Rethinking GDP as a measure of progress

[TinyRedLeaf]

Sarkozy: Let's use happiness as economic indicator

Paris (Sept 15): French President Nicolas Sarkozy asked world leaders to join a "revolution" in the measurement of economic progress by dropping their obsession with gross domestic product to account for factors such as health-care availability and leisure time.

In a speech on the first anniversary of the collapse of Lehman Brothers, Mr Sarkozy said the financial crisis has shown the need for a better way of calculating a country's economic health. His own country, known for its leisurely meals, long vacations and labour protections, could outshine more profit-focused economies if nations act on new recommendations in a report headed by two Nobel economists — Professors Joseph Stiglitz and Amartya Sen — commissioned 18 months ago.

The experts' report was released on Sept 14 at a time when many economies are beginning to emerge from recession but unemployment is continuing to rise and consumer confidence is still too shaky to drive a strong recovery. "Across the whole world, citizens think that we're lying to them, that the figures are false and, worse, that they're being manipulated," Mr Sarkozy warned.

However, "there's no single number that can capture anything as complex as our society", Prof Stiglitz told Agence France-Presse in an interview to launch the report. "So what we argue for is the need for an array of carefully chosen numbers, with a better understanding of the role of each of those numbers."

- ASSOCIATED PRESS, AGENCE FRANCE-PRESSE

GDP missing the happiness factor

By Mark Rice-Oxley
Singapore (Sept 20)

A YEAR after it whirled into motion, the global financial crisis is threatening one of the most totemic institutions of global economic discourse: the hallowed notion of gross domestic product.

GDP is a basic measure of a country’s economic performance and is the market value of all final goods and services made within the borders of a nation in a year. Revered for 60 years as a benchmark of performance, progress and prosperity, this measure of economic output has fallen on hard times, embarrassed by the crisis it failed to foretell and discredited by the large disconnect between the "growth" it suggests and the grubbier realities of everyday life.

The fact that it has started rising again in most developed countries while millions struggle joblessly onwards merely underscores the point: GDP is anachronistic, a throwback to an era last century when the material privations of life meant it was important to know how much stuff we were producing.

As one analogy puts it, measuring progress by calculating GDP is like measuring a person’s health purely through the amount of food he takes in. Until now, only one country — Bhutan — has moved to a more qualitative measure of life, incorporating factors as diverse as pollution, noise, serious illness, divorce rates and democratic freedoms into its assessment of social progress.

Better model needed
"The crisis not only makes us free to imagine other models, another world. It obliges us to," French President Nicolas Sarkozy said last week, as he received a report from a commission headed by Nobel economics laureate Joseph Stiglitz, which called for measures of growth to be expanded to include concepts such as work-life balance, environmental sustainability and mental health.

"Had there been more awareness of the limitations of standard metrics like GDP, there would have been less euphoria over economic performance in the years prior to the crisis," the report said. Take traffic jams. Not everyone’s favourite way of spending an afternoon. But in the GDP measure, they are a positive: all that petrol consumed will add to the bottom line. Now take a volunteer who puts in an hour reading to children at a primary school. Smiles on small faces, a virtuous win-win for all concerned — but not a measurable event that will register in the GDP figures.

"GDP, by definition, omits many important things," said British economist Andrew Oswald, who contributed to the Stiglitz report. "It only values market activity. If I do something for my community, that counts as nothing to GDP."

However, Mr Nic Marks, founder of the centre for well-being at London's New Economics Foundation which has pioneered work on post-GDP statistics, warned: "To dethrone GDP from its 60-year reign, we need a headline measure of overall progress...that captures succinctly the success of a society."

- THE SUNDAY TIMES

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Who invented GDP? And why?

PRIOR to the development of national income and product accounts (NIPA), policymakers had to guide the economy using limited and fragmentary information about the state of the economy. The Great Depression underlined the problems of incomplete data and led to the development of the national accounts:

"One reads with dismay of Presidents Hoover and then Roosevelt designing policies to combat the Great Depression of the 1930s on the basis of such sketchy data as stock price indices, freight car loadings, and incomplete indices of industrial production. The fact was that comprehensive measures of national income and output did not exist at the time. The Depression, and with it the growing role of government in the economy, emphasised the need for such measures and led to the development of a comprehensive set of national income accounts."
- Richard Froyen

In response to this need in the 1930s, the Department of Commerce commissioned Nobel laureate Simon Kuznets of the National Bureau of Economic Research to develop a set of national economic accounts. Professor Kuznets headed a small group within the Bureau of Foreign and Domestic Commerce's Division of Economic Research. He coordinated the work of researchers at the National Bureau of Economic Research in New York and his staff at Commerce. The original set of accounts was presented in a report to Congress in 1937 and in a research report, National Income, 1929–35.

Early in 1942, annual estimates of gross national product were introduced to complement the estimates of national income and to facilitate war time planning. Wartime planning needs also helped to stimulate the development of input-output accounts. Nobel laureate Wassily Leontief developed the United States input-output accounts that subsequently became an integral part of the NIPA.

In commenting on the usefulness of the national accounts, Mr Wesley Mitchell, Director, National Bureau of Economic Research, said: "Only those who had a personal share in the economic mobilisation for WWI could realise in how many ways and how much estimates of national income covering 20 years and classified in several ways facilitated the WWII effort."

- BUREAU OF ECONOMIC ANALYSIS, U.S. DEPARTMENT OF COMMERCE

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And they call economics a dismal science. Perhaps, if Prof Stiglitz and his colleagues have their way, it may yet become a tad more cheerful.

If you've managed to get here after wading through the wall of text above, I presume that you have at least some interest in this long-overdue debate on how we should envision and measure "progress".

I put it to you that the issue is not as trivial as it at first appears. Before I came upon these articles, it had not occurred to me that I cannot even imagine a world where aggregated figures on economic production and macroeconomic health are not easily available.

All these years, we've been conditioned to think of "progress" in terms of industrial output or pure human consumption. Along the way, ordinary people have long forgotten the warnings of the original creators of macroeconomic statistics: GDP is not, and was never, meant to be an indicator of the quality of life.

I further put it to you that, if statistics such as life expectancy and environmental sustainability were already a part of a country's "national product", the current debates on health care in the United States and global warming would look very different indeed.

So, if it were up to you, what do you think should be included in a "new" GDP? What is "happiness"? Is it even measurable and, if so, how should we go about doing it?

[justsomeguy]

Couldn't we just compile data on poverty, illness, homelessness, etc. into a "misery index" and use that to measure happiness, or lack thereof?

[Slice of Life]

My happiness is over 9000.

There already are happiness indices, good governance indices, freedom indices, income equality indices, gender equality indices, life expectancy indices, you name it you get it. But they won't increase their importance by presidental order.

There is no point in trying to quantify what is a subjective notion. They' better spend their energy on concrete pragmatic politics instead of feeding people's number fetish.

[ChainLegacy]

True progress ended when hunter gatherer societies were pushed aside by the clusterf*ck that is civilization.

[Kusa-San]

Originally Posted by TinyRedLeaf

So, if it were up to you, what do you think should be included in a "new" GDP? What is "happiness"? Is it even measurable and, if so, how should we go about doing it?

I think we should include environmental protection in the GDP. It's called green GDP : http://en.wikipedia.org/wiki/Green_g...mestic_product

[LynnieS]

Happiness being included in the GDP calculations? So for a serial killer or a scam artist, how exactly does that work then? By the number of people killed or tricked out of their money/property?

Also, people get used to happiness. If you are happy for a period of time, if you are asked to describe your "happiness" state in the beginning and toward the end, the chances of your being less "happy" in the end are good, IMHO. You get tired of being happy; it's just a chemical behavior after all. Also, when you stop being happy, you're usually more depressed during that instant of time and then grow out the funk as time passes.

It really does not matter what is used, IMHO. You are essentially using the GDP numbers to compare multiple nations. So long as the metrics are the same, it's okay. Making investment decisions based on GDP growth or shrinkage is doable, but aside from a news blurb, I don't really see much of that happening.

[RadiantBeam]

Oh, how far we've fallen. Including happiness in GDP calculations... what next?

[yezhanquan]

Personally, I think this rethink is long overdue. GDP is an adequate measure of the quality of life, but many people take it as the only criterion. That has got to change.

[Alchemist007]

I think true/impossible communism is best.

[Cipher]

Agreed. GDP does not equal progress or development. Countries around the world, United States, Middle Eastern Countries, Europe and others, are clear examples/evidences of this. They may have high GDP but, realistically, people aren't well supported.

[Alchemist007]

Measurement of political pen0r perhaps?