January 29, 2010
Would it surprise you to hear that the New York Times has managed an economics fail? Again? No, I suppose it probably wouldn’t but you will at least be interested in finding out which part of the dismal science they’ve managed to entirely misunderstand I have no doubt.
It’s here, in one of the editorials, moaning about how big big business is:
Big Oil is so big that Royal Dutch Shell is the world’s 25th-biggest economy, bigger than Norway.
No, it isn’t. It’s not even close to that sort of level. This is entirely nonsense, nonsense upon stilts, nonsense that betrays a sad and woeful lack of knowledge about what an economy is and how we count and measure it.
The truth is that Shell is around and about the size of Luxembourg, number 68 or so on the list.
So, what is it that the New York Times has got wrong? Well, basically, they’ve looked at a few numbers, seen some that look about the same and then hared off cock-eyed to their conclusion: about what we expect from children just past the “why’s the sky blue, daddy?” stage.
The GDP of Norway is (I’m rounding everything here, just to conserve the world’s supply of digits) around $400 billion. The turnover of Shell is around $400 billion. Thus Shell is the same size as Norway, right?
No, entirely wrong. GDP is Gross Domestic Product. There are a number of different ways to think about it but the one we want here is that it is the value added in the economy over the year. What it isn’t is the turnover in the economy. Think of housing for a moment: you sell your house (umm, well, if you can at the moment of course) and someone else buys it. That’s a transaction and is it included in GDP? No, it most certainly isn’t. Total sales of houses in the US are around $12 trillion a year and the total economy is $15 trillion: whatever you might have thought of the past few years it isn’t true that housing is 80 percent of the US economy. No, the bits we include in GDP are the bits of added value: the realtors fees, the closing costs, the points you pay the mortgage broker. Yes, I know, tough to think of these as added value but to economists (a strange breed indeed) they are.
However, to get that $400 billion figure for Shell we’re not measuring value added, we’re measuring turnover. So to equate the two numbers is somewhere between the apples and pears thing and comparing apples to Rush Limbaugh: somewhere between inappropriate and surreal.
The value added at a company (and I’ll agree that there are different ways of doing this) is best represented by the profit that they make. Take all the sales, take all the costs, net them off and you’re left with that profit: the value that’s been added by incurring all those costs to make those sales. Shell’s profits are around $30 billion a year. So that’s the number that we want to equate to the GDP of a country and Luxembourg’s GDP is about $30 billion and so Shell is about the size of Luxembourg.
“But, but, wait” I can hear the confused leftist at the back of the lecture hall saying “Shell is still the size of a country and that’s bad, right?”
Well, no, not really sure that this is still bad. Shell employs a couple of hundred thousand rich world people in its business. Luxembourg employs a couple of hundred thousand rich world people in its business as a country. Why should anyone be surprised that a couple of hundred thousand rich world people produce about the same value added even if employed in different ways?
As to the New York Times editorial writers, well, next time they tell us that politicians run things better than markets, that taxes or the minimum wage should be higher, you know, the sorts of things that those arts graduates love to lecture us on, just remember that on matters economic they simply haven’t the first clue of what they’re talking about. They might know where to put, commas, and how to spell stuff but numbers clearly confuse them.