, there can be no consensus as to the definition of these indicators, nor can they be given the significance and status they require to become efficient instruments to promote human security and the real wealth of nations.

The transition to an economic system and theory which go beyond the traditional notion of economic (added) value requires acceptance of a degree of uncertainty with regard to our measures of wealth and progress. This uncertainty stems from the fact that the very question of what wealth should be entails defining certain goals and expectations. Our conception of wealth will always be a relative construct, a function of time and evolution of society. For this reason, new measures may never arrive at a reliable notion of wealth, but even if we cannot define it, we will know it when we see it. It will be a world in which the capacities of every human being have an opportunity for development and gainful employment; a world in which everyone has the necessities of life – not only the necessities for mere physical survival, but also the modern necessities for human security and development; a world in which we do not pillage the earth and rob future generations for present enjoyment. Having come this far over the last ten millennia, the last two centuries and, especially, the last five decades, surely there must be a way to get there. Having learned how to progress so rapidly, surely it need not take a long time to arrive. But we need a new roadmap, for present economic theory and measurement do not and cannot tell us how to get there.

16. Conclusion

With all its limitations, is it not wiser to accept the notion of value and a simple system for measuring it which has served us fairly well in the past? Alas, it is a matter of evolution. Hunting and gathering served humanity fairly well at one time, as did traditional forms of agriculture, monarchies, city-states, handwritten books, handmade shoes, the horse and carriage, telegraph, LP records, silent motion pictures, typewriters, VCRs, landline telephones and countless other remarkable inventions and social innovations. But had we been satisfied with any of them, we could not today enjoy a fraction of the comforts, conveniences and security that modern life affords. Had we not learned how to raise agricultural productivity, Malthus’ prediction would have certainly come true.

The problems humanity confronts today suggest that it is time to move on, to move forward. The severe strain being placed on the natural environment is one indication that old concepts and old measures no longer suffice. Rising levels of unemployment, ever increasing levels of inequality, social tension and unrest are point to the same conclusion. We see the effects all around us, but our science and our numbers assure us everything is perfectly alright.

Moreover, the process of social evolution we have been tracing has not reached an end or conclusion; it is only our outdated conceptions, attitudes and values that have exhausted their utility. We have organized production to perfection, but left out the most crucial ingredient – humanity. We have raised the value of GDP phenomenally, but overlooked the value of human security. The process of society’s past evolution offers hope and assurance that there is a better way and a better life for all humanity waiting to emerge. Human-centered economic theory and measures of wealth, welfare and human security can help us realize it now.


10. OECD, Enhancing the Performance of the Services Sector ( Paris: OECD Publishing, 2005)
11. Orio Giarini et al., “Introductory Paper for a Programme on the wealth of nations revisited,” Cadmus 1, no. 1 (2010): 9-27.
12. George von Furstenberg, (ed.) Social Security versus Private Savings (Cambridge: Ballinger Publishing Company, 1979) 59
13. Pei-Fen Chen et al., “Insurance market activity and economic growth: An international cross-country analysis” Annual Conference of economists September 2010.
14. Marco Arena, “Does insurance market activity promote economic growth?,” Journal of Risk and Insurance 75, no. 4 (2008):921-946.
15. “Assessment on how strengthening the insurance industry in developing countries contributes to economic growth” USAID, 2006.
16. Krishna Chaitanya Vadlamannati, “Do Insurance Sector Growth and Reforms Affect Economic Development? Empirical Evidence from India,” The Journal of Applied Economic Research 2, no. 1 (2008): 43-86.
17. Liyan Han et al., “Insurance Development and Economic Growth,” The Geneva Papers 35, no. 2 (2010):183-199.
18. Employment Summary August 2011, Bureau of Labor Statistics, 2011. http://www.bls.gov/news.release/empsit.nr0.htm
19. Giarini and Stahel, The Limits to Certainty, 9.


Pages: 1 2 3