Life and money in the human species

Matt Berkley

Draft, 11 May 2004

Contact details: Matt Berkley, 33 Howard Street, Oxford OX4 3AY, United Kingdom.

Tel. +44 (0)1865 726768 matt@mattberkley.com

Summary

This article considers errors of reasoning in macroeconomics, and explores their implications.

A. Introduction

How can I know

[the average outcome for hungry people]

if I don't know

[how many survived the year]?

I can't, and nor can an economist. The existence of fundamental errors by economists can help explain:

i) why some countries have markedly different trends in GDP and life expectancy;

ii) why official global statistics claim fast progress on poverty and yet slow progress on health.

Bad health is often an outcome of malnutrition through lack of control over resources.

The errors mostly concern demographic change and the cost of living. It seems plausible that finance ministers are aware of several.

Policy advice from economists has been based on the misdescription of statistics: for example, "income in the poorest fifth went up 1%" does not mean "incomes of the people in the poorest fifth had income rises of 1%". Such misdescription, appearing in economists' claims of "benefits" under particular policies, has amounted to a bias against certain policies. For instance, if you use the national inflation rate, you end up saying that food subsidies didn't help poor people very much.

How far have economists misrepresented economic outcomes? That question is not answerable. Firstly, data are unavailable on several key aspects. Secondly, some data are by definition unavailable. Those are the things which cannot be measured. There is no such thing as "economic welfare" as a separate concept from other welfare, because your circumstances determine your wants. But then so do your preferences.

How far are economists' policy recommendations wrong?

That question could perhaps be answered in one way. Where people live longer, their consumption has been more adequate than the economists have said - for one purpose.

Economists' policy recommendations for "prosperity" and "poverty" are based on studies of past income trends, and are full of mistakes.

In one respect, it is undeniable that economists have overstated economic progress in the human species. The reason is simple: there are more adults per child than in the past. Since adults need more food than children, it follows that, in comparing yearly statistics, the economists are now underestimating global food needs.

In another respect, it is undeniable that economists have understated economic progress in the human species. The reason is simple: people live more years than before.

This means that over time, resources are shared out among fewer people. Net consumption per person has gone up because people live longer.

Welfare is a subjective concept. But economists have made several fundamental errors in their statements about consumption adequacy in the species.

Income without adjusting for necessary expenditure is a social indicator, not a welfare indicator.

How can

[income]

be a measure of prosperity without subtracting

[necessary expenditure] - which is by nature subjective?

B. Prosperity, poverty and children's meals

Economists' measures of national prosperity have ignored the fact that adults need more food than children. The global proportion of children is going down. This method overstates consumption adequacy as time goes by.

This method enables governments to make misleading statements on success: "Incomes have risen 1%" is not much use to people as a statistic if the change is merely due to a change in the proportion of children. It is of use to a government, for financial planning: more taxable income per person brings in more money for a government.

Note: More taxable income per person means the government gets more tax. With more taxable income per person, a government can increase tax revenue and at the same time claim (misleadingly) "We've cut taxes!". What they should say is "we've cut tax rates". Lower tax rates do not equal smaller government.

Income, though, is not a measure of financial profit without subtracting necessary expenditure. That is true for businesses, governments and people. In national statistics, economists adjust this year's income statistics by this year's prices.

To judge policies by their effects on per capita economic statistics would be mistaken even if income without adjusting for expenditure needs in other respects were somehow a measure of wealth. To use a Millennium Goal indicator based on per capita figures is in that respect to exaggerate progress. It is also to misdescribe "income" as "income poverty". The economics profession has underestimated global food needs in 2004 relative to 1990 by failing to adjust for children's meal sizes.

There is an additional problem relating to economies of scale in households: smaller households cost more per person to run. Whether people prefer to live in smaller or larger households is a separate question. It illustrates the complexity of real life, and the essential futility of claiming to measure "welfare".

C. Hypothesis on life length and financial statistics

Macroeconomists say people are poor even if they live a long time. They say "Americans are economic successes, but Cubans are economic failures". Yet Americans reportedly live to 77 and Cubans to 76. In countries where life is short or decreasing, economists are allowed to say consumption is good or improving. Why?

I do not know. But here is a possible explanation for discrepancies between the income numbers and the life numbers. We can hypothesise for countries where life is long a combination of the following factors.

1. Longevity itself lowers GDP per capita.

Economists confused the trend in the average with the average trend.

They mistakenly used cross-sectional statistics to infer a longitudinal trend, without data on changes in life length. In reality in countries where people live longer, income or consumption is shared out among fewer people over time.

2. More assets and/or less debt.

Economists ignored assets and debts, which is how many people think of wealth and poverty.

3. Consumption problems transitory rather than chronic.

Economists ignored vulnerability to chronic rather than temporary consumption inadequacy.

4. Lower prices for most people.

Economists' national inflation rates are disproportionately influenced by luxury goods and services.

Economists' international price comparisons are also influenced by irrelevant prices in other countries.

A sensible guess might be that food was cheaper in countries where life was long.

5. Fewer items of expenditure or consumption required.

Economists confused prices with the cost of living.

A cost-of-living index depends on what amounts you need, not just on prices.

6. More income/consumption for most people.

Economists used the mean, one type of average. The mean is unrepresentative of the majority. Most people have incomes or consumption expenditure or monetary value of own produce below the mean.

7. Perhaps more unrecorded income in countries where people live longer.

Some of these things are impossible to measure, so perhaps the best thing to do is think.

1. Longevity itself lowers GDP per capita.

Economists confused the trend in the average with the average trend.

The trend in the average is what economists measure (a cross-sectional statistic)

The average trend is what happens to real people (a longitudinal statistic).

In a country where most people live longer, that success makes per capita figures lower.

Most people have below-mean incomes.

And so most people raise the average by dying.

The effects may accumulate over time. Economists have no idea of the size of this effect on their statistics.

But in any case to ignore longevity while claiming to have measured "welfare" trends is ludicrous.

In other countries the majority increased the statistic for average income by dying earlier. That does not mean anyone had a rise in income. It just means the observer is now looking at people who had more income to begin with.

In countries where life length is more equal across income levels, this necessarily lowers the statistic for average income. Where life length is more unequal, you would expect the statistic for average income to be higher as a result.

Part of this problem is that economists counted retired people as economic failures.

[Survival beyond retirement]

necessarily lowers the statistic for

[average income among those alive at the end of the period].

So do policies to save the lives of those on low incomes in general.

If people in Cuba live to the age of 76, then there are probably a lot of retired people. The macroeconomist counts most of them as doing worse than if they had died. This would be a mistake even if everyone had the same amount of income over the course of their lives.

It is the longevity itself which is partly responsible for lower GDP per capita in such countries. Why do some countries have low GDP per capita but high life expectancy? Partly because life is long. Is this a large or a small effect? Economists do not know. So what is the sensible thing for them to say? That they have statistics, not that the statistics show prosperity.

In countries where most older adults have pension arrangements, people on low incomes subsidise the pensions of those on high incomes. So the economists' ratios of income received are wrong.

All economists' measures of "income inequality" have been based on annual statistics for the people alive at the time. But that is the wrong way to look at income trends. Other things are not equal, because for one thing declared income is not the same thing as actual income. But if the economists knew the incomes of everyone, the ratios would still be wrong. People on higher incomes are still around to receive income when those on lower incomes have died. People on higher incomes get pension money for several more years than those on lower incomes.

This is also a problem for economists' claims that particular policies increased income for poor people. It is a problem because policies have different effects on survival. When economists and officials have said "this policy is good for the poor" and they quoted a number, we could say it is the result of looking at the wrong income trend. That is true in one sense. But since dead people don't have an income trend, it's not only wrong but also incoherent to speak of having measured the trend for real people.

The FAO made a similar mistake concerning the proportion of hungry people. "Reducing hunger" is the wrong approach for a species where many die much earlier than others.

In addition, the proportion of "poor" or "hungry" people goes down if the "rich" or "well-fed" live longer or have more babies.

2. More assets and/or less debt.

Economists ignored asset ownership - despite the fact that most people think of "rich" and "poor" in terms of assets.

There are two relevant effects of assets on survival.

First, assets may help you survive in a crisis. If you have land, goats, cows or other assets you are more likely to survive in a crisis. It is plausible that in countries where people live a long time, they have more to fall back on.

Second, assets such as land ownership decrease the need for expenditure on such things as rent. So perhaps there was more asset ownership in countries where people live longer.

Most people think of "rich" and "poor" as describing [asset ownership]. But oddly macroeconomists think of "rich" and "poor" in terms of [income].

"Welfare economics" in capitalist societies does not measure the accumulation of capital!

It is not a capitalist system of economics, but an "incomist" system. Not net income or real income, but income without adjusting for necessary expenditure or even for an appropriate rate of inflation for most people (see below).

Also, generally it is true that money can make money. For one thing, you get interest on capital and pay interest on debts.

So for several reasons, to ignore capital and debts is a bit odd for a tradition claiming to measure economic prosperity. When macroeconomists talk about "rich" and "poor" they ignore the fact that people may be priced out of house ownership and therefore waste huge amounts of money on rent (and then perhaps as a result run up expensive debts on top).

So we might hypothesise more asset ownership in some countries where people live longer. And/or more assets among those on lower incomes.

Economists ignored debt levels.

Debt interest adds to necessary expenditure. So perhaps [lower levels of personal or national debt] in countries where life is long.

Both of these tax people. [Income without subtracting interest payments] would not be a measure of [net consumption purchasing power] for anyone at any level of income - even if economists had some way of calculating the amounts people need to buy in their circumstances.

3. More transient consumption problems than chronic.

Where many people have temporary consumption problems, survival may still be good. Fasting is not necessarily bad for you. But where fewer people have chronic problems, many may fail to survive. In agricultural countries vulnerability is seasonal, so annual figures may not be very useful in human terms.

Note: Macroeconomists confuse "incidence" with "prevalence". They talk of the "incidence of poverty" when they mean "prevalence". The usual term in relation to hunger, malnutrition or disease is "prevalence".

There are two problems with the economists' confusion of the terms. First, all of these are terminal conditions (the prevalence of malnutrition goes up if the government saves the life of a person about to die of it, since it takes time to recover from malnutrition). The other problem is that there is a difference between chronic and short-term deprivation.

4. Lower prices for most people.

Economists used price indices disproportionately influenced by unnecessary goods and services.

Macroeconomists failed to look at price trends for necessary goods, which have a far greater impact on longevity than unnecessary goods.

By convention in economics the overall price index in a country is mathematically influenced more by more expensive items.

Macroeconomists use the overall inflation rate. That rate is determined mathematically largely by purchases of unnecessary items. That is because more money is spent on them.

The hypothesis that "items necessary for survival were cheaper in countries where people live longer" is especially plausible given that some countries have had price controls and/or subsidies for food.

Consider a country where most people can only afford, or not afford, the basics. It is not surprising if their survival rate has nothing much to do with rises in average income - which are calculated using the overall inflation rate, influenced mostly by prices paid by the minority.

In other words, the fact that mean income buys more this year of (necessary and unnecessary goods) doesn't say whether consumption among the majority went up or down. Rice may have gone up by 50% or down by 50%. Whether the overall rate goes up or down by 5% tells you nothing about rice.

International comparison:

Economists' international comparisons of average income are influenced by irrelevant price changes in other countries.

It is important to remember that when economists report differences in "income" between countries they are talking about figures after adjustment. What economists call "growth" is a rise in the average compared to inflation. How the inflation rate is calculated is therefore important.

Economists' measures of "purchasing power parity" present the same problem as the national inflation rate: they are not representative of the inflation rate for the typical person.

The additional problem with international comparison is this:

Other countries' prices, and the relative weight of different items in the index (e.g. rice versus restaurant meals) - determine the reported "income" in the country being looked at.

We might also add that internationally traded goods are not included in the international rates used by economists to assess "welfare". People on higher incomes might be getting cheaper goods and services which are not reflected in the national inflation rates.

5. Less expenditure needed.

Economists failed to distinguish between a price index and a cost-of-living index.

A cost-of-living index, if such a thing could be devised, would be a function of both prices and amounts needed.

Macroeconomists assumed that "people need to buy the same amounts of goods and services whatever the policy or circumstances".

Even if net real income were all that mattered to people, income could not be a measure of welfare without subtracting necessary expenditure.

In reality, the need for expenditure depends on assets (personal, societal, environmental), debts and your own assessment of what you think the equivalent standard of living is in different places.

It is plausible that there were fewer items of necessary expenditure in some countries where life is long.

In a country where the government pays for more things, you don't need to spend as much.

In a country where it's warm, you don't need heating.

The omission by economists of state provision as an economic benefit is another flaw in their claims that policies benefit or do not benefit poor people.

Where the state provides things or subsidises them, people need less income. Where those things are removed, people need more income. This would appear to bias economists' conclusions towards water charges, charging for health care, and charging for education. The fact that your income goes up by 1% does not mean that you have 1% more net income.

A similar error arises in respect of price controls on food: the economist simply says "the poor are x% better off in country B" without looking at food prices. - and then says "price controls in country A have not helped the poor". This kind of social science is, in this as in other respects, biased against some policies.

The list of necessary items for purchase varies according to climate, provision of goods and services by the state, and geographical factors.

In a crowded city, for example, the ability to get out of the city is often prized , which is why those with higher incomes and assets buy country houses and those who cannot afford to get away for a while may become unhappy.

A list of necessary items is both necessarily subjective and also controversial, since what is necessary for a good life depends on what you think a good life is.

However, in the literal sense the cost of living is the cost of staying alive for a set period. In theory, that might be both non-controversial and measurable.

But then the cost of living in the literal sense would be equivalent to the nutritional or other quality of goods relative to longevity.

But that is not calculable.

The need for expenditure - like the value of a year of life - is therefore a philosophical matter, not an empirical one.

In other words, the cost of living is a function of the standard of living, and both are matters of opinion.

The cost of staying alive is less controversial, since it can be measured in years.

Note on the failure of economists (and the FAO) to develop meaningful measures of the quality of food or other goods or services: Perhaps there is better food and services in countries where life is long.

This failure is not surprising, since these things are in practice impossible to measure. What is more surprising is that social scientists have pretended that the problems do not exist. Failure to develop measures of the cost of living or the quality of items is not surprising, since these are subjective notions.

But economists' confusion of [income] with [profit] makes no sense.

To confuse [income] and [income minus necessary expenditure] is incoherent.

Existing international comparisons of prices of standard items (such as a can of beans) are largely irrelevant for the purpose of comparing the value of items in different countries. Fresh vegetables are better for you than old ones. A water supply with arsenic or cholera is worth less to you than safe water. These things are, like the factors above, in practice impossible to analyse with numbers. The central belief of the macroeconomist is that it is either now possible (see World Bank pronouncements) or will be possible one day if they make their equations complex enough, to measure human welfare with a number, by factoring in all kinds of variables about the size of the children, the cost-effectiveness of different household sizes, the cost of all the food items and so on. But how do you judge food quality?

Leaving aside the fact that the cost of comparable housing, the adequacy of the culture in respect of health practices and everything else in human life would need to be taken into account (and I haven't yet mentioned the sensible tradition of Ayurveda medicine in Kerala, where people live for a long time on low numerical values of income) let's think a bit more about food.

What are called poverty lines are usually set in terms of the purchasing power of money for a certain number of calories (without necessarily adjusting for even the price of those calories). So are hunger lines. This is highly problematic.

Firstly, the calories you need depend on the activities you undertake. You don't want too many calories if you work behind a desk, and a population will need more calories if the jobs created are hard physical jobs).

Secondly, malnutrition is not simply about calories. For health, people need essential fatty acids, vitamins, amino acids and a balanced diet.

They also need food which not only contains helpful chemicals, but is also relatively free from harmful ones - and harmful bacteria and viruses.

How to calculate the quality of food, water, shelter and clothing would be immensely complex.

Where people live longer, their consumption has been more adequate - for one purpose, anyway.

And the fulfilment of that purpose can be measured in years.

Note

The quality of life is something else. Psychologists or sociologists may grade countries according to responses to questions about the quality of life. The answers will depend partly on people's perceptions of other people's lives. "How happy are you?" "Compared to who?"

6. More income for most people.

Economists used the mean, which is not representative of the typical person.

The person on mean income is not typical, since more people have incomes below the mean than above it. Per capita (mean) income statistics are hypothetical: they represent what each person would have if the income were shared out equally. But the income is shared out more equally in some countries than others.

The median would represent more accurately the income of the typical person, since it refers to the middle person in the distribution. The mean disproportionately represents the incomes of a minority.

In other words, the mean is biased towards people on higher incomes.

7. Perhaps more undeclared income in some countries where people live longer.

Speculation on my part.

Notes

Failure to develop measures of the cost of living or the quality of items is not surprising, since these are subjective notions.

But economists' confusion of [income] with [profit] makes no sense.

To confuse [income] with [income minus necessary expenditure] is incoherent.

The quality of life is another matter: at the risk of opening another philosophical discussion, someone might say that people who are happier live longer and that happiness depends on the climate, the culture, and the honesty of social scientists.

D. Hypothesis on global health goals and financial statistics

A partial explanation for slow global progress on health goals can plausibly be found in the same errors, since economists habitually made these mistakes when claiming economic gains or losses to people on low incomes from particular policies.

They used the wrong income trends (cross-sectional rather than longitudinal), the wrong inflation rates (those dominated by prices of unnecessary items) and the wrong concept of a cost-of-living index.

Lending policies have been determined by comparison of past economic statistics (income without adjusting for necessary expenditure, and the wrong income trend: cross-sectional rather than longitudinal).

For example, since 2000 the World Bank, the Development Assistance Committee of the OECD and the UK government have publicised a document containing the claim that social spending does not help the poor very much economically. But if social spending keeps the poorest alive, they are still in the figures to bring the averages down. And the analysis used the wrong inflation rate.

World Bank strategies for OECD countries' lending have been based on these mistakes.

One mistake is the ambiguous and misleading term "poverty reduction". The FAO has made the same mistake, assuming that the change in the number of hungry people shows how well or badly hungry people ate.

E. Hypothesis on finance ministers' knowledge

Finance ministers who govern the World Bank and the IMF are plausibly already aware that economic statistics are lower in countries where there are more retired people.

Economists forecast falls in per capita income in Japan in the future when the population ages.

The idea that Japanese finance ministers have been unaware of this seems implausible.

Whether finance ministers understand that per capita income rises if poor people die earlier is not publicly known.

Finance ministers might also be expected to know that net income is decreased by interest on debts, and that if you have a house you don't pay rent.

The finance minister of the United Kingdom was informed of the longevity flaw in the notion of "poverty reduction" on 6 November 2003. The Chief Secretary of the Treasury was informed of the flaw in October 2001. He informed the Secretary of State for International Development, Britain's Governor of the World Bank. The Bank and the UK Government continued to publicise conclusions based on the misdescription of data trends.

F. Three axioms of social science

Axiom 1

Where survival rates are unknown, the average outcome is unknown.

How can an economist know the average outcome for hungry people without knowing how many survived the year?

The idea of "poverty reduction" is fundamentally flawed, as is the idea of reducing hunger.

They are both double negatives. It is generally more productive to focus on the intended outcome rather than the problem.

Axiom 2

If adults need more than children and the birth rate is falling,

then other things being equal

per capita statistics progressively overstate consumption adequacy.

How can economists' measures of national prosperity be right if they don't adjust for the meal requirements of children?

Note, however, that the term "adequacy" begs the question of "adequate for what?".

Also, nutritional adequacy is not an objective notion - except in terms of effects on longevity.

What is good food?

In countries where food is plentiful, people often think of good food as food which staves off fatal disease.

Axiom 3

The cost of living is a function of both prices and amounts needed.

Note: "Amounts needed" is a subjective concept. "Prosperity" is therefore fundamentally a matter of opinion. That is true for an additional reason also: life length varies and people only need to eat if they are alive, so the measurement of needs is problematic anyway.

G. Terminology and statistics

There is no such thing as the "right" cost-of-living index, since the cost of an equivalent life is a matter of opinion.

There is no such thing as the "right" income trend, because only the living have income trends. So there is no way of balancing economists' errors about life length improvements, where they occur, against their error relating to proportions of adults.

Nor would adjusting for [assets, debts, food/housing/clothing price inflation, government provision, climate, children and life length] be practical even if it were possible. Economists' equations are already vastly complex, and their terminology impenetrable to most people.

But there is such a thing as accuracy in describing statistics. Income on its own cannot reasonably be described as measuring wealth or poverty.

"Income in the poorest fifth rose" is wrongly presented if it is presented as a longitudinal trend ("incomes of the poor rose"). That is because if the most vulnerable people die they are replaced by people who were not so vulnerable to begin with. Economists do not know survival rates in the lowest fifth.

But in any case, an [income rise] is not equivalent to an [income gain], for reasons concerned with age and necessary expenditure.

How can an economist know the "average outcome" for hungry people without counting how many survived the year?

How can economists have a global "poverty" count if they don't know the price of food or the proportion of children?

One of the most basic tasks of the scientist is accurate description.

Social science can be useful, but only if practitioners understand the philosophy and theory.

And only if the theory is rooted in real life.

H. Concluding remarks

There is little point in gathering statistics if they are misdescribed.

There is little point in devising targets if they are misdescribed.

In terms of basic consumption adequacy, it looks as if the economists have promoted the wrong policy models, since people in some countries live a long time despite being "poor" by the economists' measures.

It is wise not to assume that one's own culture is superior to others.

The solution to the problem of starvation may lie in greater understanding.

Greater understanding can only come if social scientists, officials and politicians provide accurate description of their numbers, without embellishment or spin.