I know that tech companies are big now, but they're not the size of countries

By Tim Worstall , written on March 5, 2014

From The News Desk

I've had this old statistic thrown in my face again elsewhere, that of the 100 largest economies in the world 51 of them are companies. Apparently this shows that we are all under the control of The Man instead of that other Man over there. Or under the control of the Capitalist Man instead of the Democratic. The only slightly unfortunate thing about this idea is that it's nonsense, total gibberish.

I tried to track down where the meme came from and as best I can see it came from this near 15 year old report from something called the Institute for Policy Studies. I had thought that this was where arts graduates went to parade their ignorance of economics but apparently it's considered one of the top five think tanks in DC.

They give us this nice list here with companies listed by turnover and countries by GDP. When you count down the list you find that we do indeed have 51 companies in the top 100. However, unfortunately their method is wrong: howlingly so. The error is in this sentence:

Of the 100 largest economies in the world, 51 are corporations; only 49 are countries (based on a comparison of corporate sales and country GDPs).
Actually, it's in the parentheses. The turnover of a company is nothing at all like the GDP of a country. GDP measures value added in a place, nation or, if we squint a little we could say the value added in a company or organisation (where we might call it GVA, or Gross Value Added, but this is the same concept.) Which isn't the same as turnover at all.

As an example, consider this: in London, each and every banking day, there's a turnover of some $2 trillion on the foreign exchange markets. That is, I agree, a very large number: and it's the turnover, the total amount traded. It would be very difficult indeed for us to include this turnover into the GDP of the UK itself, the place where this turnover takes place, for the GDP of the UK is around £1.5 trillion (or $2.2 trillion) a year. Given that all of you people working in tech can actually do math it's clear and obvious that we cannot be including some $400 trillion of turnover (with 200 banking days) inside a $2.2 trillion GDP.

So what is it that we do include in the UK's GDP from this FX market trading? We include the value added only, not the turnover. That is, we include the fees that are charged on it. These might be 0.01% (no, really, that low) and that's a much better estimation of the contribution to GDP made by London being the foreign exchange trading capital of the world.

So, if GDP is the value added in an economy then what's the equivalent of the value added by a company? One way we can measure GDP is by looking at all of the incomes of all of the people in that economy. The same number for a company would be the profits plus the wages being paid out to people. I once did these numbers for Exxon: 200,000 employees at perhaps $100,000 a year, add profits of $30 billion and we've a value add in the company of perhaps $50 billion. This is, of course, very rough and ready, the Worstall Calculator approach (that pencil and back of paper envelope). At which point we've got something that we can actually compare with the GDP of a country. We're now comparing value added to value added. And there is indeed a country with a GDP of around that $50 billion (we can get all complicated and look at purchasing power adjusted if you like but this is an accurate enough comparison for, umm, a comparison) and that's Luxembourg. So, Exxon is the same economic size as Luxembourg, see, we've proved it, companies are as large as countries!

Except for two things: we're now comparing Exxon, one of the largest companies in the world, with one of the smallest countries in the world. Luxembourg is actually about the size of Pittsburgh. The second thing being a more economic point.

Exxon is a country full of rich world people doing rich world type of work. Amazingly, so is Luxembourg a rich world place full of people doing rich world sort of work. And there's about the same number of people working in each too. All the people at Exxon work (well, OK, but you know what I mean) while about half the population of a country are actually in the labour force. So, we've 200,000 rich world people in Exxon adding about the same amount of value as the 200,000 rich world people in Luxembourg's labour force. Which is pretty much how we would expect it to be. For the very definition of being in the rich world is that we're adding value like people in the rich world do. That's what it means to be in the rich world. We and the people around us are all adding a lot of value.

We can indeed run these numbers over other companies and find some exceptions. I'm certainly willing to bet that the GVA at Apple per capita is very much higher than that in any nation on earth. But these really are exceptions. By and large the number of people in a rich world company times their value add will be around and about the same as the value add of the same number of people in a rich world economy times their GDP per capita. Simply because the two numbers are trying to measure very much the same thing: the amount of value added by rich world workers, once as a group in a company and the second time as a group in a geographic area. Given that they're different methods of measuring the same thing we shouldn't be all that surprised that we get much the same answer.

The end result here is that sure, large rich world countries can indeed be the economic size of countries. But measured against rich world countries they'll be about the same economic size as rich world countries with the same working population as the company has labour force. It is also true that the 200k people inside Exxon are about the same economic size as the 30 million people in Sudan, yes, but this is a reflection of the abject poverty of Sudan, nothing more.

[Image adapted from Thinkstock]