consists of low-value construction materials, and until very recently these were rarely recycled. I show the effect of these factors later on in Figure 15.
Basic economics; GDP explained
To understand what has really gone wrong with the economies of the developed world, it might help if we give some thought to the concept of wealth. Riches, abundance, prosperity, even just a general feeling of well-being or happiness: all these can be thought of as wealth.
By some measures (for example, the World Bank’s 2006 report, Where is the Wealth of Nations?) wealth includes ‘intangible capital’, as well as the stuff we might normally think of as wealth, such as property and money. By ‘intangible capital’ the World Bank means human potential, as defined by the quality of education and the political and social institutions of the nation in question.
These are difficult things to measure of course, so economists and governments calculate the wealth of nations in terms of Gross Domestic Product, or GDP, which is an approximation of the final output, in money terms, of all economic activity. GDP has become a global standard as an indication of a nation’s wealth, primarily because it’s the only measure widely available and, when adjusted for the purchasing power of different currencies, allows for a useful comparison between countries.
So the GDP figure has become important as an indicator of the health of a nation, as well as its wealth – if the figure rises, we have a growing economy, which governments and economists think is good; and if it falls, we have a recession, which is bad.
Things are not quite so clear-cut as this might suggest, however. For a start, GDP figures are not a very good indicator of a nation’s real wealth, as I will explain in Chapter 4. In addition, growth cannot go on forever, because before very long, almost certainly during this century, we will start to run out of resources.
Rich Mother Earth
Real wealth comes from the earth. It always has done and, as long as there are human beings living on this planet, it always will. The problem is that, at some point in recent history, we lost sight of this fact. We came to believe, for example, that the financial sector of the economy created wealth, when all it has ever done is to shift wealth around. It creates money, but that is an entirely different thing. In fact, creating money is part of the problem.
From a time before the human race had developed enough to have anything resembling an economy, and indeed right up to the middle of the last century, most people would have understood that real wealth had to come from the earth. What would we have, if we had not grown the crops, reared the animals, caught the fish, chopped down trees, dug minerals and fuel from the earth? Nothing.
Well, that’s not quite true, of course. We’d have a pristine natural environment, so in that respect we’d have everything, but we’d still be living in caves and eating grubs. Looking at this in purely economic terms, we’d have no economy, no ‘assets’, no wealth in the accepted sense.
We are products of the earth. We dug raw materials from the earth and, using human ingenuity and labor, we added value to those materials – we turned the earth’s natural wealth into something useful. Through industry, we turned crops into food, reared livestock on the soil’s bounty, turned animal skins, flax plants and cotton into clothing. We built houses and factories from timber and stone and clay, learned how to make cement from limestone, how to make steel from iron ore. We invented machines that made it possible to make more things more easily, using coal, and later oil, as fuel. And all of this came from the earth, to be enriched by human ideas and hard work.
A simple equation:
I don’t mean to imply that this is a mathematical or scientific equation; the values are not absolute, rather they are concepts with variable optimum inputs. The main point is that neither the raw materials nor the labor have what we would call ‘value’ by themselves. The gold or iron-ore buried in the earth, the undisturbed soil or the virgin forest: this natural wealth only acquires its value, to us humans at least, when we apply human labor and turn it into something useful. And the labor itself is useless without the natural resources to work with.
So we see that no wealth can be created without both materials and human effort, and this has important implications for the future, as technology makes industry ever more productive.
Whichever way we look at it, there is no economy until we extract the raw materials from the earth, and this would have been perfectly clear to anyone who cared to give it some thought, until economics started to get more complicated, say around 50 years ago. At this point some of the more obvious truths began to get submerged beneath a rising tide of prosperity, and beneath the corresponding rise of the service sector, which now employs over three-quarters of the workforce in many Western countries, yet creates no real wealth.
This brings us back to one of the fundamental problems affecting the major economies of the developed world. In order to understand this problem fully we must first endure a brief lesson in simple economics.
Back to basics
In traditional economic teaching, the economy is divided into three sectors: Primary, Secondary and Tertiary.
The Primary Sector is concerned with the extraction or harvesting of natural resources and includes agriculture, forestry, fishing, mining and oil-drilling.
The Secondary Sector is concerned with turning these raw materials into something useful. This means industry – processing, manufacturing, construction.
The Tertiary Sector is everything else, and is usually referred to as the service sector. It includes retail, transport, finance, marketing, healthcare, leisure and entertainment.
Sometimes these days a fourth sector is added to cover knowledge-based intellectual services and government activities, but this is an unnecessary complication. To create a new category for them is to miss the main point of the original three-sector classification:
1) Take the natural wealth from the earth.
2) Use human ideas and labor to turn that wealth into something more useful, thus adding value and producing ‘tangible’ wealth.
3) Distribute that wealth amongst the population through payments for services, thus creating a wider economy.
Certainly there is a lot of crossover between sectors: industries such as publishing and information technology, for example, have large elements of manufacturing as well as services, and some big oil companies straddle all three sectors. But the main point still stands: are the majority of workers productive or non-productive? Or, to put it another way, do they work mostly out on the land or in factories, or do they work in shops and offices? It used to be classified by clothing – blue-collar or white-collar – but that distinction has faded with time, and with the T-shirts and jeans of Silicon Valley.
This is all very simplified of course – a significant proportion of service workers drive trucks and buses and trains, for example. Another distinction can be made between private and public ownership. In the US and Europe these days, most direct government employment is limited to the service sector,
