23 Things They Don't Tell You About Capitalism

buy in different countries – this fictitious currency allows us to convert incomes of different countries into a common measure of living standards.

The result of converting the incomes of different countries into the international dollar is that the incomes of rich countries tend to become lower than their incomes at market exchange rates, while those of poor countries tend to become higher. This is because a lot of what we consume is services, which are much more expensive in the rich countries. In some cases, the difference between market exchange rate income and PPP income is not great. According to the World Bank data, the market exchange rate income of the US was $46,040 in 2007, while its PPP income was more or less the same at $45,850. In the case of Germany, the difference between the two was greater, at $38,860 vs. $33,820 (a 15 per cent difference, so to speak, although we cannot really compare the two numbers this directly). In the case of Denmark, the difference was nearly 50 per cent ($54,910 vs. $36,740). In contrast, China’s 2007 income more than doubles from $2,360 to $5,370 and India’s by nearly three times from $950 to $2,740, when calculated in PPP terms.

Now, the calculation of each currency’s exchange rate with the (fictitious) international dollar is not a straightforward affair, not least because we have to assume that all countries consume the same basket of goods and services, which is patently not the case. This makes the PPP incomes extremely sensitive to the methodologies and the data used. For example, when the World Bank changed its method of estimating PPP incomes in 2007, China’s PPP income per capita fell by 44 per cent (from $7,740 to $5,370), while Singapore’s rose by 53 per cent (from $31,710 to $48,520) overnight.

Despite these limits, a country’s income in international dollars probably gives us a better idea of its living standard than does its dollar income at the market exchange rate. And if we calculate incomes of different countries in international dollars, the US (almost) comes back to the top of the world. It depends on the estimate, but Luxemburg is the only country that has a higher PPP income per capita than that of the US in all estimates. So, as long as we set aside the tiny city-state of Luxemburg, with less than half a million people, the average US citizen can buy the largest amount of goods and services in the world with her income.

Does this allow us to say that the US has the highest living standard in the world? Perhaps. But there are quite a few things we have to consider before we jump to that conclusion.

. . . or do they?

To begin with, having a higher averageincome than other countries does not necessarily mean that all US citizens live better than their foreign counterparts. Whether this is the case depends on the distribution of income. Of course, in no country does the average income give the right picture of how people live, but in a country with higher inequality it is likely to be particularly misleading. Given that the US has by far the most unequal distribution of income among the rich countries, we can safely guess that the US per capita income overstates the actual living standards of more of its citizens than in other countries. And this conjecture is indirectly supported by other indicators of living standards. For example, despite having the highest average PPP income, the US ranks only around thirtieth in the world in health statistics such as life expectancy and infant mortality (OK, the inefficiency of the US healthcare system contributes to it, but let’s not get into that). The much higher crime rate than in Europe or Japan – in per capita terms, the US has eight times more people in prison than Europe and twelve times more than Japan – shows that there is a far bigger underclass in the US.

Second, the very fact that its PPP income is more or less the same as its market exchange rate income is proof that the higher average living standard in the US is built on the poverty of many. What do I mean by this? As I have pointed out earlier, it is normal for a rich country’s PPP income to be lower, sometimes significantly, than its market exchange rate income, because it has expensive service workers. However, this does not happen to the US, because, unlike other rich countries, it has cheap service workers. To begin with, there is a large inflow of low-wage immigrants from poor countries, many of them illegal, which makes them even cheaper. Moreover, even the native workers have much weaker fallback positions in the US than in European countries of comparable income level. Because they have much less job security and weaker welfare supports, US workers, especially the non-unionized ones in the service industries, work for lower wages and under inferior conditions than do their European counterparts. This is why things like taxi rides and meals at restaurants are so much cheaper in the US than in other rich countries. This is great when you are the customer, but not if you are the taxi driver or the waitress. In other words, the higher purchasing power of average US income is bought at the price of lower income and inferior working conditions for many US citizens.

Last but not least, in comparing living standards across countries, we should not ignore the differences in working hours. Even if someone is earning 50 per cent more money than I earn, you wouldn’t say that he has a higher living standard than I do, if that person has to work double the number of hours that I do. The same applies to the US. The Americans, befitting their reputation for workaholism, work longer hours than the citizens of any other country that has a per capita income of more than $30,000 at market exchange rate in 2007 (Greece being the poorest of the lot, at just under $30,000 per capita income). Americans work 10 per cent longer than most Europeans and around 30 per cent longer than the Dutch and the Norwegians. According to a calculation by the Icelandic economist Thorvaldur Gylfason, in terms of income (in PPP terms) per hour worked in 2005, the US ranked only eighth – after Luxemburg, Norway, France (yes, France, that nation of loungers), Ireland, Belgium, Austria, and the Netherlands – and was very closely followed by Germany.[1] In other words, per unit of effort, the Americans are not getting as high a living standard as their counterparts in competitor nations. They make up for this lower productivity through much longer hours.

Now, it is perfectly reasonable for someone to argue that she wants to work longer hours if that is necessary to have a higher income – she would rather have another TV than one more week of holiday. And who am I, or anyone else, to say that the person got her priority wrong?

However, it is still legitimate to ask whether people who work longer hours even at very high levels of income are doing the right thing. Most people would agree that, at a low level of income, an increase in income is likely to improve your quality of life, even if it means longer working hours. At this level, even if you have to work longer in your factory, higher income is likely to bring a higher overall quality of life, by improving your health (through better food, heating, hygiene and healthcare) and by reducing the physical demands of household work (through more household appliances, piped water, gas and electricity – see Thing 4). However, above a certain level of income, the relative value of material consumption vis-a- visleisure time is diminished, so earning a higher income at the cost of working longer hours may reduce the quality of your life.

More importantly, the fact that the citizens of a country work longer than others in comparable countries does not necessarily mean that they likeworking longer hours. They may be compelled to work long hours, even if they actually want to take longer holidays. As I pointed out above, how long a person works is affected not only by his own preference regarding work – leisure balance but also by things such as welfare provision, protection of worker rights and union power. Individuals have to take these things as given, but nations have a choice over them. They can rewrite the labour laws, beef up the welfare state and effect other policy changes to make it less necessary for individuals to work long hours.

Much of the support for the American model has been based on the ‘fact’ that the US has the highest living standard in the world. While there is no question that the US has one of the highest living standards in the world, its alleged superiority looks much weaker once we have a broader conception of living standards than what the average income of a country will buy. Higher inequality in the US means that its average income is less indicative of the living standards of its citizens than in other countries. This is reflected in indicators such as health and crime, where the US performs much worse than comparable countries. The higher purchasing power of US citizens (compared to the citizens of other rich countries) is owed in large part to the poverty and insecurity of many of their fellow citizens, especially in service industries. The Americans also work considerably longer than their counterparts in competitor nations. Per hour worked, US income is lower than that of several European countries, even in purchasing power terms. It is debatable that that can be described as having a higher living standard.

There is no simple way to compare living standards across countries. Per capita income, especially in purchasing power terms, is arguably the most reliable indicator. However, by focusing just on how many goods and services our income can buy, we miss out a lot of other things that constitute elements of the ‘good life’, such as the amount of quality leisure time, job security, freedom from crime, access to healthcare, social welfare provisions, and so on. While different individuals and countries will definitely have different views on how to weigh these indicators against each other and against income figures, non-income dimensions should not be ignored, if we are to build societies where people genuinely ‘live well’.