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Why we should measure national wealth in assets
WHEN the privatisation programme of Margaret Thatcher's government got into its swing in the mid-1980s, Harold Macmillan, a former UK Conservative prime minister, compared the policy to a family selling off its assets: "First of all, the Georgian silver goes, and then all that nice furniture that used to be in the saloon. Then the Canalettos go." You can't eat the accumulated wealth of generations, but it has always been understood that assets are vital for lasting prosperity. No business would ignore its balance sheet, or rather, those that resort to tricksy off-balance sheet accounting often fail spectacularly.
Wealth is just as fundamental to national prosperity in the long term. Assets are the stored capacity to generate future income and consumption. They may be created by investments funded out of current income, or they may be gifts of nature. How well-off people are in terms of their ability to consume or otherwise lead the lives they want depends not only on their own endeavours but also on the past accumulation of a wide range of assets. Some of these are individual; human capital reflects personal effort and acquisition of skills, family and social background and the education system. Others, such as natural capital, are collective assets whose state reflects the entire economic system - globally, in the case of climate.
This speaks to widely acknowledged flaws in using gross domestic product (GDP) as the key metric of economic success. For example, the paradox that a natural disaster is good for GDP, because of the required reconstruction of homes and infrastructure, is often pointed out. Yet, immense resources go into measuring GDP and little into measuring wealth.
This is just starting to change. The World Bank is building a database on "comprehensive wealth", defined as consisting of natural, human and produced capital, and net foreign assets. The UN has been developing a statistical standard for measuring natural assets.
The UK government's natural capital committee and the Office for National Statistics (ONS) are pioneering the development of natural capital accounts. They show that the value of natural capital, including mineral resources, urban green space, biodiversity and air quality, has been in decline. But much more data is needed to be able to say when any component will reach the tipping point of collapse, unable to contribute to future living standards. There are statistics on financial capital and conventional productive capital such as factories; there are fewer on infrastructure and its quality - how many postwar concrete buildings or bridges will soon need replacing? Some countries measure human capital, which the ONS is working on improving.
One key missing piece of the picture is social capital, or trust. Economic theory says this is vital. Anyone buying online puts their trust in someone they do not know, whose product they cannot see. In business, trust comes as goodwill, which makes it easier for a company to raise new capital. Social capital lies behind whether a government can raise tax revenues and provide public goods. But how to define it with sufficient detail for statisticians to measure it? My colleagues and I are working on extending the definition and measurement of comprehensive wealth, in cooperation with organisations such as the ONS and UN. Our recent interim report highlights work such as a methodology for capturing in just two indicators the many dimensions of social capital.
However, the task is enormous - as big as the effort in the 1930s and 1940s to develop the current system of national accounts. GDP was a metric for its time - a measure of economic possibilities when the needs of the Depression and war were urgent. The pressing challenge for today's economies is the sustainability of our present standard of living. Unless we measure our assets, we will not know how far we are living on borrowed time until it is too late. FT
- The writer is Bennett Professor of Public Policy at the University of Cambridge