The core ingredients

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Wealth matters. Thus, measuring wealth matters because ultimately, that's what determines what is feasible for the economy today and into the future. Modern economies can be complex. There are many different sectors: the government sector, the banking sector, international trade, and domestic trade relationships. We understand these relationships by using economic statistics. Economic statistics are the lens through which we observe the economy. Policymakers, businesses and investors all update and change their behaviour based on what they see through that lens.

As complex as a modern economy might be, we can distil some things to fairly simple, fundamental first principles. It’s similar to running a bakery: the size of the pie that we can produce in the future is determined by the stock of ingredients that we have in the pantry. If we’re running out of milk, eggs, sugar and flour, then the size of the pie we can make in the future shrinks. The problem we've had is that our economic statistics have focused only on the size of the pie while ignoring everything that's going on in the economic pantry. I'm not merely talking about milk, eggs and butter, albeit there is a lot of economic research on those specific commodities, I’m talking about the fundamental economic ingredients that make up modern, prosperous economies. These are components of wealth, capital assets which include things such as physical infrastructure like buildings, transport infrastructure, machinery and factories. We need those in order to develop goods and services in a modern economy.

Human, natural and social capital

Another component of wealth – another one of these ingredients in the economic pantry – is our human capital. It's the health, the skills and the knowledge of the workforce. Ultimately, human capital, our entrepreneurial spirit, determines what we can do with all of that physical infrastructure and capital assets.

Natural capital is another ingredient we need to measure. The components of the natural world underpin all economic processes and therefore, provide goods and services directly into the economy. In other words, a stable climate system makes it possible to have a transportation system that runs on time. Forests and ecosystems should cycle nutrients that purify the air and store carbon to provide a space for wildlife and biodiversity. I’m also talking about the oceans and fisheries that provide fish stocks for us to harvest, catch and eat year on year. The benefit of understanding what's going on with these stocks in the economic pantry is that if we can measure them, we can manage them.

Our social capital is one of the hardest components to define, measure and value; nonetheless, it is important. By social capital, I mean: the strength and quality of social relationships and the degree of trust that exists among people within an economy and amongst institutions. If we trust that our government is going to obey and enforce the rule of law, we can enter into economic contracts with the knowledge that the people on the other side of the deal have a legal obligation to honour it. We start to see social unrest and uprisings in countries where this kind of social and institutional capital collapses. Although this sort of social upheaval may be necessary to progress a society towards a more sustainable future, they are not helpful, nor conducive to economic output.

The downside of economic growth

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If we survey the past century, what has happened to the global economy? We have seen economic growth undergo an unprecedented meteoric rise in all parts of the world. We have seen life expectancy and literacy rates jump. Moreover, we have seen an irrefutable improvement in the human condition: Access to education, particularly for women and girls, has increased along with access to basic lifesaving medical care, which has prevented the deaths of young children that were commonplace only a century ago.

However, this unprecedented economic growth and improvement in the human condition have taken a toll on the planet. We have seen the release of one and a half trillion tonnes of CO₂, the reduction in the population of nearly 70% of the world's species, and now, we have driven one million additional species to the brink of extinction. These ecological and environmental catastrophes have the potential to wipe out the century's worth of economic growth that we've enjoyed. One reason our economic measures have created a dichotomy between being able to calculate things that work and not measuring other important facets at all is that economic measures narrowly focus on the size of the pie, our income. Little importance has been afforded to the assets on which the pie is grounded.

Understanding the problem

The good news is that economists are increasingly aware of the importance of understanding what's going on with our underlying wealth: our stocks of physical infrastructure, human capital, natural capital, our social relationships and the quality of our institutions. Since we're beginning to understand how important these are and beginning to see the consequences of an economic system that has ignored them in the past, we're developing new economic statistics that deliberately and specifically attempt to measure and value these core underpinning assets – our inclusive wealth. We've collaborated with the World Bank, the United Nations and governments all around the world on projects that measure the different components of wealth. Currently, over 100 countries have started to develop natural capital accounts. It's a difficult process. It includes a lot of information. We need to understand the physical magnitude of the natural world – the size of an ecosystem as well as its quality. Is it healthy, or has it been degraded? Once we have these physical accounts, we can start to combine them with economic models to understand the economic contributions that they make. Wealth economics is not just an attempt to reduce the natural world to dollars and cents; it's an attempt to use the tools and lessons of economics to try and protect that world for future generations instead.

A big innovation

For the past century or so, governments and economists have determined that a good year is one in which GDP grew whereas a bad year is one in which it shrank. While we are generally better off when GDP grows and we're generally a bit worse off when it shrinks, this entire discussion about GDP misses the fundamentals of those underpinning stocks of wealth. The next big innovation will be communicating what's happening in the economic pantry, communicating what's going on with our stocks of wealth. Therefore, when we report economic data, we'll continue to report on GDP that may go up or go down; however, we will focus reports on what's happening to our stocks of wealth. Are we increasing our human capital through improved health or better skills within the economy? Are we becoming more trustworthy? Are our social relationships stronger and healthier? Are our networks serving us so that people can find the right kinds of jobs in the right kinds of places? These are the measures that we need, and they are essential to the economy. The next big step is to ensure that they are central to economic reporting: when a journalist reports on the economy, we want them to report on these wealth statistics as well.

Widening the gap of inequality

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Modern economies have tremendously changed over the past half-century or longer. If we looked back just 50 years ago, international trade was only about 25% of total global economic output. Last year, it was closer to 65%. That’s an enormous shift in the structure of the economy, whereas we used to produce things domestically, now we trade. Global trade helped us share ideas and cultures and people across borders, but it hasn't always led to an equitable distribution of the gains or benefits of that trade.

If you think the world is unequal in terms of its income right now, we are even more unequal in terms of the impacts that we are having on wealth. One example is the global climate system. Wealthier people in wealthier countries have been overconsuming for the past half-century. In fact, for the past 150 years, we’ve been overconsuming our component of the shared global carbon budget, emitting more carbon than we should be. This matters for international policy, it matters for climate change and it matters for ethics and fairness in how we distribute the gains from trade. Right now, the way that we account for carbon emissions determines how we proceed in terms of policies like the Kyoto Protocol or the Paris climate change agreement. Thus, although economies have expanded greatly and the world has become deeply interconnected with the exchange of goods, services and people across borders, it has incurred a cost. We must work to change our wealth parameters to warrant a sustainable, ethical and inclusive future.

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Measuring Wealth

Agarwala, M., Cinamon Nair, Y., Cordonier Segger, M.C., Coyle, D., et al. (2020). Building Forward: Investing in a Resilient Recovery. Bennett Institute for Public Policy, University of Cambridge.

Zenghelis, D., Agarwala, M., Coyle, D., Felici, M., Lu, S., and J. Wdowin (2020). Valuing Wealth, Building Prosperity. Bennett Institute for Public Policy, University of Cambridge.

Coyle, D., Zenghelis, D., Agarwala, M. (2019). Measuring Wealth, Delivering Prosperity. Bennett Institute for Public Policy, University of Cambridge.

Atkinson, G., Dietz, S., Agarwala, M., et al. (Eds.). (2014). Handbook of Sustainable Development. Edward Elgar Publishing Limited.

The wealth economy