Most economists assume the answer is obvious. They say the purpose of the economy is growth, and they measure success using GDP. But what if they are asking the wrong question?

In this second video in my Understanding Economics series, I argue that economic growth is not an end in itself. Endless growth is impossible on a finite planet, GDP tells us remarkably little about whether people are actually thriving, and rising GDP has too often been accompanied by growing inequality and environmental damage.

Instead, I suggest a different way of thinking about economics.

The purpose of the economy should be to help everyone live well and thrive. Markets matter, but they are tools, not the purpose of society.

Money should help us organise resources, not dominate every decision we make.

I also introduce the idea of capital maintenance, a concept that accountants understand well but economists have largely ignored. Prosperity depends on protecting the real resources we inherit, including knowledge, institutions and the natural environment, so that future generations can thrive too.

This video lays the foundations for everything that follows in this series. If we begin with the wrong purpose, we will inevitably create the wrong economic policies.

If you'd like a different way of understanding economics, this series is for you.

This is the audio version:

There is no Debate Ammunition for this video, but there is an infographic here.

This is the transcript:

Hello, I'm Richard Murphy, and this is the second video in my Understanding Economics series.

In the first video, I explained what economics is. In this video, I want to ask what the economy is for. I think that might be the most important question in economics, and it's also the question that very few economists ever ask.

They assume that the economy exists to grow. In fact, they treat that as the purpose of the economy, and politicians almost always, as a consequence, judge their success on the basis of economic growth. Economists almost always measure that growth using a measure called gross domestic product, or GDP, which is the growth in monetary transactions in the economy, which does not necessarily reflect value. And economic policy is then designed to increase this gross domestic product, which will be the subject of another detailed video in the future.

The problem is very few people ever ask whether that growth should be the goal, because the fact is that growth of this sort cannot continue forever on a finite planet, and ours is finite. The laws of physics make clear that is not possible. Endless growth demands endless use of resources, and we do not have endless resources.

We can see the consequences of that false assumption that we have endless resources available to us. Climate change provides the evidence that this is not working. We're burning our planet out because we're exploiting it too much, and that means we are pursuing a goal that is not sustainable. We cannot treat the planet we live on as though it has no boundaries when, in truth, it has, and we've met them.

What is more, growth does not tell us who benefits from economic activity. Rising GDP, gross domestic product, can and invariably has of late coincided with rising inequality. That's the gap between the wealthiest in our society and those who are poorest in our society. Wealth arising from economic growth often flows to those who already have the most already. And other people are seeing very little benefit from economic growth. This goal of economic growth, therefore, is leaving many people worse off rather than better off. This measure of what the economy is for is simply not working.

Growing inequality and rising growth are bedfellows far too often, and that is causing stress in our society; stress we can see all around us. So, we need to ask this question: what is the economy for? And the fact is, GDP is not a measure of whether people are thriving, and that is the problem.

Our well-being is what our economy should be about. We should be looking to deliver increased well-being, not increased numbers or values of economic transactions. And that is particularly true when the transactions reflected in GDP do not reflect the economy as a whole.

Some of the figures in GDP are measured, some are estimated, and some are a little more than assumptions. Others are literally made up. 10% of the value of UK GDP is made up of a figure, which is assumed to be the rent that people who live in their own homes in the UK pay to themselves for the right to live in their own houses. And I can promise you nobody in history has ever paid themselves that rent. But nonetheless, nearly £300 billion of that rent is included in our GDP each year, and that makes that figure complete nonsense.

At the same time, GDP says almost nothing about health, flourishing, the state of education, the security of the nation, or perhaps most importantly of all, our happiness, because we cannot assume that more consumption is equivalent to more happiness, because there's plenty of evidence that that is not the case. In that case, there is no reason to treat economic growth as the purpose of the economy.

So I think the economy should exist to meet people's needs. Now, that's a very different goal.

Everyone should have enough to live well.

Everyone should have the chance to thrive.

In that case, markets are useful tools, but they're not the purpose of our society.

Money should help us organise resources, but it should not dominate our thinking.

An economics that says it should is an economics that is not serving our interests, and economics should serve our interests. That is the whole point of this series.

At the same time, real resources are what matter when it comes to the economy, and every economy is constrained by the availability of those real resources. It's because those real resources are constrained that we have to make economic decisions, and that subject is something that we will look at soon in this series.

The resources we're talking about include people, their knowledge, their labour, and their skills, but others as well, including the availability of natural resources, the capital that we have invested in our society and our shared institutions like government.

The point is, in our economy, we should share these resources wisely and fairly so that we can all thrive. This is a much better goal than simply chasing financial returns when those financial returns are not delivering outcomes that appear to be making most people happy. If they were, we'd be living in a happy and contented society, but it's clear we're not.

So, we have to do all of that, but we have to take something else into account as well. And I call this capital maintenance. I think we have to prosper whilst making sure we protect the resources we have inherited from previous generations to ensure that they're available to the generations to come. This is a concept which is familiar in accounting, but which is almost unknown in economics. I'm not being a radical. This is the basis on which all the accounting of all large companies is based. I think it should be a concept which is built into national economics as well.

The fact is we know that if we overconsume capital, companies go bust. The reality is that if we overconsume inside our economy, we can also run out of resources. Therefore, accounting for resources is the foundation of our lasting prosperity, but our economics hasn't done that and that is why we have a climate crisis and so many other things that are going wrong inside our society.

So, what is the economy for? That's the question I asked at the start of this video. I think the purpose of the economy is to help everyone to thrive.

It should release our human potential so that we can use it to best effect instead of exhausting the planet.

It should create value through cooperation as well as exchange.

It should serve society instead of just serving financial returns, not that there's anything wrong with those, but they are not our sole priority.

And that is the understanding of economics that shapes everything I will discuss in this series.

You can call it an economics of well-being. I call it an economics of care, and that to me is what all of economics should be about.

I care. I suspect you do. Economics should do so as well.

Poll

PDF of article