Look around at the busy world of international trade, and there is plenty of activity and thriving businesses, writes Philip Whiteley. Yet the news media, at least in the west, are filled with tales of doom. Why this disconnect? Debt and malfunctioning banks are obviously part of the picture, but the disjuncture between economics and business is an aggravating problem.
There is a tendency in economics to link data points together – the primary indicator being changes to Gross Domestic Product (GDP) – and then overlay these on a transport metaphor. Nautical ones are common. So if GDP ‘growth’ is less than expected, we are ‘facing head winds’, or ‘heading for the rocks’. If things pick up, suddenly we’re in a spacecraft! We have ‘escape velocity’!
There is insufficient analysis of what is really going on. To begin with, GDP is not even a useful indicator. It tells us nothing about business performance. Rising GDP can reflect sustainable growth in trade and development of highly networked ‘clusters’ of businesses, or it could simply be the development of an unsustainable credit boom. Or it could be a mixture.
The daily reality is that an economy is not on a journey and GDP does not measure progress. The economy does not follow laws of motion; indeed it is not governed by laws at all. Fiscal and monetary policies are not the only ones with influence because the economy does not consist of money, it consists of people.
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