One of our problems is that a lot of people don't think we have a problem. It's true that we have some unemployment, they say, but the GNP is going up so the economy is doing all right. Most people think one dollar is as good as another, and if we have enough dollars we're doing okay. That's the mistake I call Marshall's Fallacy.
Alfred Marshall was professor of economics at Cambridge university about 100 years ago, and he is considered by some to be "the father of neoclassical economics". He helped develop a radical new concept of wealth first proposed in the 1760's by Francois Quesnay, a physician at the court of Louis XV.
In a day when most people thought wealth could be measured only in silver and gold Quesnay said it was the result of production. In his view the only true "production" was agricultural and craftsmen and artisans only modify goods that have already been produced. We think differently now, but Quesnay's insight was radical for its time.
Adam Smith took the next step in his classic book "The Wealth of Nations" published in 1776. He said the source of wealth is labor, and that the wealth of a nation is the material goods that everyone, rich or poor, uses or consumes in his or her daily life.
Unlike Quesnay, Smith included the work of craftsmen and artisans in his definition of wealth but he did not include intangible goods -- such as a singer's song or a lawyer's brief, for example.
More than 100 years later Marshall decided that anything that can be exchanged for money counts as wealth. He summed his idea up with the statement that "a lawyer's brief is just as real as a sack of potatoes".
The statement is true, but the fact that two things are both real does not make them interchangeable, or even comparable. We can see the difference between a lawyers brief and a sack of potatoes if we consider the possibility that in some years either the farmer or the lawyer will produce more than usual. If the farmer has a bumper crop of potatoes our cost of living will go down. If the lawyer produces more briefs than usual, our cost of living will go up.
The differences between a lawyer's brief and a sack of potatoes are far more important than the similarities, but Marshall's idea sounded good. If all goods can be measured by cost value then the state of the economy adds up to one number, which is the sum of the cost value of all the goods produced in a year. We call it the "gross national product" or "GNP".
It's convenient and easy to quote but it does not tell us much about the state of the economy. Simon Kuznets, the US Department of Commerce economist who set the format for the US GNP, told the US Congress in 1934 that it could not be taken as a valid indicator of the welfare of the nation. In 1962 he argued, in an article in the New Republic magazine, that national accounting in the US needs to be re-thought. He won the Nobel prize for economics in 1971, but most economists still ignore his concerns.
The most obvious problem with the GNP is that it counts all transactions as positive factors, even if they are obviously negative. The ice storm that hit southern Quebec and eastern Ontario in January of 1998 added billions of dollars to Canada's gross national product.
In 1993 the bombing of the World Trade Center in New York added more than a billion dollars to the GNP of the U.S.A. In 1995 the bombing of the Murrah Federal Building in Oklahoma City added even more that year and sparked a long-term increase of at least $300 million a year for extra security at US federal buildings.
In Canada Paul Bernardo who raped at least 14 women in the Toronto suburb of Scarborough and who kidnapped, tortured, raped and killed two teen-age girls in St. Catherines added tens of millions of dollars to the GNP. His contribution includes the cost of the police investigation of the rapes and kidnaps, medical and psychiatric treatment for the victims who survived his attention and, after he was caught, his trial and the media frenzy that accompanied it.
If he spends the rest of his life in jail he will continue to contribute to the GNP because the average prisoner costs at least $50,000 a year to maintain and a "special" prisoner like Bernardo, who needs protection from other prisoners, probably costs more. If you believe in numbers, Paul Bernardo was and is a productive member of society.
My examples are grotesque but they are real, and they prove the point. Any system that counts natural disasters, terrorist bombers and sadistic psychopaths as positive economic factors is worse than useless.
And by counting only cash values Marshall's fallacy and the GNP ignore, even deny, the distinction between what educator/philosopher Ivan Illich describes as "cost value" and "use value". In real life something that has limited use may be expensive and something that is useful may be cheap.
Consider the relative values of an emerald ring and a glass of water. The ring has great cost value and the water very little, but the ring has no practical value and the water is a necessity of life.
Use value is vital, but in a world that accepts Marshall's fallacy it is not considered. That attitude creates a series of problems.
One is that if money is the only measure, then money is the only thing that counts. All other measures -- including truth, honor, beauty, honesty and so forth -- are swept away.
A man's social position is no longer based on his worth to society, but only on the money he can take out of it. A drug dealer can be a folk hero, and a professional boxer or hockey player may be considered more important than a poet, a philosopher, or a scientist who develops a new vaccine or a new crop that feeds millions.
And if air and water are worthless they are not worth protecting. Through the early years of this century industrialists and government alike ignored the use value of clean air and clean water, and assumed that pollution was progress. They also assumed that a tree had more value after it was run through a sawmill than when it stood in the forest.
The use-value costs of pollution and deforestation now get lip-service recognition if not real concern, but the other economic problems created by Marshall's fallacy are generally ignored.
One is that goods with high use value often have low cost value, and vice versa. In a society that ignores use value, the government and the economy will favor cost value over use value.
A millionaire who wants to build a baseball stadium can get help from the government and support from private business. A farmer who wants to develop a new crop cannot.
Marshall's fallacy suggests that we can measure everything by cost value, and forget about use value. Thanks to Marshall, and to the people who believe that cost value is the only measure of worth, the truth about our economy is hidden in a blizzard of meaningless numbers. People who believe in numbers can ignore the beggars on our streets, the families that eat out of food banks, the personal bankruptcies and other miseries of a dying economy.
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