The Riches of the Ocean for Humankind: Rethinking Value in Economics and Development

3. Measuring Value in the Industrial Revolution: The Monetarized Flow
It is essential to understand that the measurement of value in economics refers to the measurement of a flow. This can best be explained as a bathtub with two taps, as shown in Figure 1. The bathtub contains a certain amount of water W, representing a stock of wealth that we use for our needs and pleasure. This stock of water W is fed by two taps:

  • the tap M represents the flow of monetarized production, which pours additional wealth into our stock W;
  • the tap NM symbolizes the flow of goods and services that also increase our wealth, but the production of which is nonmonetarized. It refers for instance to free, unpaid human contributions, or free goods like air.

Figure 1: The Bathtub of Economic Wealth


Flow M: The flow of monetarized goods and services including money itself.

Flow NM: Flow of goods and services that also increase wealth but the production of which is nonmonetarized: unpaid human contributions, or free goods such as air.

W: The stock of wealth that we use for our needs and pleasure; the utilization value of this stock depends on the quality and quantity available.

When reading about economic indicators, many problems arise in our mind from the lack of distinction between what relates to our stock of wealth W (monetarized or not) and what refers to the flow F (monetarized or nonmonetarized). The value added in economics is essentially a measurement of the monetarized flow. It measures how much monetarized production is passing through tap M to increase the stock of wealth W. The underlying assumption rooted in the Industrial Revolution is that any additional flow represents an equivalent increase of the stock W (i.e., a value added).

The first reason for choosing the monetarized flowFM instead of the stock of wealth W as the measurement reference is that the statistical measurement of the flow is easier to do. The measurement of the stock, in contrast, appears much more complex because all sorts of nonmonetarized production that inevitably intervenes may not be noticed and because, in the case of the sale of a part of our stock, a definite reference value to refer to the loss in stock or wealth may not be available. However, the fundamental assumption of this reasoning still is that the production of the monetarized flowFM is equivalent to an increase in wealthW!

Over the last 20 years, we have perceived the emergence of a new type of problem linked to environmental and ecological constraints, which strongly suggests that the monetarized flow is not always an addition to wealth; the monetarized flow contains a nonnegligible part of pollution that does not add to, but destroys wealth.5 Part of the “added value” is then in fact a “deducted value.” The measurement of growth as expressed in the gross national product is precisely and only the measurement of such a monetarized flow at the macroeconomic, national level. It excludes the standard accounting practice used by all industrial companies and individuals: an accounting of total assets or stock available, and total liabilities incurred (the balance sheet), of which the analysis of the flow of activity performed during a given period of time (the statement of income and ex­­­­penses) is an integral part. At the microeconomic level, it is a matter of common knowledge and common sense that the differential in total value of assets (e.g., stock) does not necessarily coincide with the volume of activity performed over a given period of time. The accounting of assets is a process that determines the accumulation of an activity during a longer period of time, rather than simply measuring if the monetarized flow during this same period of time has increased or decreased, but remaining always by definition bigger than 0!

During the classical Industrial Revolution, it could be assumed that the amount of monetar­ized flow largely corresponded to increases in the stock of wealth. In the modern economy,6 this is no longer true; the real level of wealth (i.e., the stock) depends also on nonmon­etarized contributions and deducted values. In the first phase of the industrial revolution, value added coincided largely with the real utilization value and as such became the primary indicator of the growing wealth. The notion of utilization value itself refers to the assets (stock) and the way it is used in time, in contrast to the notion of added value referring to the flow of monetarized production.

The measurement of such stock can of course only be approximate and will be partly subjective: this means that the decision of what has value partly becomes a matter for political consensus. The future choice may well be between a system of flow measurement that is quantitatively precise but is increasingly losing its significance, and systems of asset measurements that might be less precise but will be more relevant to the real world. The quantification of nonmonetarized wealth elements can be achieved by adequate indicators. This is a crucial topic, as any method of asset accounting would also enable a better definition of riches and poverty, and this avoids the perpetuation of a system accounting a misleading level of wealth, as the nonmonetarized contributions to the wealth of one country may be higher than the one of another country.7

4. Old and New Shortcomings: Wealth and Riches
Classical economists, and in particular, Ricardo, were well aware that the accounting of economic wealth that they were elaborating was not really comprehensive of the real level of wealth of an individual or a country. A clear distinction was made between the notion of riches, on the one side, and of wealth, on the other.8 There was even an implicit admission that an increase in wealth could eventually correspond to an increase in riches.

However, these considerations remained secondary because the main problem during the Industrial Revolution was to identify the most dynamic system of increasing the wealth of nations, that is, the industrialization process, and to concentrate on its development. Inconveniences and discrepancies between wealth and riches were considered to be of minor importance. The writings in classical economics and some of the later commentators9

were a consequence of the fact that the first formalization of economic theory was a description of the industrialization process; the priority was to measure a flow of goods and the value added.

In the modern economy,10 when the industrialization process, although important per se, is no longer identified as the prime mover to increase the wealth of nations, the problem is quite different and the contradiction between wealth and riches becomes much more impor­tant. The divergence of the notion of riches versus the notion of wealth corresponds to what can be called the development of deducted values in the modern economy. The increase of these deducted values stems from the increasingly higher allocation of economic resources to activities that do not add to the real level of wealth or of riches, but which are in fact absorb­ed by the rising costs of the functioning of the economic system (e.g., the costs for waste management).

‡ * Monetarized refers to any goods or services exchanged, monetarized or not. Nonmonetarized refers to goods or services with no relation to exchange.
5. See the notion of “deducted values” in Giarini, Dialogue on Wealth and Welfare, 121.
6. The modern economy which in fact we call the “service economy” for reasons described by O. Giarini and W. R. Stahel, “The Limits to Certainty–Facing Risks in the New Service Economy,” in International Studies in the Service Economy Series, vol. 1, ed. Kluwer Academic Publishers (Dordrecht: Kluwer Academic Publishers, 1993), 294.
7. A. Tevoedjre, La Pauvreté, Richesse des Peuples (Paris: Les Éditions Ouvrières, 1977).
8. W. A. Weisskopf, The Psychology of Economics (Chicago: University of Chicago Press, and London: Routledge & Kegan Paul, 1955, also University of Chicago Press, Midway Reprint, 1975), 52.
9. Weisskopf, The Psychology of Economics.
10. Giarini and Stahel, The Limits to Certainty.

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