In the first debate leading up to the US presidential election, Donald Trump claimed credit for building ‘the greatest economy in history’. A comment like this from Trump would generally attract the attention of a myriad of dedicated ‘fact-checking’ media sources looking to confirm or (more commonly) invalidate his assertions. I’d wager, however, that they’d struggle to test his latest claim. Sure, they might be able to take a look at the trends in GDP, unemployment and inflation and use their movements to assess the economy’s performance. But at some point, a normative judgement would be necessary. 

If you’ve taken ECON2030, then you’d know that normative statements can be problematic. Unlike a positive statement which can be tested and confirmed using evidence, a normative statement is subjective and lacks any confirmability; it is a value judgement (Fontinelle, 2020). Unfortunately, Trump’s statement falls into this category, which isn’t so good for the aforementioned fact-checking media sources looking to categorically debunk his claims. 

Upon listening to the presidential debate – and reviewing the wisdom of ECON2030 – I began thinking about how we could define ‘economic greatness’. While there’s little controversy around established notions like ‘economic growth is good’ and ‘unemployment is bad’, Trump is entitled to his own opinion regarding the precise characteristics that define a great economy. So, to keep things apolitical (though maybe that’s a political position in itself), I’m going to explore the different criteria we could use to determine the calibre of an economy, from traditional metrics like GDP all the way to environmental sustainability considerations.

The merits of a ‘big economy’

GDP tends to be the first metric we look to when assessing economic performance. The US, unsurprisingly, does very well here, with a nominal GDP of over 20 trillion US dollars. Without adjusting for price levels, this equates to a 24% of share of the world’s total output. If a great economy is a big economy, then the US may have indeed been the greatest economy. And the claim that the calibre of an economy is defined by its Gross Domestic Product isn’t a totally unfounded one; it is to be expected that standard of living is higher in countries where households have access to more goods and services. 

That said, the typical criticism of GDP as a measure of economic performance is that it inherently favours countries with a larger population; this is the argument for using the per capita alternative. When the advantage of a large population is removed, the US doesn’t rank so highly. In fact, with nominal GDP per capita as the sole consideration, Monaco would be regarded as the greatest economy in the world based on 2019 estimates from both the IMF and the World Bank (The World Bank, 2020). Perhaps this is because Monaco has a population of only 38,000 – but there’s certainly no shortage of output to be distributed among that 38,000. 

While GDP per capita is probably the preferable measure here, relative economic size provides no insight into how this wealth is distributed, so we can’t assess standard of living at the individual level.

What about distribution?

Many would argue that the role of policymakers is not only to promote growth and efficiency, but also to ensure that an equitable distribution of societal wealth prevails. If this is the case, then equity would be an important consideration in determining the ‘greatness’ of an economy. Where issues of distribution are concerned, economists tend to rely on the Gini coefficient, which you may know as a ratio representing the degree of wealth/income inequality in a country. 

It might seem intuitive, therefore, that the most equitable nation is the one with the lowest Gini coefficient. But that’s only if we assume that an equal distribution of wealth (or income) is also an equitable one. Hearkening back to ECON2030, this would require that every member of society attained the same utility from wealth and that we adopt a Rawlsian view of social welfare, where net societal welfare is equivalent to the utility of the worst-off member of society (Stark, Jakubek, & Falniowski, 2014). But what happens in circumstances where individuals attain different utility from wealth, or where we depart from the Rawlsian view and contend that the utility of certain individuals is more important than others?

Maybe utility can be more tangibly expressed as ‘need.’ Conceivably, a person who is hospitalised with a serious illness has greater need for a share of society’s wealth than someone who is healthy. Equity, in this case, might depend on ensuring that those who need wealth have wealth. 

On face value, Trump’s definition of greatness doesn’t seem to place too much weight on equality, as the US’s Gini coefficient of 0.41 means it is the 51st most unequal nation in the world (Index Mundi, 2020). Whether the economy has achieved an equitable outcome depends on if societal wealth is in the hands of the right people. Unsurprisingly, controversy ensues when we look to decide who the ‘right people’ are.

In South Africa, the Gini coefficient is 0.63, and the richest person probably likes it that way.

The argument for stability

Macroeconomics also likes to emphasise the distinction between the determinants of long run economic growth and the business cycle fluctuations that occur in the short run. Extending this, it’s often seen as the role of the governments and central banks to minimise inflationary booms and recessionary busts, keeping the economy on its balanced, long run growth path. It makes sense then to incorporate some stability considerations into our criteria for economic greatness.

Jumping now to ECON2040, key economic variables such as GDP, inflation and unemployment can be decomposed into a trend and cyclical component, with the standard deviation of the cyclical component representing a degree of ‘departure’ from the realms of stability; a commonly used model for this is the Hodrick-Prescott filter (Jong & Sakarya, 2016). Such data is often simplified into ‘economic resilience’ indices when published in mainstream media. 

The Scandinavian countries tend to perform among the best when it comes to economic stability, as a result of social and economic policies that ensure greater uniformity (Galloway, 2020).

Determining the relative importance of stability is certainly tricky. Is an economy with low GDP per capita growth in the long run but a high level of stability better than an otherwise identical economy with much higher average growth that suffers from significant booms and busts? This is, of course, a question of whether the hardship endured through recessions in the short run outweighs the benefits of higher growth overall.  

Is there something to be said for sustainability?

In defining a ‘great economy’, perhaps it’s also necessary to address the increased characterisation of environmental and sustainability issues as ‘economic problems’. A recent study by the National Academy of Sciences in the US essentially described the economy as the overarching system responsible for allocating a country’s scarce resources to satisfy the needs and wants of its people (a definition that aligns with most textbooks). Sustainable development is concerned with ensuring that the satisfaction of present societal desires does not compromise the pursuit of future needs and wants. In other words, if an economy is booming today at the expense of the world’s natural resources, the boom will reverse itself at some point in the future (Polasky, et al., 2019) . 

Therefore, when assessing the calibre of an economy, it’s important to consider sustainability and other measures of inter-temporal efficiency. Perhaps the most commonly discussed environmental metric is the percentage share of the world’s emissions attributable to particular nations. China is responsible for the largest share of the world’s emissions in absolute terms (Fleming, 2019), but the US and Australia lead on a per capita basis according to last year’s figures (World Bank, 2019). Linking this to the notion of the ‘greatest economy’ on the national level, however, isn’t completely straightforward, as a country producing high emissions also sabotages the future of other economies. 

The data on waste is perhaps more intuitively tied to the role of economies in satisfying present and future needs; a country in which present production creates a significant amount of waste directly sacrifices the availability of those resources to future generations. Despite the US and China being the largest emitters, countries such as Kuwait and Sri Lanka lead in the realm of waste production (Sebastian, 2019). 

Something to ponder

Perhaps all I’ve done here is reinforce the unavoidable subjectivity of economics. Some of us might see it as the economy’s principle role to produce output, while others care more about how well the distribution of wealth aligns with a particular definition of equity. Some might wish the business cycle to be completely eradicated, and others place significant weight on sustainability. For most, I’d guess it would be some mix of the four (and a whole host of other factors). 

It might be frustrating that the normative side of the discipline provides us with no straight answers, but we can at least appreciate the choice that it affords us. After all, normative economics entitles us (and Donald Trump) to our own personal definition of what makes a great economy. If we wish to have robust opinions on what ‘ought-to-be’ when it comes to policy and the economy, then maybe it’s worth spending a little time to decide what that definition is. 

On a topic as subjective as what makes a great economy, our readers are bound to have differences of opinion. UQES Publications welcomes reader correspondence on our articles. If you wish to reply to points raised, or believe a perspective has been missed, feel free to send respectful responses to d.hunt@uqes.com.au. We will endeavour to publish correspondence in subsequent articles.

References

Fleming, S. (2019, June 7). Chart of the day: These countries create most of the world’s CO2 emissions. Retrieved from World Economic Forum: https://www.weforum.org/agenda/2019/06/chart-of-the-day-these-countries-create-most-of-the-world-s-co2-emissions/

Fontinelle, A. (2020, February 3). Positive vs. Normative Economics: What’s the Difference? Retrieved from Investopedia: https://www.investopedia.com/ask/answers/12/difference-between-positive-normative-economics.asp

Galloway, L. (2020, April 6). Five Countries with the Most Resilient Economies. Retrieved from BBC Travel: http://www.bbc.com/travel/story/20200405-covid-19-how-global-economies-will-recover-from-coronavirus

Index Mundi. (2020). Gini Index – World Bank Estimate . Retrieved from Index Mundi 2020: https://www.indexmundi.com/facts/indicators/SI.POV.GINI/rankings

Jong, R. d., & Sakarya, M. (2016, April 21). The Econometrics of the Hodrick-Prescott Filter. Retrieved from The MIT PressJournals: mitpressjournals.org/doi/abs/10.1162/REST_a_00523?journalCode=rest

Polasky, S., Kling, C. L., Levin, S. A., Carpenter, S. R., Daily, G. C., Ehrlich, P. R., . . . Lubchenco, J. (2019). Role of economics in analyzing the environment and sustainable development. Proceedings of the National Academy of Sciences , 5233-5238.

Sebastian, A. (2019, November 2). 5 Countries That Produce the Most Waste. Retrieved from Investopedia: https://www.investopedia.com/articles/markets-economy/090716/5-countries-produce-most-waste.asp#:~:text=for%20the%20latter.-,1.,dispose%20of%20all%20the%20waste.

Stark, O., Jakubek, M., & Falniowski, F. (2014). Reconciling the Rawlsian and the utilitarian approaches to the. Economics Letters, 439-444.

The World Bank. (2020). GDP Per Capita: Current ($US). Retrieved from The World Bank: https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?most_recent_year_desc=true

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