Monday, July 25, 2005

Rationalizing Within Socialism?

Yesterday evening I found myself engaged in an interesting discussion. One in which I alluded to a claim in which capitalism and free market exchanges give rise to the wealth of society. I said, maybe incorrectly so, that the free enterprise will also allow for a faster rate for that wealth whereby to increase. To my surprise, the fellow conversing with me responded by asking why the EU gross national product was higher than that of the US gross national product. And without much thought, my immediate answer was the US does not realistically take part as a free enterprise because we have a system of welfare distribution. The talk went on about such topics as job securities, and labor wages, etc. But all this left me thinking about one thing. Though uncertain the merit of the fellow’s claim regarding the gross national product (by this I mean the correctness of his claim), if the EU has a higher GNP, and both the US and the EU have a system of welfare distribution, then how come the EU does it better?

7 Comments:

Blogger Robert said...

I think the EU's GDP is slightly higher, but the more relevant stat is GDP per capita, since it takes the EU's greater population into account. The EU has a significantly lower GDP per capita.
Moreover, I'm pretty sure the EU countries generally have significantly higher levels of government expenditures as a percentage of GDP. And, unlike the US, very little is spent on defense, so it goes to social welfare, regulatory regimes, etc.

4:28 PM  
Blogger Priscillia said...

First, I understand the intent, but comparing the US (a country) to Europe (still a continent) is an odd thing to do. I know indicies are in terms of dollars, but I'm not sure how he was able to do that when not all of Europe uses the same currency.
Second, economists don't use the GNP index anymore coz it completely ignores "the value of natural resources, education, unpaid subsistence labor, and self-employment labor which accounts for over half of the world's production and nearly 80 percent of its capital investments." What is used is the GDP indicator, which in 2003, had the US in second place. We could be ranked differently now.

That is just the tip of the iceberg of trying to compare indicies across nations. You can get into debates of purchasing power of parity... which means, trying to relate it to how much you can buy with your money. So what people look at is the rate at which GDP grows. The US is not leading here (we have done better than countries in Europe), but what is important is that the countries who are leading are places like India & China who have begun to privatize.

4:29 PM  
Blogger Robert said...

but growth rates are misleading, too, because you can't expect an affluent country to achieve a 10% growth rate; but it's quite plausible for a poor country (like china) to maintain double digit growth for many years, especially given the ability to import knowledge/technology/etc quickly and at low-cost. a wealthier country is still wealthier even though it's growing more slowly.

4:44 PM  
Blogger Priscillia said...

Don't get me wrong, there are definite limitations to using GDP to say who is better off. It doesn't take into account production that doesn't go to market, which is a big deal for less-developed countries that have underground economies. GDP is no measure of welfare, it's just a level of economic activity.

However, when you see a poor country grow 10% it is more meaningful than saying it went from 195th place to 180th place.

5:20 PM  
Blogger Joseph Schultz said...

Hm... macro theroy galore here. First and foremost, I'll iterate a point made in an earlier comment. You NEED to compare any economic measure per capita. It just doesn't make sense to compare Europe to the US in the same way it doesn't make sense to compare Singapore to China.

From that vantage point, the US is decidedly superior to Europe or any country In Europe except Luxembourg (which is supported by very wealthy families that prop the country's GDP per capita up).

This argument does get more complex. It could be that Europeans simply value liesure more highly than Americans. Maybe. If true, then Europeans would get less per capita because they are choosing to consume leisure rather than working. A few attempts have been done to try and account for this. If these studies are to be believed, Americans are more efficient than Europeans. So you can be safe in your belief that Americans royally trump Europeans when it comes to economic growth.

European countries do indeed tend to have a higher percentage of GDP spent as government expenditure. This can be seen as a weakness (and I think it is). Government expenditure is basically taxed (or borrowed) expenditure that comes directly out of consumer/business spending. It can be thought of as a zero sum game: money is spent by governments or people. Governments tend to require money to run their programs above and beyond the taxes they collect, so really total GDP drops as government expenditure rises.

The Solow growth model has something to say about comparing growth rates between countries. The short version is that less developed countries can grow faster because the requirements to grow for these countries are much lower than developed nations. Think technology pool and exploitation of existant technology pools.

Gotta love macro theory. Everyone have a great day.

7:40 PM  
Blogger Pieter said...

Exact, Joseph. Europe and the US can be compared in terms of gdp, because they have a similar degree of development, unlike the US and Morocco, for example, which implies that it is a bad thing for Morocco not to have the same growth rate as the US.

Europeans are indeed lazier than Americans, not because of genes (I hope), but because of overregulated labour and overtaxed wealth, that creates a culture in which it is not very interesting to work.

One thing one should say about the current growth rates in the US, is that they are partly caused by defense deficit spending. Also the artificially low interest rates create an unhealthy situation.

7:32 AM  
Blogger Tony said...

I don't have much to add, but one small but relatively important point to make. GDP doesn't account for goods costing different amounts in different countries. The Economist tried to account for this (in an admittedly facetious way) with the "Big Mac" index, where they took per capita GDP and looked at how many Big Macs that could buy in various countries (using the price of the Big Mac of the specific country). Unsuprisingly, the Scandinavian countries (which tend to top the per capita GDP lists along with the US) promptly fell a few spots down the list. I think they keep doing that every year, but I haven't read The Economist in some time so I can't really say.

5:00 PM  

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