By Diane Coyle*
Is the world becoming increasingly prosperous? It would be hard to answer “yes” right now, at least so far as the leading high-income economies are concerned. Yet the longstanding bellwether of economic progress – inflation-adjusted GDP – has been growing across most of the OECD since 2010, suggesting that everything is fine.
Some 80 years after GDP was introduced, nearly everyone (apart from the indicator’s stewards) has concluded that it is no longer a useful measure of economic progress. But there is no consensus yet on a possible replacement. Reaching agreement on an alternative will require a new concept of prosperity and a new way to measure whether living standards are improving.
There are several potential alternatives. One influential approach, pioneered by the Massachusetts Institute of Technology’s Erik Brynjolfsson and his co-authors, is to ask people how much they value free digital goods such as online search and social media, and then add the result to the conventional measurement of GDP. Their research indicates that the average person in the United States would need $17,530 per year to compensate for lack of access to online search, $8,414 for email, and so on.
These are large numbers relative to the US median per capita income of just over $31,000, indicating that the economic-welfare benefits of zero-money-price digital goods are high. This approach therefore captures some meaningful improvements in people’s lives that are currently excluded from GDP. But to generate a meaningful economic-welfare metric, the same technique should be applied to other important components of wellbeing not captured by GDP, such as the natural environment, leisure, and unpaid work in the home.
Another alternative, supported by a large and growing body of research in economics and psychology, is direct measurement of wellbeing or happiness. Surveys of reported levels of wellbeing are now available for many countries, and the idea of cutting to the chase by using this as the prosperity metric has strong advocates. But this option has several drawbacks, including the fact that indicators of wellbeing change little over time. Happiness surveys in rich countries, for example, typically show a score of six or seven on a 0-10 scale.
One way to make such indicators more directly relevant to policy would be to track the ways people use their time and attach wellbeing measures to each. For example, people like leisure and especially digital media, may or may not enjoy their work, and hate commuting. This approach holds an obvious attraction in a largely services-based economy where the major input is time to produce and time to consume, and where digital technology is clearly changing the way many people allocate their time. After all, who wakes up thinking about what to spend rather than what to do?
These two options are rooted in the utilitarian philosophy that the goal of policy is the greatest happiness for the greatest number of people at any moment. This accounts for the focus on income or expenditure in the existing GDP framework, and the resulting paradoxes such as the way a natural disaster can increase GDP. It also underlies the emphasis on directly tracking wellbeing in the moment.
A third possibility for a new prosperity metric is to return to the origins of statistics, from the Domesday Book to William Petty, and measure wealth rather than income. Embracing such a balance-sheet approach would immediately bring sustainability into the calculation of economic progress by revealing when future prosperity is being compromised for that of today.
Measuring people’s access to assets also draws on an ethical tradition, associated with the Nobel laureate economist Amartya Sen, which emphasises people’s agency and ability to lead the kind of life they value. What matters here is access to human capital (health and skills), social capital (human relationships and networks), and infrastructure. The World Bank has emphasised the measurement of wealth, and the calculation of these “missing capitals” is moving up the research and statistical agenda.
It is both revealing and encouraging that the issue of economic measurement has prompted such vigorous and exciting research. But, in addition to devising a new indicator of prosperity, there is the question of how to implement the shift. Official statistics are similar to a technical standard. It’s hard for anyone to move from one framework to another without a lot of other people doing so at the same time.
Dissatisfaction with the prevailing GDP approach is therefore insufficient; a sufficiently large coalition has to agree to an alternative framework. Any successor to GDP also must be easily implementable, because statisticians will have to set out detailed definitions and methods, and collect the data.
Finally, and perhaps most important, there needs to be a public conversation about what is happening. Although very few people have the faintest idea about what GDP is or even what the acronym stands for, it is a single number that has gained the entrenched status that comes from long and frequent use. Its successor will need to be compelling and tell a persuasive story, consistent with experience, of what is happening in our economies. GDP may be toppling from its throne, but there is a long way to go before another composite indicator is crowned in its place.
Diane Coyle is Professor of Public Policy at the University of Cambridge. This content is © Project Syndicate, 2019, and is here with permission.
25 Comments
Great article and kudos to Interest.co for posting it.
She's a smart lady and she gets to the nub of the problem. Labour are grappling with this as are Treasury as are Statistics - but it's a slow train coming. And the RBNZ will be just in front of the guard's van.
One of the most important metrics is entropy - we have a never-bigger collection of physical 'stuff', all of it decaying at various rates. Of course, we could always list it as 'vintage', add 'patina' and flog it off at a premium. Maybe Gisborne could do that with it's water-network.....
Very good article.
The challenge the west faces is that GDP created by ever expanding bank balance sheets and money creation paints a false picture of wealth when ‘effort’ or the return for labour fails to keep pace with the ‘debt’ required to live. The west has been living in a dream world for 30 years.. ‘Stuff’ has become cheaper but real life costs, the ‘The roof’ over one’s head and the negative impact on ‘time’ to repay debt has had huge societal and relationship costs. We’re no different to the rest of the West, just that we have possibly had more space to live which has masked the true effects of the debt pile.
Thanks again interest for allowing Diane to pose the questions. It is my belief that many of societies issues stem from the ‘money creation’ process of the digital age.
If the "world" is becoming more prosperous on the back of growth (especially population growth) non renewables, waste and deforestation, then it truly is not the world becoming prosperous, it is being depleted. Please stop thinking in terms of the human race only.
From one perspective GDP could be looked at as how well/efficiently a nations slaves are performing/output of products/services. From another it could be argued high GDP increases quality of life/prosperity.
But ultimately if the purpose of life is to be happy why do we chase productivity numbers? If GDP is good, but depression and suicide stats are high, the drive to produce products/services in that fashion clearly isn't working and a new system is required. Perfect world would be steady GDP growth with low suicide/depression stats. Is this possible? I don't know...My experience supervising/managing people (and the way I work personally) is that happy people are more productive. Perhaps the correlation is low and making a link that doesn't exist - although I would swear that NZ'ers are far more stressed and unhappy compared to 10 years ago (people always saying how tired they are, how little time they have for themselves..etc, etc) - although many have become 'wealthy' via debt creation. So I'd argue that wealth doesn't = happiness and there are many observations of this being so.
It would appear we have the cart (GDP) leading the horse (person/happiness), not the horse leading the cart. My belief is that if we fix that, GDP/prosperity will follow. But recently it would look like we've put financial performance before human performance and that is going to come with a cost.
There is significant merit to the idea that GDP is only part of the metric for which one should rate a society. The first link espouses fiscal imprudence, which essentially is a beggar thy future to improve the present approach. Not sure that is an appropriate approach. The US is currently conducting a real-time experiment in this regard. In reality, GDP should subtract the government debt increase in order to get a more appropriate economic metric. A societal metric will include the citizens health, personal wealth, access to basic human needs, access to justice, access to personal improvement, etc., along with the important environmental factors. An improving GDP tends to help some of these, and to provide increased government funding to achieve some of these factors.
I strongly disagree with her statement "Some 80 years after GDP was introduced, nearly everyone (apart from the indicator’s stewards) has concluded that it is no longer a useful measure of economic progress." The link that purports to support this conclusion doesn't do a good job in that regard. What she appears to want to measure is not only economic progress, but societal progress. Conflating economic progress with societal progress is rather silly. Economic progress can be quite helpful for societal progress. We have also seen cases where economic progress appears to have not helped societal progress. These are the minority cases at present.
Some of the wellbeing indicators that have been used are somewhat misleading. For example, I'm not enamored of poverty being defined as a fixed percentage of median income. The people within a particular country can gain a materially higher standard of living yet still shift into the poverty range as a countries economy improves.
Provide a framework for more than just money making is the idea I would have thought?
Which they do to a fairly large extent I guess.
But when it comes to politicians standing up and talking about how the country is going, they always mention growing the economy - certainly as the first and foremost thing.
Anything other than a basic framework gets into putting the same ideal on everyone whether they agree or not. I’m against the idea of a “well-being” budget as well being is different for everyone as we are all different.
It should be our right to persue what we determine for ourselves what is happiness and well being free from as many restrictions as possible.
A smoothly functioning economy with minimal compulsion achieves this.
By taxing for the necessities that are relevant for everyone. I.e. police.
We are compulsorily taxed for example, we have no choice, so what ever tax goes towards should be very universally agreed on. Not things like the PGF which at best 5ish % of the country voted for yet we all pay for.
I think you're right, we do need to update the speed dial system from time to time & as has been said above, there are many measures we could include. Remember money gives things a value & we all value things slightly differently so it's going to be a tricky one for Mr Robertson & co, this autumn. Good on them for giving it a go, however, that's not to say I'll be agreeing with them, but it will be a contribution to the wider debate, which it seems is happening in other places as well. I personally think we are better off today than we have ever been, just on the shear choice of services & products available, but I too am concerned about the state of our relationships with one another, which seem too fractious & quick to anger at times. Having suffered from the big D for many years I know how dark & alone that particular journey can be, but I'd still chose that over living in India any time.
Great article. Often I have criticised the policy raising GDP (It's only an acronom) by means of keeping NZers incomes low. Incomes and wealth of us locals are more important than that bloody acronym.
Yes. Very interesting to measure assets of all kinds - as described in the article.
Think of the political implcations of a drive to own more of our nations assets. And control and ownership by New Zealanders becoming a policy imperative.
I can't wait. Ownership and control has always been the way to human and financial wealth in my view. Lets do it as a nation
Sounds like a good idea. How would it weigh the significance of 'lack of freedoms and independence" - examples: an elderly or handicapped person in rural location with no public transport has restricted freedom to travel and socialise that hits them every day whereas a muslim in a muslim country has no freedom to change their faith - but that is a very rare event. What value do I assign to the ability to criticise my political leaders?
This is muddled thinking. You argue that we need a better measure of economic progress, then start going on about wellbeing and happiness. Since when has that been solely dependent on economic progress?
Things like the natural environment and leisure are different measures, all of which contribute to overall wellbeing. But we are talking specifically about economic progress, being just one factor of overall wellbeing.
The obvious way to avoid your paradox is to measure both GDP and the wealth of a nation.
These are economic indicators.
Trying to come up with some sort of measure that combines economic progress with all of the other factors that contribute to an individual's wellbeing is laughable. Imagine all of the different weightings that would have to be applied to each measure, all of which wouldn't suit everybody, and the only purpose it would serve is to hide the true raw figures behind some bureaucrat's idea of what weightings should apply to everyone in measuring a person's wellbeing.
Measuring the non-economic stuff could be theoretically done by intensive and ubiquitous central surveillance, centralised electronic financial transacting yielding preference patterns, aided by AI and machine learning to discern state-of-mind, incentivised by some sort of societal ranking number, and controlled by determined and omnipotent yet well-intentioned central leadership.
Oh, wait, that's already being tried, just a little to the north of us.....
Nup - you've muddled 'economic' with 'progress'.
It wasn't progress, it was unsustainable momentum in a certain direction with pretty dire ramifications. using indicators which din't measure properly.
For those who are slow, the PM has assured that GDP won't be dropped. For those who are quicker, she's saying it has to be bypassed.
To quote from the article:
"Some 80 years after GDP was introduced, nearly everyone (apart from the indicator’s stewards) has concluded that it is no longer a useful measure of economic progress".
Have another go mate, and maybe just concentrate on what is actually in the article.
"a balance-sheet approach would immediately bring sustainability into the calculation of economic progress by revealing when future prosperity is being compromised for that of today."
Economic progress basically measures how fast we are burning through resources. And all debt (= wealth) is designed to increase the burn.
The sustainable point was passed (way back) when we began burning through more of anything than what the eco system could replenish in the same time frame.
Exponential growth comes with a collapse kicker.
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