OR WOULD YOU PREFER TO KNOW THE TRUTH? - CONT'D
The GDP mystery
The GDP has been in use for so long that people believe it. Yet, the GDP is a deeply flawed number (for an explanation see GDP Keynessians Vodoo Economics). The GDP is not a measure of wealth, is a measure of theoretical wealth contaminated by government taxing, borrowing and printing. If we take the simple step of subtracting "official" and "formal" debts from all countries from the GDP, we obtain the real World-Wide wealth over time. This can be seen in the graph below (Note: we had to move the graph further down because it was interfering with the poster... it happens).
As you can see, this picture presents an entirely different scenario. Yes, it is true that wealth has been increasing steadily over time (see the black trend line) but the increase was not that spectacular. This is to be expected because wealth is created by people, not governments and people want to improve their lives. In order to do so they work hard to become richer.
If we calculate roughly what that increase was, it turns out to be in the range of 1.6% per year (using a reverse compound interest calculation). This number is of interest because if we compare what the economic growth was during the times when governments did not interfere with the economy (i.e. quasi-truly free markets), this number has a range with a low value of 2% and a high value of 3%. This means that tanks to the actions of governments "managing" the economy, we lost anywhere between 0.4% and 1.4 % per year of world-wealth!
Now considering that an increase in (the flawed) GDP of "only" 0.4% per year is considered "significant", it is clear that a "significant" portion of our wealth went up in smoke thanks to the actions of governments. But it 0.4% loss is the lower limit, what are then we to think about losing 1.4%?! Yes, governments are that dangerous to your wealth.
Now compare this growth with the growth of the standard GDP. If we perform the same calculation, we get that the economic growth was in the order of 7.8% per year every year!!! Does this make any sense to you? At all? If you follow more-or-less the announcements of GDP over time in your country, you will know that if a GDP is in the order of 3% politicians begin to light fireworks and the economy sort of stabilizes. Think back. When was the last time that your country had a growth of 7.8. Consistently. Sustained. Over 25 years!? See the lie here? The numbers do not add up. The GDP is nothing but refined bull manure.
Our little wealth calculation explains why the well-being across many countries in the world either stagnated or dropped. Because wealth did not increase for the population at large. Although it is true that in absolute terms wealth increased about 50% since 1980, the distribution of that wealth also shifted. There are fewer, richer people while there are more poor people. The so-called "gap" has increased. This is the reason why you did not feel this well-being.
But, wait a moment. Did we just become socialists? Don't socialists obsess over "equality"? Yes they do and no we did not. The issue is simple. In a free market there is a distribution of wealth across the population. As wealth increases, the shape of the distribution does not change, it simply moves to a wealthier region. This is good. The ratio of rich to poor people remains the same but everybody else is far well off because of the increase wealth.
In a managed economy, the shape of the distribution changes. Fewer people become richer at the expense of everybody else who becomes poorer. This is not good (you can see a lengthy explanation in Austrian Economics In Pictures). Because of this phenomenon, even though wealth increased by 50% over the last 25 years, you did not received your share of it. You were cheated out of it and you have only the politicians to blame for this.
We know that in order to be happier we need to be wealthier (see Make Money Be Happy). Anything that conspires against our wealth conspires against our happiness. As wealth has been systematically destroyed at the world-wide level for at least 25 years (although we suspect that this number is closer to 45), is then a surprise that you feel that you are going nowhere? That you are in a rat-race toward oblivion? Of course not. What you feel is real and it is depressing but the first step towards healing is a good diagnostic and now you have it. It is through the actions of governments that this problem has been created. This leaves us two possible solutions:
Get the government to fix it. Well, people have been trying to get governments to "fix" things for 200+ years without success. Central Bankers have been "fixing" the economy for 100+ years. We now know the outcome and it is not good. We think that this possible solution has run its course and it must be recognized that abject failure does not seem to be an option any longer.
Get rid of all governments. This solution has been approximated in the recent past and we can see it at work if we look at economies between roughly the 1700's and 1900's. In those two years governments had little impact on economies (with exceptions, of course) and economies grew at about 2 to 3% per year without significant booms or busts. Sure, there were economic manipulation and wars and plagues and other things… which were mostly triggered or brought about by governments. But if we remove those artificial elements from the picture (as we should because we are studying government-free economies) then the solution presents itself. We can have successful economies without governments because we had them in the past. We don't have to imagine what it could be; we know what it could be because it was. For a very long time. This is not economic science fiction nor wishful thinking. This is history. There is no reason whatsoever why we cannot use a tried-and-true solution. The only impediments are… you guessed it… the usual suspects: politicians.
What you feel is real. You are in a cocaroach-race towards nowhere and you can thank politicians for this state of affairs. You can't change this, but you can begin to tilt the balance; just refuse to vote (see for example Every Vote Discounts). And if you ask us, no, we are not happy at all and thank you for joining our club. We suspect it is indeed a very large one.
But this is not the only option. You may trust the government. You may vote for a different politician. You may believe. You will be in good company. Alchemists used to do this. They used to repeat the same experiment time and time again on the theory that it at first it did not work, if you repeat the failures verbatim long enough it will. And we of course know who successful they were at developing the "Philosopher's Stone" the "Transmutation of Base Metals" and the creation of the "Elixir of Life".
Note: please see the Glossary if you are unfamiliar with certain words.