Based on Adam Smith's Digression on Silver

The Alternative to GDP Icon

December 14, 2020

Pantrynomics will use Purchasing Power as its alternative to GDP, as explained in The Digression on the Value of Silver of the Wealth of Nations.

In that Digression, Adam Smith proved that money supply, as the prices of gold and silver, are not correlated with a society’s wealth or poverty. Instead, he wanted to prove that it is the money price of some rude produce relative to the main food grain (such as wheat), which is the clearest indicator of a society’s wealth or poverty.

The increase of food from the increasing cultivation increases the demand for the non-food produce of land. This demand will then be applied to use or to ornament. There should be only one variation in the comparative values of the commodities for use and the commodities for ornament. The value of non-food produce should constantly rise relative to food produce.

Simplified Wealth of Nations Book 1, Chapter 11, Part 3

To do this, he had to write about:

  • the price of wheat (food produce) in three periods
  • the price of silver in the world and its ratio to gold (non-food produce)
  • the nature of the price of other non-food produce

In the same way, we want to objectively prove that GDP (measured in dollars instead of silver as non-food produce) is not a proof of the wealth of a country. Instead, it is the collective grain value (main food produce) that a society needs in order to gain possession of all the cars, iPhones, bus tickets, real estate, etc. in that society for a certain timespan.

Grains

This grain value emodies the purchasing power of a person or a society. Without food, no one can do work to mine metals, make cars, inspect real estate, code websites, build infrastructure, etc.

The individual and aggregate purchasing power of a city or country is then compared to itself in the past or with other cities or countries. In this way, we can more easily say whether the US, China, or the EU is really wealthier and which country’s wealth is based more on real value, instead of fake or nominal value.

Who wouldn’t want to live in a country that has more real value and is more resistant to economic crises?

Finding an easy proof of a country's prosperity may be useful to the public.

Simplified Wealth of Nations Book 1, Chapter 11, Digression

Basically, the aggregate purchasing power of a society or Net Domestic Product (NDP) is its GDP minus the revenue of its entire financial system which we notate as:

NDP = GDP - $

  • NDP: Net Domestic Product
  • GDP: Gross Domestic Product
  • $: Gross Revenue of the entire financial system and insurance of a country

The money which circulates the society's whole revenue among its members makes no part of that revenue. The great wheel of circulation is different from the goods which are circulated through it. The society's revenue is in those goods, not in the wheel that circulates them.

In computing any society's gross or net revenue,we must always deduct the whole value of money from the whole annual circulation of money and goods. The value of money can never make a part of the society's gross or net revenue.

Wealth of Nations Book 2

Money and finance are just tools to circulate real value as services (haircuts, cleaning, construction, utilities) and products (iPhones, potatoes, clothes). They are not real value or wealth themselves.

For example, a family has no internal financial system that charges the children a fee each time their mother cooks a meal for them. Instead, they pay back by getting good grades and doing as they’re told. Family life would actually be more difficult and unnatural if the parents imposed such an internal financial system.

There are two ways to get the NDP, just as there are two ways to get the GDP:

  • Top-Down
  • Bottom-Up

Top-Down

This approach deducts the effort of society in maintaing the money-system that circulates the real value between people. Currently, this effort manifests as the banking, financial, and insurance systems. In the past, it was the imperial system of the Romans and ancient Chinese made up of a rent-seeking class* of tax collectors and eunuchs.

*Pantrynomic systems aim to reduce corruption by reducing the rent-seeking and profit-seeking classes through automation. Unlike the fallacious systems of Communism and the Resource-based Economy where technology is used to create value, in Pantrynomics, technology and artificial intelligence are used to maintain value.

The expenses for finance charges, insurance premiums, interest payments, credit card annual fees, etc. all go as into the gross revenue of banks, fintech, and financial institutions. These are therefore deducted from the GDP to arrive at the NDP.

For example, the GDP or gross revenue of Singapore is nominally $323.9b. Its purchasing power would be the GDP minus the entire gross revenue of its financial and insurance system for that year. This includes its social security and pension system.

Why do we need to deduct the entire financial revenue?

(Update Jul 2021) Currently, GDP includes the revenue from financial activities, which Smith classifies as unproductive labor and can never be the solid foundation of any economy*. > *Singapore, Hongkong, and Switzerland can base their economy on financial services because they are tiny countries serving global customers. A recent proof* is Lebanon's GDP which was artificially propped up by state-run financial ponzi scheme. When that scheme collapsed, their GDP crashed suddenly, leading to instant unrest, violence, and death. A larger example is the 2008 Financial Crisis that was left unchecked, as to lead to the Great Recession and secular stagnation. > *An older example is the Mississippi Scheme by John Law in France. An NDP system would expose the lack of real value in an economy immedately so that policymakers or the people can take appropriate measures, instead of being fooled into complacency.

Bottom-Up

Governments will likely stick to the GDP system instead of computing the revenue of its financial system. So we can build the NDP from the bottom-up by computing the actual purhases of people relative to the past and those of other countries.

For example, the value of the purchases of a sample of five random people for this month can be compared to their purchases last month and last year. To eliminate the financial aspect, we peg the value to grains, through a grain index, instead of money.

For example:

  • If a kilo of rice in the Philippines $0.75 and a kilo of chicken is $2.50 then 1 rice : 0.33 chicken.
  • If a kilo of rice in Vietnam is $0.50 and chicken is $5, then 1 rice : 0.10 chicken.
_
1 kg Rice can buy 330 grams chicken 100 grams chicken
1 kg Chicken can buy 3.33 kg Rice 10 kg Rice

This means that chicken is really cheaper in the Philippines, meaning that while Vietnamese enjoy cheaper rice, Filipinos enjoy luxuries better (to Smith, meat is a luxury).

This is consistent if we replace chickens with cars. A Toyota Vios is 16,000 kg rice in the Philippines, but 44,250 kg rice in Vietnam.

This would then guide people on which cities or countries they might want to move to, in order to match their social status, fulfilling the requirement of Adam Smith that our model must have a practical use. The rich could use this to justify moving to Singapore, while the lower classes might use it to decide to live in the Philippines or Vietnam.

_
GDP per capita $100,345 (1st place, 13x Vietnam) $8,936 (2nd place, 1.19x Vietnam) $7,510 (3rd place)
Rice Prices per kg 75 US cents or 1.1 SGD (2nd place or 1.5x Vietnam) 80 US cents or 40 PHP (3rd or 1.6x Vietnam) 50 US cents or 12k VND (1st place or cheapest)
Chicken Prices in rice 4.22 kg rice (2nd place or 1.3x Philippines) 3.25 kg rice (1st place) 8.33 kg rice (3rd place or 2.56x Philippines)
Toyota Vios in rice 73,636 kg rice (3rd place or 4.46x Philippines) 16,500 kg rice (1st place) 44,250 kg rice (2nd place or 2.68x Philippines)
Toyota Alphard Luxury Van in rice 206,000 kg rice (2nd place or 2.25x Philippines) 91,250 kg rice (1st place) 336,000 kg rice (3rd place or 3.7x Philippines)

The amount of the metal pieces which circulate in any country must always be of much less value than the worth of that money. But the power of purchasing or the goods which can be bought with that money, must always be the same value with that money. The revenue of those who receive that money must be of the same value with the money they receive. That revenue consists in thepower of purchasing or the goods which can be bought. It cannot consist in those metal pieces of which the amount is so much inferior to its value.

Simple Wealth of Nations, Book 2

This system can of course be used for policymaking. Both Economics and pantrynomics will conclude that Singapore is the most prosperous country and Vietnam the least prosperous of the three, from the supply side. But from the demand side, pantrynomics can reveal much more info:

  • The poor of Vietnam are ‘wealthier’ than the poor of the Philippines (which is really the poorest)
  • The middle class of Vietnam is the poorest of the three
  • The rich of the Philippines are more prosperous than that of Singapore
  • Because the poor benefit in Vietnam, the policies are likely pro-poor and anti-rich, consistent with Communism
  • Because the rich benefit in the Philippines, the policies are likely pro-rich and anti-poor, consistent with oligarchy

So by combining GDP, Grain index, NDP and personal NDP, we can get a more granular picture of the real economic situation of a society. By plotting the ratios of prices of different products and services relative to the Grain index annually, we can even determine the economic direction of a society and can better iron out kinks in a society’s supply and demand.

We can even use the data to plot exactly when the grain ratios started to change so that we can pinpoint specific laws that caused the problem or improvement. We can trace objectively when the oligarchy started in the Philippines and when Vietnam became anti-rich, by getting their historical annual pantrynomic Purchasing Power even without any knowledge of historical events – this is what our machine learning is supposed to do*.

*This system is implemented with our points-based moneyless economic system

Big Mac Index
The Big Mac index has some of the basic ideas of Smith’s commodity-based valuation system, explained in the Digression, as it uses a real, useful thing to valuate a mere piece of paper with a number written on it

Bye Bye GDP Problems

In contrast, modern Economics measures national wealth top-down through GDP and its sustainability through the CPI (consumer price index), both measured in currency.

This makes it difficult to value goods and services during bubbles and hyperinflation as what happened in Zimbabwe. If a financial crisis hits a pantrynomy, the valuation can merely switch to the Grain index to keep the supply chain humming.

Under Economics, a country can theoretically have a single giant corporation exporting everything, having huge GDP while its workers starve to produce those exports at low cost. A GDP standard would still rate the starving country as wealthy. Countries even tweak their GDP numbers artificially to give an illusion that their economy is so good and their leaders are so effective.

Our NDP standard, on the other hand, would properly expose the real poverty hidden by the nominal wealth just as it exposed the hidden middle-class poverty in Vietnam and the real poverty in the Philippines.

Some organizations advocate a GDP 2.0 which measures income and other things. However, their flaw is that those are still measured in money which is volatile to begin with.

In addition, our Grain index eliminates the need for complicated subjective factors that are present in other indices like the Human Development Index , Happy Planet Index , Better Life Index , etc. The subjectiveness is only in what items are pegged aganst the Grain index.

More importantly, our system retains democracy and does not degenerate into a social credit system while it reduces the cost of cirulating value throughout society.

The riches of a country does not consist in the amount of money used to circulate commerce, but in the great abundance of life's necessaries. We would greatly increase our country's wealth if we could find a way to send the half of our money abroad to be converted into goods, and supply the channel of circulation at home, at the same time.

Lectures on Jurisprudence Chapter 9
_ Economics Economic Superphysics
Measure of Supply GDP as Gross Domestic Product or the gross sales in a country Purchasing Power as the net revenue in a country after deducting finance and money
Measure of Demand Consumer Price Index or prices of year X relative to year Y Grain Index or prices of different goods and services relative to grain. For basics, it is fuel, electricity, water, rent, basic medical services and common non-essentials (meat, milk). For luxuries, cars, condominiums, etc.
Subjective Measures Arbitrary, depending on think tank (Human Development index, Happiness index, etc) Not-so-arbitrary. Measures are integrated in the items included in the Grain index. For example, a rich country might include prime beef and pork in the index, but a vegetarian country might not. In general, meat is included since Smith included it in his digression
Ease or Difficulty Difficult, needs to get accounting of all output, and various data on well-being which are difficult to get Easy, Survey the purchases done by a sample population, and get the prices of benchmark commmodities
Update: Jul 2021

So What’s the Use of GDP in Pantrynomics?

Since GDP will no longer be the measure of wealth, it becomes a measure of the velocity of an economy or how fast the economy is going, or whether it is going forward of backward. It is an important part of the DCTI tool in the absence of a direct way to get the Purchasing power of everyone.