How should we measure economic success? Criticisms of conventional indicators, particularly gross domestic product, have abounded for years, if not decades. Environmentalists have long pointed out that GDP omits the depletion of natural assets, as well as negative externalities such as global warming. And its failure to capture unpaid but undoubtedly valuable work in the home is another glaring omission. But better alternatives may soon be at hand.
In 2009, a commission led by Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi spurred efforts to find alternative ways to gauge economic progress by recommending a “dashboard” of indicators. Since then, economists and statisticians, working alongside natural scientists, have put considerable effort into developing rigorous wealth-based prosperity metrics, particularly concerning natural assets. The core idea is to create a comprehensive national balance sheet to demonstrate that economic progress today is illusory when it comes at the expense of future living standards.
In an important milestone in March of this year, the United Nations approved a statistical standard relating to the services that nature provides to the economy. That followed the UK Treasury’s publication of a review by the University of Cambridge’s Partha Dasgupta setting out how to integrate nature in general, and biodiversity in particular, into economic analysis. With the consequences of climate change starting to become all too apparent, any meaningful concept of economic success in the future will surely include sustainability.
The next steps in this statistical endeavor will be to incorporate measures of social capital, reflecting the ability of communities or countries to act collectively, and to extend measurement of the household sector. The COVID-19 pandemic has highlighted how crucial this unpaid work is to a country’s economic health. For example, the US Bureau of Labor Statistics intends to develop a more comprehensive concept of living standards that includes the value of such activity.
Aggregate measures such as these can be useful for guiding important policy decisions in a manner consistent with familiar economic concepts. This approach also helps the conversation with finance ministry officials and business executives, whose support for a longer-term perspective regarding prosperity will be essential to bring about change.
But many advocate thinking about economic success and failure in terms of well-being, a broader and fuzzier concept. The idea that policy decisions should focus on what ultimately matters in people’s lives is intuitively appealing. And a number of governments, from New Zealand to Scotland, have recently adopted explicit well-being policy frameworks.
This approach, however, raises even more difficult measurement questions. Well-being depends on many aspects of individuals’ life circumstances. To be sure, there is a large body of research in psychology and economics concerning how to measure well-being and analyze the factors that influence it. Often, the measurement involves surveying people’s satisfaction with their lives or their level of anxiety. For example, the United Kingdom’s Office for National Statistics has been tracking anxiety and depression throughout the pandemic.
But while policymakers need some top-down, aggregate statistics to facilitate their decision-making, such indicators have limitations. For example, whereas the links between well-being and factors identified by econometric analysis – such as being employed or in good mental health – are intuitive, the causal connections are not well understood. A depressed person may benefit from therapy, as well-being advocates often urge, but decent housing might be even more effective. Public policy based on well-being thus still lacks a theoretical underpinning.
Moreover, some policymaking contexts will require a more granular level of detail. Qualitative research – rather than large-scale surveys with predefined questions – points to a wider range of considerations affecting well-being. For example, one recent UK study, co-produced by researchers and people experiencing poverty, found that while basic material needs including health were important to well-being, autonomy and a sense of purpose mattered just as much. The top-down aggregate indicators devised by social scientists and statisticians cannot capture such findings.
While time-intensive ground-level research will not always be practical, it is important to keep in mind that the concept of well-being is much richer than most other economic indicators. Importantly, the comprehensive wealth and well-being approaches outlined here are complementary: the assets measured by the former provide the means to achieve the latter. Indeed, New Zealand’s policy framework makes this link explicit.
What is exciting about these alternative approaches to assessing and measuring the economic success of a community or country is the amount of practical progress already made in defining concepts, creating metrics, and building expert consensus about the direction policymaking should take. Ditching GDP as the main gauge of prosperity was always impossible in the absence of broad agreement about what the alternative might be. And it will take many more years of work at the statistical coalface to develop a framework as sophisticated and well-embedded as GDP and related economic indicators. But the direction of change is clear, and the impetus to bring it about is powerful.
Diane Coyle, Professor of Public Policy at the University of Cambridge, is the author, most recently, of Cogs and Monsters: What Economics Is, and What It Should Be (Princeton University Press, 2021). This content is © Project Syndicate, 2021, and is here with permission.
35 Comments
"...it will take many more years of work at the statistical coalface to develop a framework as sophisticated and well-embedded as GDP..."
What? We already have a better indicator of our country's wealth. CoreLogic publish it regularly.
And it will take many more years of work at the statistical coalface to develop a framework as sophisticated and well-embedded as GDP and related economic indicators.
We don't have 'many more years'. If we'd been accounting properly, we'd have known that already.
Dasdupta will be invited to do a zoom session (in NZ) early next year. Pity, he may be further down the track than almost all economists, but he's not far enough. I waded through his 500 pages, ending with some pages of my own referenced rebuttal - but it's all too little too late. By the time a complex society realises it has to account properly, it's overshot. Seems to happen every time; this time globally.
https://archive.org/details/manecosphereread00ehrl sits in my bookshelf; note the publishing date. We've KNOWN all this stuff for 50 years.
Yes a complex society who thinks its really smart, but actually its really stupid. Its going to get really ugly for more and more people out there. The slow downward slide has been happening for decades now but its beginning to accelerate. People will not change however and it will continue like it is at present until the end.
But...the wisdom of crowds!? /s
What? We already have a better indicator of our country's wealth. CoreLogic publish it regularly.
And real GDP captured by housing value added endeavours hardly features - it's just a rounding error contribution.
1.55% in fact, and banks are still authorized to extend around 60% of their lending to the housing sector - source
CPI's days might be numbered also. No pun intended.
CPI UK = 5.1%
https://tradingeconomics.com/united-kingdom/consumer-price-index-cpi
RPI UK (Retail Price Index - what they actually pay for stuff) = 7.6%
https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/ccyx…
And the answer, apparently, is a cash rate at 0.25%
Rabid financial repression.
This is the phenomenon we study. Financial repression (FR) is defined in Box 1, while Table 1 describes a selection of policies that defined the FR era in the United States but are representative for other countries, advanced and emerging alike. There is considerable cross country variation in the extent of financial repression and the magnitude of the financial repression tax. When controlled nominal interest rates coupled with inflation produce negative real interest rates, it liquidates (reduces) the stock of outstanding debt; we refer to this as the liquidation effect. However, even in years when real interest rates are positive, to the extent that these are kept lower than they otherwise would be via interest rate ceilings, large scale official intervention, or other regulations and policies, there is a saving in interest expense to the government. These savings are sometimes referred to as the financial repression tax. Link
A sovereign can inflate away debt if the average interest rate on the debt falls below the growth in nominal GDP. (It doesn’t matter whether it’s volume growth or inflation driving GDP.) It's called covert default. Link
Let's change the measures so that the USA will always be number one.
No, with GDP you could do that; by any other measure (except per-capita consumption/energy-use/waste-generation) it is number 302/4a.
GDP's days are indeed numbered....it will cease to be referenced once it is consistently negative
My thoughts exactly, the moment something looks bad we get lets change it ! Got to keep that happy face on.
Yes. GDP is a failure in many ways, but the framework is unlikely to change overnight. And there are some simple things we can do to make it better:
We can focus on the broader measure 'per capita'. That way, we get a directional understanding of whether the share of the pie is growing for the individual. We know that the NZ and Aussie economic models have been focused on immigration as an economic driver, but if GDP per capita is not growing (and it is likely not to be), then people can at least understand the reality.
It was a favourite claim of the previous National govt that GDP was increasing as a result of their massive net immigration; for much of that time per capita GDP decreased because the immigration was mostly low wage un/semi skilled so less that average - even as qualified & experienced immigrant doctors & dentists were forced to drive taxis to make a living.
The changing distribution of that GDP/capita needs to be assessed at the same time.
"Diane Coyle favours adopting alternative wealth and well-being approaches to measuring societies' economic success"
Dear Diana Coyle, Only Well-being is do you own a house or not.
"And its failure to capture unpaid but undoubtedly valuable work in the home is another glaring omission."
Well not really. My leisure time has value to my mental health and undoubtedly society, however my gaming / drinking at the pub / relaxing at the beach has no economic value to anyone else in that no (normal) person would pay for me to do these activities. Arguably my employer already does.
If we go down that road, what does it mean? Should the state be paying me to look after my family and pay for my leisure time? Sounds great, can't imagine there being any unintended consequences....
It's an interesting point. Work in the home. This has always been subjectively understood as "housework" done by the stay-at-home female. This is so outdated from a societal point of view. Does it cover things like Dad or the kids mowing the lawns? Dad working on his boat or car? The kids tidying up the operating system on the home computer? Or even kids tidying their rooms.
I think you will find that yes it does cover those things, and that gender is not determinative, but the fact that those things are getting done, is assumed but not quantified.
One of the biggest societal costs we face today is the downstream effects of failing families. In health, in jails, in courts up & down the country & in welfare payments that reward people for living apart, failing families underwrite just about everything awful in our culture today. Stats across the world tell us those who grow up in single parent families are much more likely to end up with nothing, in trouble or costing the rest of us in their accommodation, health & welfare payments for the rest of their lives. All these things we measure in our GDP - albeit that they a negative not a positive contribution. All govt spending is included in our GDP numbers but a large portion of that spending is underwriting bad attitudes & bad behaviours leading to bad financial outcomes for all of us. Those of you following the decay & decline in Americas big cities of recent times will know this situation well. The Democrat State Govts are leading the charge with murders, violence, drug use & general thuggery overwhelming their cities (whose govts do not care nor punish) to the point where businesses & households are relocating to places that have active police forces & sensible court systems. This uber-urban-liberal experiment is falling fast & is separating America by default which will be an interesting (if somewhat frightening) watch as it quickly descends into chaos. And Labour want to bring that here. No thanks. Reward families for staying together, preferably with good fathers & mothers. And then measure that in our GDP!
Nonsense.
It matters not a whit ( Whig?) who is in power in First World democracies; the neoliberal religion has them all in thrall. Democrat, Labour, Republical, Lib/Dem, National; they're all the same thing. It depends who gets into power when; Clinton timed it right, Bush the Younger didn't.
You are right about GDP including the bad - if we all went around smashing up each other's stuff, GDP would go through the roof. Prima facie proof it's a nonsense.
But urban disintegration (social) is a product of reducing energy input.
https://surplusenergyeconomics.wordpress.com/2021/12/10/217-no-soft-lan…
You are right about GDP including the bad - if we all went around smashing up each other's stuff, GDP would go through the roof. Prima facie proof it's a nonsense.
The broken window fallacy.
The core of the broken window fallacy argues that spending money on items that have been destroyed does not lead to economic gain. The broken window fallacy suggests that an event can have unforeseen negative ripple effects if money is redirected to repairing broken items rather than to new goods and services. (Investopedia)
Hmmm? "Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period." Doesn't repair of the window include goods and services that would be measured as GDP? Whether that money was spent on something totally new, or repair of damage, is irrelevant.
Christchurch rebuild?
All those issues you identify can be explained by inequality and poverty.
Address those issues.
GDP is a measure of production / consumption - it was never intended by its inventor to be used as anything more than that. GDP goes up whether you build a bridge, or demolish it. The fact that politicians and economists adopted and used GDP as a measure of success is monumentally stupid.
"Distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long term. Goals for more growth should specify more growth of what and for what." Simon Kuznets, the creator of GDP, in 1962
Politicians and economists are the only ones who make decisions based on gDP.
Correct Wall Street is totally detached from the real economy.
I think the assumption here is that GDP is something people use - for lack of an alternative - to qualatively understand their lives. It's not.
I think it's a mistake to try and build policy around a subjective measure, such as wellbeing (why else have said measure).
I feel that the political class, has become so disassociated from the middle and lower class that they are willingly to try and quantify the indignity of having no input in to how to live their lives.
Maybe they can? I don't know.
I think democracy is the best solution, even if I am not happy with it, I can find some small comfort in the fact that the majority support the action.
Fair points on wellbeing. I think there are things that we know we need as a people and as a country to live well - clean drinking water, rivers you can swim in, warm houses, meaningful dignified work, wages that enable a reasonable quality of life, nourishing food, clean energy, good public services, stuff to do and see etc. I want to see politicians come out and say - in simple bloody terms - what they are going to do to get those things we need in place. Nevermind whether we are 3% over target on blah blah blah. The crap they come out with to avoid talking about real things drives me mad.
Well, Jfoe, your own list of wants? ...expectations? is pretty much a yearning for utopia. There is no shortage of politicians who will promise you that, and even tell you how they will get there. I am old enough to remember a wonderful NZ (mind you a bit of rose tinted nostalgia! ) Our old villas were sturdy but certainly not warm...that's what blankets, another pullover and woolly socks were for. Swimable rivers? We swam at Mission Bay & Kohi, just down tide of Auckland's untreated sewerage outlet at Okahu Bay...it didn't seem to affect us.Etc., etc..
I am reminded of the old saying, ..."perfection is the enemy of good".
If your expectations are focussed on utopia, you are bound to be disappointed...perhaps even "drive you mad".
Glass half full- it'll keep thousands of starving post-grads in dog food for years, as the Research Continues for that elusive Measure of Utopia.
1) The wellbeing approach the government is taking is broadly correct - its includes socioeconomic cost-benefit assessment (SECBA) to spending taking into account of economic, social and environmental impacts.
2) GDP only really measures the economic component, and badly at that - e.g. having road crashes can add to GDP due the goods and services needed to deal with them
3) Treasury is also championing an intergenerational investment approach to the wellbeing analysis with something like a 50 year horizon - Not sure if they are changing the discount rate (rate at which future costs and benefits are discounted) so there is no discounting (0%) over the 50 year period - it should as this would give future generations a bigger voice - otherwise the benefits at year 50 could easily be discounted away to zero.
4) With SECBA we can roughly determine where the best value for money (socioeconomic benefits) is in spending each tax dollar (the financial cost) so that all the best/better policies would be implemented (i.e. we can determine the best way to spend at the margin)
5) One issue is that total welfare (total wellbeing - economic, social & environmental) is harder to define, measure and value (e.g. as part of total wellbeing what value is placed on an indigenous species that is nearly extinct?) so we dont necessarily know how far away we are from maximising total wellbeing.
Academics such as Ms Coyle prefer to overlook the deep, embedded driving forces in human society: Darwinistic survival of the fittest, Dawkins’ selfish gene… I am so distrustful of statist ‘well being’ initiatives as they are simply Trojan horses for the removal of individual freedom. There, that’s what Covid has done to me.
Like many I have gone on for years about how hopeless the GDP measure is. My reasons are
1 It does not distinguish between the activities. E.g. it weighs some very bad and damaging activities equally to very beneficial activities. A dollar spent on medical services equals a dollar spent on alcohol consumption, exports equal imports, house rental equals house construction, medical costs from car crashes equals dollars spent on making safer roads. It is a totally dumb measure.
2 What you measure and hold up as a yardstick for an economy governs how the economy is managed and ultimately the economy that you end up with. So as we are structured our economy will reward and pursue a lot of undesirable activities. And you see many silly examples of this.
3 Any such measure should always be referred to size of the population. With the raw GDP measure, we can double our population and say increase our GDP by only 60% and therefore appear to be making economic progress. In reality on the basis of GDP/capita we have gone backwards and are individually worse of. This is what appears to be happening to NZ at the moment. This increase in the population is also increasing our consumption and environmental impacts for net reduction of individual economic well being. The raw GDP measure encourages this.
As a suggestion how about developing a weighted domestic product where the dollars expended on beneficial activities are weighted in accordance to their wider benefit to the economy and society. Activities with little or negative value could be attributed close to zero or negative weighting. The final measure would be divided by the size of the population.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.