To take an example, say South Korea produces 100 million smartphones one year, valued at $100 each. Total value is $10 billion. In Germany on the other hand, let's say that 100 000 houses are built, valued at $100 000 each. That is not accounting for the land value, but only for the value of the structure. Nevertheless, total value is $10 billion here as well. In both cases, this economic activity adds $10 billion to the respective country's GDP. As far as economic activity goes, I suppose that I can't deny that the these two activities represent roughly the same value. The difference becomes obvious however, when we move 5 years into the future. What are the smartphones worth now? If the smartphone has been used, we can get maybe 20% of the original value. If not, and it's a model that has not entirely gone out of fashion, then maybe 50%. The houses on the other hand, need only 1-4% annual maintenance to stay fresh [1]. The equivalent maintenance rate for the smartphones would be 20%, if there was a business for smartphone upkeep.
So there is a big value term that is missing from GDP, namely how much value that is destroyed by wear and tear each year. Why is this important? The accumulated value is important when we're not just using economics to measure geopolitical johnsons, but when we're thinking about what it is that we actually want the economy to produce for us. And that is not only fast consumption goods, but also real estate, roads, railroads, water supplies, and power plants. The quality of the solid capital in one's country has a large impact on how wealthy it feels. And good quality solid capital is not only important for the feeling of well-being, but it is also the best insurance against crises. Imagine a country with no solid capital whatsoever. All their real estate is literally air castles, inflated by foreign companies for a rental fee. The water pipes and power lines are likewise rented from an entrepreneur. Come a global finance winter, and these people are sitting on the bare ground within a year!
This example is obviously a hypothetical extreme. How close do we get to this in reality? Apparently, Dubai does not have a network sewage system for their skyscrapers, but rely on septic tanks and regular offloading by trucks [2]. I can't universally diss this system: it has no pipe ruptures, that might render whole blocks without sewage, instead of just single skyscrapers. Actually, the downside of this system is mainly in the normal case: the cost of renting dozens of truck drivers regularly must be much higher than paying a couple of guys to do regular maintenance on pipes and be on standby for ruptures. But fair enough; for these rich people, the extra cost is not so painful. However, such systems are not only for the very rich: it can also be a poverty trap. In Mexico City, for example, major parts of the population rely on water tankers to supply their needs [3]. In the case of Mexico City, however, there is a municipal water system, but it is leaky for large-scale engineering reasons [4]. In Slagskuggan (1969), Swedish author Sven Lindqvist points out that the great tragedy of Latin America is that unemployment is sky high, while at the same time the there is no shortage of work to be done; the countries badly need roads, hospitals, and schools. All these examples go under the label "underinvestment in solid capital".
So much for underinvestment. What other problems are there with ignoring the value of solid capital? One problem is that if governments use GDP as their compass, then it is very easy for them to miss that their country is quietly losing wealth. If the population also happens to be highly educated so that they also look at GDP rather than at the ground in front of their feet, then even the people can miss this. In a country where a measure of the solid capital is not a part of the evaluation of governments, a government can balance a poor budget by shuffling over long-term costs to future voters. In this way, deterioration can be hidden for decades, while on paper it looks like the economy is growing. There is a saying that when a measure becomes a target, then it becomes a bad measure (because people will start to hack it). This has surely happened to GDP at this point.
Let us also look at an example of successful solid capital investment. Consider the value added to the European continent by landscaping over the last 1000 years. Barely a stone lies there, or a tree grows there, except that it is for the service of humans.
Now for the self-criticism. Is there such a thing as overinvestment in solid capital? One example I can think of is Göta Kanal, a canal which was built from 1810 to 1832. It connects the Swedish west coast to the east coast. The point of this was to reduce travel time from industries on the east coast to the Atlantic, and to avoid Danish tolls. The problem is that the canal was almost immediately rendered obsolete by the railroad [5]. The Danish tolls were also abolished in 1857 (upheld since the 1400s, the tolls disappeared soon after the US refused to pay) [6].
 |
| Göta Kanal, an example of overinvestment in solid capital. The canal was rendered obsolete by the railroad soon after its completion. |
It is ironic that Göta Kanal, a large investment in solid capital, was made obsolete by the railroad, another large investment in solid capital. The case of the cannons vs walls is more asymmetric. In another asymmetric example, the growth on Amazon and other online retail shows that investments in physical retail can be disrupted by on-demand services. At the same time, the dominance of Amazon itself compared to other online retail, is in large due to large investments in solid capital by managing their own fulfillment centers [7][8].
One final note about the completeness of solid capital as a measure of wealth. An arguably even more important hidden value term is institutional and human capital. Both are very hard to measure directly. What is the economical value of having the world's best schools, for example? The value of a country's schools in terms of added human capital can be measured indirectly with a large time lag (about 15 years), and even then it is very uncertain what the value added by the school is. Schools deteriorate very slowly and silently (the students can't vote, and don't have a reference frame), so of course they are underinvested in.
Let us end by saying something actionable. How to avoid the trap of underinvesting in solid capital? (Not to mention institutional and human capital). Should we rely less on electable politicians to take decisions about long-term investments? Maybe shift those decisions off to experts? That strategy is itself vulnerable to institutional rot, however, and when that happens it creates popular rage and it's very hard to fix from within a democratic system (actually, from within any political system). The one action that seems most positive to me is to just start measuring the solid capital, and to start using this measure as part of the conversation. Perhaps as an extended GDP, that also included deterioration of capital. If this measure becomes an often-used figure to compare countries, then undoubtedly governments will also try to hack it. Still, it should attract investment to more long-term projects.
References
[1] Annual house maintenance
[2] Dubai sewage trucks
[3] Mexico City water tankers
[4] Mexico City water infrastructure
[5] Göta Kanal wikipedia
[6] Öresundstraktaten wikipedia
[7] The Everything Store (2013 book)
[8] All about lean: fulfillment centers
No comments:
Post a Comment