More thoughts on a new economy

In a previous post, I looked at some characteristics that a post-modern economy ought to have. But later, I realized I had overlooked a useful way of considering this issue: the economy is, in some sense, a giant business entity. That means accounting has something to offer on the topic.

Imagine you’re put in charge of a large corporation. It’s a robust and healthy business with a good mix of cash, inventory, equipment, buildings, and other assets. It has few liabilities. And it generates income and supports a lot of employees who rely on the corporation for their livelihood.

But your theory of management is that the more money you spend, the more prestigious the company appears. So you get busy spending. All the profits go right back out the door. Sell the inventory at fire sale prices and spend that, too. Fixtures, equipment, land & buildings? Sell them and spend it. Borrow more money and spend that, too. What do you get for your money? Who cares? You’re spending, and that’s all that matters. Maybe you’ve got a yacht and a corporate jet. Maybe you’ve got attendants in the executive bathrooms to hand you a towel when you’re washing your hands. Maybe you have huge corporate banquets where everyone gets well fed and drinks plenty of expensive wine. It doesn’t matter: the more you spend, the more prestigious you are. And of course, you pay yourself an exorbitant salary commensurate with your management success.

There’s just one problem: your robust business soon isn’t so robust anymore; your healthy company isn’t very healthy. The assets are quickly disappearing, and the liabilities are mounting. The employees may need to be laid off soon because there’s not enough cash to pay them. And the stockholders– those investors who have an interest in your company– are seeing the value of their investment rapidly approach zero.

Maybe this sounds familiar. It’s not too different from what some of the companies now begging for bailout dollars have done. But that’s not what this post is about. Rather, this is my point: That’s exactly how we manage our macro economy.

Think of our globe as a business. It has income and costs, in the form of economic activity and overhead. The difference between those is net income, which corresponds to an increase in value or wealth. Our globe also has a balance sheet: Resources are assets. Future environmental costs are liabilities. People are assets, but the food and resources they’ll need in the future is a liability. Our equity– the value of the planet– can be viewed like the value of a company: assets minus liabilities. That means as we burn resources and accumulate environmental costs, we’re reducing the value of the planet.

But we don’t measure assets and liabilities. GDP measures only consumption, assuming that assets are unlimited and liabilities nonexistent. There may have been a time when that assumption made sense, but not in today’s world.

It would be insane to measure a business strictly on the money it spends. Yet that’s exactly how we measure global economic activity. We ignore the resources used up and the environmental costs accrued. We even ignore whether the benefit of an activity exceeds its cost. All we measure is consumption. How crazy is that?