Production result – the ’real cake’

Inge Røpke

According to ecological economics, there is no doubt that there are limits to growth in biophysical terms. But does this also mean that there are limits to growth in economic terms? This depends, of course, on what you really mean by ‘economic growth’. Before we turn to the definition of economic growth that is connected to the concept of GDP, there follows some more fundamental considerations of what is available to society. A fundamental problem in economic theory is whether one can define what a society has available for consumption and investment during the course of one year. Can you say that in one year, society produces a ‘real cake’ – a production result, some of which is reserved for investment, while some is shared between the members of society for consumption? And can the ‘cake’ be measured?

For ecological economics, it would be natural to look at society’s energy surplus as a measure of the size of the cake. When people live in a society that has access to much more energy than the amount needed for survival (the endosomatic energy consumption multiplied by the population size), the members of society have the opportunity to achieve a high standard of living. Although this makes sense, it is not very satisfactory to measure the size of the production result in direct proportion to the size of the input. The potential for a high standard of living is not the same as achieving it. A lot of energy may be available to a society without it being transformed into something of great value for them. Firstly, part of the energy may be lost in the form of waste in the process, and secondly, production may consist of products that are not useful to the society. Therefore, it would be more satisfactory if the production result could be considered in a way that reflects the use value.

Producing and consuming the cake
When the output result can not be measured in a meaningful way from the input side, can it be done from the output side? Here the key question is what the production result actually consists of: What should be included in the ‘real cake’ that has resulted from the year’s efforts and what should be considered as consumption of the cake? Throughout the history of economic theory, what should be considered part of the production result and, thus, what human activities should be considered productive activities and which consumption activities, respectively, has been a controversial question. It is fairly easy to agree that the production of food, clothing and housing are productive activities that contribute positively to the production result. In the past, it was common to regard only the procurement of the necessities for life as productive because they form the basis for everything else: only once the productive are able to procure more necessities for life than they can use themselves, can society afford for others to spend their time caring for the elderly and the sick, holding concerts and practising religious rituals. However, if the perspective is to be meaningful, the range of productive activities quickly becomes wide because many activities are prerequisites for the direct production of the necessities for life, such as the production of the tools to be used and the care and education activities that are needed to ensure that a new labour force grows up and obtains the necessary qualifications. The more complex societies become, the wider the range of activities that come to play a more or less central role in the basis of life: The necessities of life not only have to be produced, but also distributed, while the waste must be disposed of, etc. Just like in an ants’ nest or an ecosystem, the many different functions are interdependent. In addition, it becomes increasingly difficult to define what the most basic necessities for life are. It does not really make sense to identify ever larger homes and increasingly varied food and clothing necessities for life if care for the elderly and sick, holding concerts, etc. are not.

When it is so difficult to define productive activities in a meaningful way, it is natural to choose the opposite extremity, i.e. that all activities are productive and contribute to the production result. However, this does not seem very satisfactory either. Firstly, it is common to distinguish between production and consumption, where productive work is seen as a prerequisite for consumption activities: Food must first be produced before it can be eaten. Although nutrition is a prerequisite for production, it is nevertheless common to consider dining as a kind of purpose of the productive activities and, hence, a consumption activity. In the literature on time studies, there is a proposal for a general criterion for how to distinguish between production and consumption: An activity should be considered consumption if it can only be performed by the active person – or if its value decreases as a result of being transferred to others. As Erik Ib Schmidt writes, “You can not let others eat and drink for you, or let them sleep, go for a walk, play football or read a good book for you, and you can not leave it to someone else to listen to good music for you or love for you.” (translated from “Behøver vi nå det hele?” Spektrum 1990). At the same time, it is acknowledged that the criterion involves borderline cases. For example, education is inextricably linked to the person who takes the education, which means the criterion suggests that education should be defined as consumption, even though, at the same time, it can have the character of a productive investment. In order to produce measurements and statistics, borderline cases must be addressed, but this is not essential for more fundamental considerations.

Another reason not to consider all activities as productive is based on the view that some activities do not increase the production result, but rather involve waste or are directly harmful. For example, some will doubt the usefulness of trying to persuade people (for example, through advertising) to use something that they can easily do without; or the useful in producing something that is harmful to health (such as tobacco) or increases the risk of war (such as weapons). In addition, it is important to take into account the fact that many useful activities can also have harmful effects in the form of, for example, pollution. This suggests that the production result should be applied as net term from which the harmful effects are deducted.

Thirdly, some activities involve redistribution rather than production. For example, many would doubt that there is anything productive about an activity such as stealing, even though Robin Hood may have increased the overall quality of life by taking from the rich and giving to the poor. In many societies, the production result is redistributed to take care of, for example, the elderly and sick, who can not contribute to the production of the goods themselves. However, redistribution is not considered production. As discussed in the section on distribution, societies also have mechanisms that secure strong groups a share of the production result at the expense of others.

These arguments suggest that it makes sense to distinguish between productive and non-productive activities, even in complex societies: Even though everything is connected, it seems obvious to distinguish between production and consumption. In addition, it is common to distinguish between activities that contribute to the production of use values and those that redistribute the use values. However, at the same time, the specific dividing lines are controversial. From an ecological economics perspective, some of the frequently applied criteria do not make sense. For example, productive and unproductive activities can not be distinguished based on a criterion that is based on the economic entity that performed the activity: An activity does not become more or less productive because it is performed by a private enterprise instead of a household or the public sector. It does not matter if vegetables are grown in a horticultural business or in a private garden, or if children are taken care of in a public nursery, by a privately-employed au pair or by the parents; it is still a contribution to the production result. Furthermore, whether someone earns money by performing a task is not a relevant criterion. One can say that payment is a kind of proof that someone perceives something as useful, but a lack of payment does not necessarily indicate the opposite. Whether money is earned or not has something to do with the distributive mechanisms, which is discussed in the section on distribution.

The size of the cake and its use
When the production result is seen as a ‘real cake’ – a quantity of use values that are available to a society in a given year – it makes most sense to refer to the final cake so that raw materials and intermediates are not included in the calculation several times. In the course of the year, some use values are used to produce other use values. Since they have only been a means to an end, they should not be included in the real cake: In other words, the real cake is the final baked cake – not the flour, the eggs and the sugar that are used to make it. Some of the use values in the final real cake are set aside to be used to increase future production. Such investments include, for example, new buildings, machinery, education and research activities as well as nature restoration (consumer goods that are stored for later can also be considered investments). Other use values consist of goods and services such as food, clothing, housing use, theatre visits, childcare and health services that can be seen as consumption. What should be defined as consumption and investment can be discussed, but this delimitation is not crucial here (it is, however, when producing statistics and models). In the section on dynamics and distribution, we look at why the cake grows over time and how it is shared among social groups.

Although what has been presented here is in line with the idea that, in the course of a year, a society provides a production result, it must be noted that no suggestion has been made for how this amount of use values can be measured in a meaningful manner on the output side. Ecological economics has a suggestion for the biophysical measurements of the inputs used in production, but not for the measurement of output: There is no relevant common biophysical quality of output that makes it possible to combine the use values together. Nevertheless, the concept of the real cake will be used as an abstract idea of a quantity of use values in other sections.

Gross domestic product
In order to be able to combine the values together, they must have a shared feature. As the market economy develops, an increasing number of goods and services are traded on markets, and it becomes obvious to use prices as the common measure. Then the total sum of the year’s production of use values can be calculated by multiplying each individual item (or service) by its price and then combining them all together. In order to avoid double accounting, i.e. raw materials and intermediates being counted several times – the value of the inputs used from other producers must be deducted from the price of the individual product. In this way, the market value of the final baked cake can be calculated. It is this thinking that was embodied in the concept of Gross Domestic Product, GDP, in the 1930s. In the following, we focus on GDP without discussing why ecological economists are sceptical about the use of prices as a measure. We address this issue in the themes Driving forces and distribution and Political Decisions.

The idea behind GDP is derived from the simple cyclical model from neoclassical economics, where companies supply households with goods in return for payment on finished goods markets, while households supply companies with inputs to production in return for payment on the markets for production factors (based on the view that households ultimately are owners of all production factors). Based on this simple model (which excludes investments, the public sector and foreign countries), GDP can be calculated in three ways, which in principle give the same result. GDP is the annual sum of:

  • The value added in all companies, i.e. the price of the goods minus the value of inputs from other companies (see above).
  • The production value of all finished goods that are sold to the households (based on the price of the finished product without deducting inputs).
  • The households’ income in the form of salary, dividends, interest, etc.

In practice, the calculations are, of course, more complicated, partly because investments, the public sector and foreign countries must also be included.

Illustration: Sonja Winckelmann Thomsen

Attempts to develop statistical statements of society’s total production or income go back a long way, but it was not until around the time of the Great Depression in the 1930s that a serious focus was directed to managing the macro-economy and, hence, tools for measuring total economic activity. After the Wall Street Crash in 1929 and the subsequent explosion in unemployment, Western governments needed detailed statistics for the economy. In the United States, the economist, Simon Kuznets, was therefore given the task of creating a measure of the condition of the overall US economy, which led to one of the first proposals for what we today call Gross Domestic Product, GDP. Kuznets’s initial ambition was to create a measure of economic well-being, so he suggested, for example, deducting expenses for weapons, advertising and financial speculation from the national income. However, this focus changed crucially due to the preparation for war because it was important to calculate how many resources could be included in the war effort and because this effort should not appear to be a drain on the economy.

In this early phase of the development of the GDP measure, the accounts were a means to help tackle unemployment and mobilise resources for the war and it was not intended to be an end in itself. It was not until the 1950s and 1960s that GDP growth emerged on the agenda as a goal. This was, among other things, motivated by the competition with the Soviet Union. The Organisation for Economic Cooperation and Development (OECD) was one of the main driving forces behind making GDP a measure of economic growth and economic growth a top priority for economic policy.

Today, one does not have to follow the debate about the Danish economy closely to realise that economic growth is an indisputable central theme and one of the main objectives of economic policy. Economic growth is often perceived as being synonymous with prosperity, progress and surplus, while recession – the opposite of economic growth – is associated with poverty, regression and deficit. This status is due to, amongst others, the connection between economic growth and employment and the financing of the welfare state.

Criticism of GDP
While the GDP measure has become important in economic policy, criticism of the indicator has also grown. This criticism is becoming increasingly widespread, especially in connection with the emergence of global environmental problems.

The classic objections to GDP highlight the problems that Kuznets himself was concerned with. When all financial transactions are said to contribute to GDP, the result will not be a good measure of well-being. Firstly, GDP increases as a result of having to clean up after pollution and car accidents. Again, there is no deduction to GDP when economic activities reduce the stock of natural resources, such as oil, impoverish agricultural land or damage habitats for animals and plants. Secondly, there are many useful activities that are not included in GDP because they are not traded on a market. This applies to, for example, domestic work at home and voluntary work in associations. When more women entered the labour market in the 1960s, and more children were taken care of in child care centres, it resulted in an increase in GDP.

In addition, focusing on GDP as the central goal of welfare means that other aspects of welfare receive lower priority. For example, in recent years, there has been a lot of discussion about the importance of equality for the welfare of a society. On the basis of comprehensive statistical analyses, the social epidemiologists, Wilkinson and Pickett, have argued that more equal societies experience greater welfare, measured on a large number of parameters related to public health and crime. Similarly, others have pointed out that greater equality increases the degree of mutual trust and, thus, welfare in the society.

Many other criticisms of GDP have been expressed, while the actual calculation methods are changing continuously. For example, a controversial issue is how the financial sector’s contribution to GDP should be calculated (should the activities be considered productive or should the income of finance rather be seen as a deduction from the income of other sectors), while there is also a discussion about how statistics can capture what is happening in the digital economy, where many services are free.

Next: The growth dilemma