Tuesday, January 12, 2010

The Meaning of Wealth

While defending China's long term prospects, Robert Fogel paints a bleak picture for Europe.
In another way, Europe's culture confounds economists. Citizens of Europe's wealthy countries are not working longer hours to make higher salaries and accumulate more goods. Rather, European culture continues to prize long vacations, early retirements, and shorter work weeks over acquiring more stuff, at least in comparison to many other developed countries, such as the United States...A promenade in the Jardin du Luxembourg, as opposed to a trip to Walmart for a flat-screen TV, won't help the European Union's GDP growth.
No doubt that the laws requiring long vacations and strong job security has had unintended consequences for the countries' economy and employment rates. But stuff (GDP) is not wealth. It is a source of wealth, but it is not wealth. The closest thing to wealth is happiness (a notoriously difficult thing to measure). Its people's priority over non-pecuniary benefits is not confounding at all.

GDP is a useful proxy for wealth but its dangerous to forget it's just a proxy. This idea stretches all the way to Adam Smith (as so many great ideas do). He noted that all jobs are relativity equal if take the large picture (including educational requirements, work hours, effort, stress, independence, and of course pay). Natural differences in the nature of work will be balanced by the size of the salary. (Later called compensating wage differentials.) Professors have great freedom and jobs, but don't get paid that much given their educational background. CEOs get paid a lot but have to work long hours. Some people prefer the salary and become management; some prefer flexibility in their time and become professors.

Like GDP, we use salary as a rough estimate of how successful we are. But, when pressed, we know it's more than that. Not all of us wish to work the 80-100 hour weeks of a CEO, stock broker, or high-powered lawyer. Nor do all of us wish to go to school for years and years, only to have all that work result in less than six figures a year (save rare exceptions).

On the macro scale, you can say it's different. More spending means more jobs and no matter how bohemian you enjoy your lifestyle, you still need to eat. If the people prefer time, rather than stuff, then their economy is in a bad position; you can't sell time. But you can; by making life easier for your customers, you effectively sell time. This is what the services industry is all about. While I agree that Europe's shrinking population is a problem, the preferences of its people is not.

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