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Transatlantic Blog

Sin and vice do not belong in the GDP

Economics can be a brutal science. Its focus is limited to a particular part of human activity that deals with the process of wealth creation, acquisition, production, and consumption. It measures what has, and not what should have, been done. Economics is also a science of measurements. By calculating profits and losses, businessmen can plan for the future. On a larger scale, international standards of measurement help economists develop monetary policy, make economic forecasts, and monitor growth. But greed, fraud, and theft can easily find their way into financial transactions. That is why economics must be subject to those higher normative sciences like ethics that regulate all human behavior.

However, there is increasing pressure to change the moral dimension of economic measurements. Traditionally, economic figures only dealt with the value of legal activities. Now officials are arguing that illegal transactions should also be included.

According to the Wall Street Journal’s Jo Craven McGinty, the main force behind the push for including illegal activities in standards is the United Nations. The UN promotes its System of National Accounts, or SNA, as the universal standard of economic analysis. The SNA includes the familiar Gross Domestic Product, which is a calculation of all goods and services in a country for a given year, as part of its metrics.

However, United Nations officials promoting adoption of the SNA increasingly recommend that nations include illegal goods and activities like drugs, prostitution, illicit gambling, and business theft. They claim such “transactions” represent a significant amount of economic activity. Excluding them, they argue, will distort GDP and ruin the uniformity of analysis.

Five years ago, the European Union began including illegal activities in its national accounting. Others followed suit by adopting the SNA’s guidelines. Participating governments can record no direct benefits from the metrics, since the activities are still illegal and, therefore, not taxable. However, they claim the practice will help set policy.

Although the amount of illegal activity is not easy to estimate, it is enormous, perhaps amounting to hundreds of billions of dollars. Canada has especially focused on its illicit cannabis sales which, despite the legalization of marijuana, still account for 0.4 percent of its GDP. Estimates of unlawful activities in the United States are around one percent of GDP. Theft from business alone would add $109 billion to the total amount of national “goods and services.”

The only real obstacle for the universal adoption of the SNA standards is the United States. It is not ready to include these figures on its fiscal portfolio. Thankfully, it has kept Illegal gambling, theft, drugs, and prostitution off the official ledger.

The SNA debate over adding vices and illegal goods to the metrics is a typical expression of modern economics divorced from ethics. The SNA would reduce economics to the mere mechanics of commodity exchange, irrespective of whether the activity measured is constructive or destructive. It is this indifference that is wrong.

The SNA’s proponents at the UN fail to consider that theft and corruption destroy the fabric of society. Economic transactions involve moral and ethical actions. They create relationships that increase social cohesion or undermine the rule of law. Entrepreneurs must trust that their business partners will fulfill the terms of their contract, and employers must trust that their employees won’t pilfer from the store while they’re away. Economic measures that treat the theft of an item no differently than its sale fall short of their purpose.

There is yet another objection to such indifference, which the Western tradition has upheld from Aristotle to America’s Founding Fathers. Sinful habits corrupt a people, but limited government and free markets depend on virtuous citizens. A lawless or vice-driven society cannot experience flourishing in any regard, including long-term economic growth. Nations abandon these links to their peril.

Saint Thomas Aquinas defines the virtue of justice as “to render to each one his own.”Justice facilitates virtue by clearly defining the terms of ownership, thus diminishing discord. Economics focuses on commutative justice, which is the particular kind of justice that assures that one party will render to another in transactions what is due. Justice ties trade to moral actions in favor of the common good and away from exaggerated self-interest and short-term gain. Justice creates the trust and security that allow markets to flourish.

When economists admit business theft as a metric for economic analysis, they break this trust. Injustice takes an equal place beside justice. Immoral actions like prostitution – that offend human dignity and God’s law – line up alongside professions of honor and decency. It is a formula for failure.

Standards of measurement are important in economics and must be employed judiciously. However, economies fail much more by the lack of moral metrics than by want of statistical analysis. The basis of economic thought must be a passion for the cardinal virtue that should govern all transactions: justice.

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John Horvat II is a scholar, researcher, educator, international speaker, and author of the book Return to Orderas well as the author of hundreds of published articles. He lives in Spring Grove, Pennsylvania, where he is the vice president of the American Society for the Defense of Tradition, Family and Property.