Thursday, September 11, 2014

The case for optimism in a crazy world

Lately, it seems like the world is increasingly going bananas. The Russian-Ukrainian conflict is bringing back dark echos from the past, ultra-extreme Muslim organizations rise in the middle-east, China is flexing its muscles in south-east Asia, and Europe's economy is sliding back. Nonetheless, if I were asked whether the world will be a better place in 30 years (or 20, or 50, etc.), my response would be a resounding YES. The reason is that the world has always been in a mess of some sorts somewhere in the last 50 years, and despite that it has almost continuously progressed in most measures of quality of life.

Its not that my answer can't be wrong. The world can become worse -- A nuclear war may erupt, a large asteroid may hit the Earth, and a super virus may spread. Also, individual countries can and probably will regress -- Zimbabwe and Syria are good examples. Still, I believe it is much more likely the world as a whole will become better than worse.

I focus in this post on the developed world -- the issue of `miraculous growth in the developing world' has been discussed a lot by now (and it is very much incredible!). Also, the reason for this post is that I recently stumbled upon some surprising statistics about Western countries.

The most commonly used indicator to examine national development is the Gross Domestic Product (GDP) per capita, shown in the next figure for the EU, USA and the Netherlands.

GDP per capita is simply a measure of the total production (whether it is tractors, corn, banking or magic tricks) divided by population size. In general, the more countries produce, the more they can consume and the higher average living standards become. Clearly, there was an enormous increase in total production in the Western world over the last 50 years.

There are a few problems with this measure as an indicator of 'standard of living' though. One is that an increase in average production does not necessarily lead to an increase in the standard of living for the majority of the population -- the gains may only go to a small part of the population. This may have happened in the USA and elsewhere. Another problem is that in order to measure GDP economists use market prices. That means that if something is free it does not count in the GDP. For example, many of the freely available services on the internet which make our life better than they were just 10-15 years ago (e.g. video chatting, using Wikipedia, writing blogs) are simply not included in the GDP measure.

So, to make the case for optimism I believe that less abstract indicators than GDP can be useful. And, since I spoke of the 'standards of living', why not look at death related statistics?

Here is a figure presenting the changes in infant mortality rate in the Western world since the 1980s (using the World Bank data).

Since I am a product of the 1980s, what I find fascinating in this figure is the improvements done in my own life time. I was about 2-3 times more likely to die before I reached the respected age of one year than a child born today.

Even more staggering is the improvement in road safety in the rich world. Using data from the International transport forum we can see the sharp decline in road fatalities over a relatively short time.

On the left we see the changes in road fatalities over the last 30 years for the EU, USA and the Netherlands. On the right are the changes in fatalities between 2000 and 2011 for a large number of developed countries.

Other positive trends can be found in many other areas, such as quality of life in old age and access to health and education. I am thus quite confident that the world, as a whole, will only get better.

Sidenote: crime is another indicator (and a very important one) that has gone down dramatically in the last 20 years. Unfortunately, it is difficult to predict whether it will continue on this course as the reasons for this decline are hotly debated.


  1. What happens to the division of the rising GDP? Specifically, does the bottom 25% get a share? Median income in US is the lowest it has been in 20 years, and I wonder how does the chart of the first quartile of income looks like (or indeed the bottom 10%). Not to be project pessimism, but I would not be quick to draw a conclusion based on the GDP per capita.

    1. That is a good point. I hinted at it in the paragraphs following the GDP per capita chart. In an attempt to go beyond GDP per capita, I show statistics of other indicators of quality of life. Of course, improvements in health and reductions in road fatalities may also be unevenly spread in the population. It would be interesting to see data stratified by income/race/education of these indicators, but I am not familiar with such data. Nonetheless, my prior belief is that these indicators are less uneven than GDP per capita.

  2. Hey Sayag! It's Nikita from the first year microeconomics class! Hope you remember me, and it's nice to see you have a blog.

    I have a few remarks though about what you wrote:

    1)"GDP per capita is simply a measure of the total production (whether it is tractors, corn, banking or magic tricks) divided by population size. In general, the more countries produce, the more they can consume and the higher average living standards become."

    I would disagree with this. GDP measures the movement of cash. So for example, if we were to just take on massive amounts of debt, then suddenly there is more money moving around in the system, but it says nothing about the productivity or real wealth of society, in fact, it could state the opposite.

    If we look at growth of GDP net debt, you'll see that the developed world has become significantly poorer over the last 20 years. Here's some research on that:

    I am not sure how accurate the graphs are, they seem a little extreme, but just some food for thought.

    2) You're right on health though. Aside from a few regions of the world, people are living longer and healthier lives.

    And as a general note, I honestly believe the developed world is getting poorer. American, European and Japanese real incomes peaked in the 90's. American industrial production is down 25% from 1998, and 19% from 2008, similar stories in Europe and Japan. The traditional wealthy countries are going to get increasingly poorer and poorer in the coming decades, and that wealth is going to the developing world. In the future, I believe that the wealth of a nation will reflect it's population size and resource base. Countries like the Netherlands will suffer. If you want to make a case for optimism, I'd say look at the developing world, not the developed one!

    1. Hi Nikita,

      Of course I remember you! and thanks for your interesting remarks. I'll preface by saying I disagree with many of your points, although I find them thought provoking. So let me answer them:

      GDP is a measure of production, though it is indeed calculated by looking at prices and quantities. Debt does not change the production capabilities of a country --- its factories, offices, available working population, and so on... (i.e. factors of production) Debt can be used to finance unproductive mean or 'artificially' (not really though -- there is nothing artificial about dent financed consumption) increase demand, which then increases productivity. Nonetheless, that does not change the fact that productivity is not influenced by debt.

      (check to read a bit about this type of an economy-is-like-a-family fallacy)

      Moreover, while debt can be very burdensome on a country (e.g. Greece), and can transfer wealth between generations (especially if it directed towards consumption) this idea of GDP-net-debt mentioned in the link does not seem very promising to me. The figures presented on this blog show that 'real net debt' GDP of the US has fallen by 45% !!!!! between 2009 and 2013, while that of Russia increased by 30%. I doubt these figures very very much (they are way beyond 'a bit extreme').

      As a whole, I would be wary of what seems to me as an ideologically motivated arguments presented in that blog.

      I disagree with you about the idea the developed world is getting (or will get) poorer. Though it does not seem likely to grow in the rates it saw in the second half of the 20th century, the rich world is definitely growing. The biggest problem, as it seems to me now, may be rising inequality and the stagnation of the middle class.

      Wealth (per capita), it seems, is almost always the result of good institutions (governments, rule of law, lack of corruption) and technology. It has shown repeatedly that resources do not necessarily lead to wealth (Spain in 15th century, Middle east with oil, Africa with many many resources), sometimes even the other way around.

      I do agree though that much of the developing world is going in the right way. That is excellent an I am very optimistic about many countries!