“WEALTH brings with it its own advantages,” John Kenneth Galbraith once wrote, “and the contrary view, though often expressed, has never been very convincing.” Despite the obvious benefits of wealth, nations are generally poor at accounting for it. They may boast of their abundant natural resources, professional workforce and world-class infrastructure, but there is no widely recognised monetary metric that can calculate the sum of these natural, human and physical assets. Economists prefer to use GDP instead. However, that is a measure of output, not wealth. It evaluates the flow of goods and services rather than the stock of assets. Evaluating an economy based on GDP is like assessing a company by its quarterly profit without looking at its balance sheet. Fortunately, the United Nations published a balance sheet report for 20 nations this month, overseen by Sir Partha Dasgupta, a professor at the University of Cambridge. The report included three types of assets: “produced” or physical capital (machinery, buildings, infrastructure, etc.), human capital (the education and skills of the population) and natural capital (including land, forests, fossil fuels and minerals).
According to this scale of values, America’s wealth was nearly $118 trillion in 2008, which is ten times its GDP in that year. (These sums were calculated based on prices in force in 2000). Its wealth per capita, however, was lower than that of Japan, which is the leader in this category. Based on GDP, Japan’s economy is currently at a lower level than China’s. But according to the UN, Japan was 2.8 times wealthier than China in 2008 (see charts). Officials often say that their country’s greatest wealth is its people. This is true for all the countries mentioned in the report, except for Nigeria, Russia and Saudi Arabia. The UN calculated a nation’s human capital based on the average number of years of schooling, the wages of workers and the number of years worked before retirement (or death). Human capital accounts for 88% of Britain’s wealth and 75% of America’s. Japan has the highest average human capital compared to other countries. Japan is also one of only three countries in the report that did not reduce its natural capital between 1990 and 2008. All countries, except Russia, however, increased their wealth by acquiring enough of other assets to compensate for the decline in their natural capital. In 14 of the 20 countries studied, this increase in wealth exceeded their population growth, resulting in higher wealth per capita in 2008 than it was in 1990. For example, Germany increased its human capital by more than 50%. China expanded its “produced” capital by a staggering 540%.
By adding a dollar value to everything from bauxite to intellect, the UN exercise makes it possible to compare and measure all three types of capital. It shows that these capitals are also interchangeable. A country can lose $100 billion worth of grazing land, gain $100 billion worth of skills and be no worse off than it was before. This framework turns economic policymaking into an “asset management problem,” says Sir Partha.
A country like Saudi Arabia, for instance, reduced its fossil fuel reserves by $37 billion between 1990 and 2008, while at the same time
adding school leavers and university graduates to its stocks (its human capital grew by nearly $1 trillion). The report points out that
in some of the wealthiest countries, it appears that investment in human capital has shown diminishing returns. Perhaps countries should instead redirect their investments towards natural capital,
filling their forests rather than their libraries.
The idea that natural resources are replaceable makes some conservationists quite nervous. They point out that many of the services provided by nature, such as clean water and air, are irreplaceable. In theory, the indisputable value of these natural treasures should be expressed in monetary terms, which would rise sharply as these resources diminish. A good asset manager will monitor them closely, knowing that a constantly increasing growth of human or physical capital will be needed to compensate for the future loss of these natural resources.
In practice, however, it is difficult or even impossible to express these natural assets in monetary terms. Thus, the UN report should not include assets such as clean air, which cannot be directly owned, bought or sold. The report should be limited to resources such as gas, nickel and timber, for which a market price exists. But even these market prices may not reflect the true value of the commodity. Beekeeping is one of the favourite examples of economic theorists. Bees create honey, which can be sold on the market. But they also pollinate nearby apple trees, which is a useful service that cannot be bought or priced.
Bee counters
No one understands these limitations better than the authors of the report. Their estimates are illustrative rather than definitive, Sir Partha notes. These calculations are general, just as the first GDP estimates were 70 years ago. He hopes that more economists will undertake the difficult but valuable work of valuing the seemingly invaluable. The profession does not actually reward this work, Sir Partha notes. Yet some economists do it anyway. Taylor Ricketts, a professor at the University of Vermont, and his co-authors have even calculated the value of pollination, noting that one Costa Rican coffee grower earned $62,000 a year from wild honey bees in two adjacent forest areas.
Now that economists have shown that such wealth can be measured, they need to decide what to call it. In earlier academic papers, Sir Partha calls it “inclusive wealth”. In the UN report, it is called “inclusive wealth”. If the concept is accepted by the wider public, no special name will be needed for it anymore. “Soon,” says Sir Partha, “we will need to drop both adjectives and call it simply wealth.”