Should there be alternative to the GDP?
In an email interview with The Nation, US-based historian, Eric Zencey says it’s time to ditch The Gross Domestic Product (GDP) for a more meaningful and inclusive index which can more accurately measure country performances.
Why should we be thinking of an alternative to the GDP now?
GDP is a deeply foolish measure of economic progress and well-being. It was never designed to measure either of those, and we ought to find a better measure as soon as possible. Anytime is a good time to do this, but the downturn we’re facing now makes this an additionally opportune time. What we’re seeing economically is in many ways unprecedented, and its resolution will require thinking in ways we haven’t thought before. In practical terms, with GDP down worldwide, a change now is easier. The new measure could be implemented and could guide policy toward an economic recovery that gives us more of what we really want, which is social well-being, not just economic activity.
Why is GDP such a “deeply foolish” measure of well-being?
The first and largest problem is that it doesn’t measure well-being at all; it measures the sum total of the monetary value of market transactions. Because of that, it adds together things that are costs and things that are benefits, without making much distinction between them. That’s foolish. And even as a summary of all costs and benefits it fails, because it fails to count costs accurately.
What does it miss?
The most significant, in my opinion, are the environmental costs of economic development—the losses in natural capital, and hence natural capital services, that come with the destruction or radical simplification of complex ecosystems. No civilization can survive the loss of the natural capital services on which it depends. If we fail to account for losses of these services in our basic reckoning of national income accounts, we’ll develop ourselves right into extinction.
Could you give examples of natural capital services? Certainly! The terminology is still rather new, but awareness of the concept is growing. We—we humans, in our communities and nations and civilizations—derive direct and undeniable goods and services from nature, outside of any market. The economists who talk about these things have come up with various ways of putting natural capital services into categories, but basically there are about a dozen of them. Let me run down the list. Micro and macro climate moderation; water purification and transport; pollination; flood control and storm moderation; provision of raw materials; absorption (and sometimes detoxification) of our effluents; soil fertility and construction; nutrient recycling; habitat for species; creation and upkeep of a storehouse of genetic possibilities; recreational, aesthetic, spiritual, and educational opportunities for humans. Again, this is just one possible way of slicing up the kinds of services that nature offers us. I like to note with students that historically the environmental movement has been associated with just the latter category—the image of the environmentalist is that of a tree-hugger, the person who finds aesthetic, recreational, or spiritual value in nature. In part that’s because traditionally economics has said “sure, nature has value; some people will pay money to go see it, so it must have some value.” What the concept of natural capital does is reset that frame. It says that environmental values aren’t a subset of economic values, but the other way around. An economy doesn’t free-float in never-never land, the way the textbooks model it; an economy is rooted in a larger environment. It exchanges matter and energy with that environment. Which means that economic processes are a subset of environmental processes. There’s natural capital and built capital, and our economy draws productive services from both.
So changing from using GDP is a crucial part of achieving sustainability.
Yes.
How can we measure the qualitative side of quality of life, which is what measures like the Gross National Happiness of Bhutan or the National Progress Index for Thailand try to do?
First, let me say that I don’t think that the US is going to move toward an index that measures such subjective things anytime soon. Informed opinion in the US is far behind that of some other countries in thinking about these things. Managerial consultants offer us a useful phrase: “manage to measure.” The idea is that however we choose to define success or progress, the tendency will be to manage affairs to achieve the goal as it is defined. I’d add that over time, the whole system tends to evolve to be in congruence with the goal—you’ll see goal-directed behavior throughout the society. In the US our measure of economic progress has been GDP, and so it’s no accident that Americans have a reputation for being interested in the bottom line, in reducing everything to economic value. The first question an American asks a stranger is likely to be “what do you do?” We tend to define ourselves in terms of what we do economically, or what we consume–the brand alliances we have in our patterns of consumption. That won’t be changed easily. To change it we have to acknowledge that there is more to the quality of life than the quantity or even quality of consumption—and the advertising industry spends billions in order to discourage us from thinking that way. I look for other nations to lead the way—nations in which market values haven’t so thoroughly become the definition of all human values.
Second: it isn’t that hard to find objective measurements of subjective satisfactions once those satisfactions have been identified and defined. Do you want to include “workplace wellness” as an element, as Med Yones, of the International Institute of Management, proposes? You can survey workers directly, sampling them, to see if they are satisfied in their work; or you can choose some variables to represent this value—the number of jobs added or lost in the economy, along with the number of workplace complaints and lawsuits. Or you could do both. You can find objective metrics that approximate the amount of such intangibles as the amount of avoidable grief and sorrow in the community: maternal and infant mortality rates, life expectancy, rates of premature death from disease, war, accident, and so forth. You still face the additional difficulty of assigning relative weights to the variables that are aggregated in each area, and then the difficulty of assigning relative weights to each of these aggregates as they’re amalgamated into the overall index. But that too is a solvable problem.
The UN, World Bank, and so on have all kinds of indices—why are they not popularly used or merged into the main GDP index?
I have no answer for that. Inertia? The force of custom? The enormous investment that neoclassical economists have made in models that include GDP and only GDP? Part of the resistance you see in the US is pure nationalist chauvinism. The US is a winner if the metric is per capita GDP; by other measures, like the UN’s Human Development Index, the US comes in below other countries, and I think some of the US resistance to alternative measures is rooted in the desire to be number one. There’s also a bit of a lesson offered by the example of meteorology, of weather reporting. Not so long ago weather reports and forecasts would give you just basic information: what the temperature will be, whether it would or wouldn’t rain. But some of what we want from a weather forecast is a prediction of human comfort levels, not just the temperature and the chance of rainfall. So a full report gives the humidity index, the heating or cooling degree days, the wind chill factor, the ozone reading, and so on, whatever is relevant in that place and season. And it tells us if there’s a storm bearing down on us. That’s one approach to solving the problem of GDP—put it in context by adding to it additional and supplementary measurements like maternal mortality, life expectancy, expenditures on health care and pollution control, changes in employment and income distribution, and so on, just like the weather report. But that demands a lot of attention from its audience, attention that most people aren’t willing to give. And unlike the weather, with economic data not many people are familiar with the conceptual framework you’d need in order to organize all that information and make sense of it. (It’s not obvious, for instance, that pollution abatement is a cost and not a benefit.) And so reporting on the topic gets reduced to a single number—and in the US that number has been GDP.
What in your view should be included in a new index? What should the composition be?
At a minimum—a minimum—the metric that replaces GDP ought to fix its obvious economic problems. Currently GDP measures Gross Domestic Transactions—the amount of economic activity there is in a given economy in a given time period. But some of that activity is defensive and remedial—we spend money to repair things, to put things back the way they were, or to keep things from going bad. These are expenses that don’t make us better off than we were before we had to undertake them. Thus, expenditures on such things as crime prevention, pollution abatement and remediation, repair of storm damage, even health care are a cost, not a benefit. The new index needs to subtract all such costs from the ledger, in order to tell us whether we’re economically better off than we were before. And among the costs that need to be subtracted are the cost of lost ecosystem services. When an upland forest is cut, the ability of the ecosystem to moderate rainfall runoff is compromised, and you have flooding; the wood-cutter imposes the loss of this ecosystem service on people who live downstream. That loss ought to be part of the calculation that economic decision makers make about whether a particular course of action is economically beneficial or not. And of course, global climate change is one huge cost that is being imposed on all of us by activity that is economic in essence—activity whose price does not reflect this cost.
But beyond these problems with GDP as a measure of economic well-being lies that second order of problem: how well does economic well-being serve as a measure of overall well-being? Economists of the old school can become splenetic when you get near this topic; neoclassical economics prides itself on being objective and scientific, and efforts to measure well-being are inescapably subjective at some level. Economists don’t care about the amount of grief and sorrow in a community. Most of them don’t yet care about loss of ecosystem services, so things like grief and sorrow or work satisfaction are completely off their map. But civic-minded people can and must and do care about such things. I think we need to move beyond economics as it is practiced today and return to the concept of an integrated discipline of political economy. These “subjective” issues were sliced off from political economy back in the nineteenth century and handed over to the study of politics, in order to give economics the appearance of being a science; economics focused only on maximizing production without worrying about what the production was of or for. I think this limitation of our economic thinking to technical, objective, “scientific” questions is now clearly part of the problem rather than part of the solution.
So, what kind of index would you like to see? What should go into it?
Rather than propose what should or shouldn’t be included in a given country’s measure of its own well-being, I’d propose instead something else: every polity ought to decide for itself what the constituent elements of its citizen’s well-being are, and establish metrics to measure them; those metrics could be weighted (again, according to each polity’s preference) to produce a single, easily digestible number that might be called Gross National Happiness, or the Genuine Progress Indicator, or the National Progress Index, or Net Economic Welfare, or whatever seems appropriate. And the process of coming up with these metrics could be an open, participatory one—the relevant subjective decisions could emerge (or at least be supported by) input from town meetings and city councils, from national referenda or polling, from any and all participatory processes you care to imagine.
That said, I think the Bhutanese model is a very good one. It seems to register and evaluate the elements that Bhutanese themselves feel are important to life satisfaction.
What would you do if you could tinker with it? Well, the Bhutanese index relies heavily on survey data: “Is pollution of rivers [and] streams an environmental concern in your area?” You could go with hard, scientific data there and in some of the other categories the index cumulates. Ultimately the question of whether a river is or isn’t healthy enough to sustain its constituent ecosystems and deliver ecosystem services at the same rate from year to year is a technical question, not something you get from surveying people.
One criticism of the Bhutanese approach is that the various elements of happiness are subjective and are likely to change, and that this undercuts the ability of such a measure to guide policy over time. What makes people happy today isn’t what made them happy a generation ago, and isn’t likely to be what makes them happy a generation from now. How do you respond to such criticism?
For years economists have put together a Consumer Price Index, and it offers useful comparison over years and decades and generations, even though what people choose to consume has changed dramatically from when the CPI was first calculated. (There were no I Phones or fast food back in the 1930s.) The market basket of goods on which CPI is calculated is revised regularly to reflect innovation and changes in tastes and habits. There’s no reason to say that a Gross Happiness Index can’t be treated similarly. With this approach, the GHI would track changes in a society’s level of well-being by offering a snapshot of the level of well-being at any given point—measured each year in terms of the constituent elements of well-being that the society valued that year. I don’t see any major problem with that.
All of this brings to mind the question of the future of capitalism in driving the world economy. How do you see this evolving? Is the financial crisis pivotal to change we are witnessing?
I’ve written recently about how this financial crisis is a manifestation of our society’s environmental crisis. Briefly: debt is a claim on the economy’s ability to produce wealth. We let debt grow astronomically, but the real, physical wealth that that debt is a claim upon can only grow in two ways: by increasing the efficiency with which we use matter and energy from nature, or by using more matter and energy. Increasing the throughput of these resources increases the economy’s ecological footprint, and destroys natural capital. At some point, trying to grow the economy through growth in throughput has to hit a limit. When debt grows exponentially but wealth doesn’t, eventually some trigger event leads to a spasm of debt repudiation. People who hold debt as an asset—creditors—have to lose some of their assets. Debt repudiation takes a variety of forms: bankruptcy, foreclosure, default, stock market crash, inflation, the disappearance of paper assets in any form. Back in March Larry Summers told an audience at the Brookings Institution that by his count, we have a crisis every 2.3 years, and he allowed that “we’ve got to do better.” We’re not going to do better unless we address the underlying cause of these crises of debt repudiation: our system allows debt to grow a lot faster than we can grow the means of paying it back. Ultimately, we’ll have to limit growth in debt to the amount that real wealth can grow sustainably.
Policy planners aren’t talking about this. They’re not talking about debt repudiation as the underlying cause of recurring crisis, and I wish they were. Still, there’s reason for hope. There are signs that this downturn-and-recovery is leading us in the direction of a “greener,” more ecologically sustainable relationship to the planet. Recovery money spent on building renewable energy and energy conservation infrastructure—windmills and mass transit and geothermal energy, all of that—is wisely spent. We have it in our power to build a thing never seen before in the quarter-million year history of humans on the planet: an ecologically sustainable society that has a high material standard of living that is widely and equitably shared among the human population. Our present industrial civilization, built on fossil fuel, gives us a high material standard of living that is widely shared—not as widely as many people would like, but more widely than any other previous kind of civilization. The problem is it’s not ecologically sustainable. I hope that as we come out of this crisis we build the infrastructure we’ll need for such a society.
And the future of capitalism? Well, I like to quote Oystein Dahle: “Socialism failed because it did not let prices tell the economic truth. Capitalism will fail if it does not let prices tell the ecological truth.” Getting our basic index of economic well being right is one part of getting prices to tell the truth.
How did you come to be interested in this subject and are you doing research in it?
As an undergraduate back in the 1970s, I lived through the US gas crisis, as it was called then—after US domestic oil production peaked in 1971, OPEC exercised its new-found market power and set a market-demand proration for oil that raised its price significantly in the US. It was, for some Americans, the first clear intimation that energy isn’t just another commodity and that there are limits to our ability to exploit past solar energy—fossil fuel—to make wealth in the present. Another formative experience was majoring in politics and economics, which at my university were housed in different departments, different colleges. In studying those subjects I was trying to understand what we were doing to the planet and what we were thinking while we did it—the idea being, we need to change the way we think if we’re going to have an ecologically sustainable society. I pursued those two questions through graduate school and have been thinking and working in this field since then. Currently I’m working on my next book, “Factory Planet: Preserving Democracy in an Era of Ecological Constraint.” The American political and economic system is built on the assumption that we can have infinite economic growth, and when we come up against limits, as we are, it’s clear that some things have to change. So I’m trying to do Green Political Economy–showing where and how our theories in politics and economics, and the institutions built on that thinking, have to change as we recognize that we can’t have infinite economic growth on a finite planet.
Eric Zencey is Associate Professor of Historical and Political Inquiry at Empire State College, State University of New York. He is the author of Virgin Forest: Meditations on History, Ecology, and Culture, and a novel, Panama. This interview is a full length version while the newspaper version was edited for length and conciseness.
Courtesy: The Nation (www.nationmultimedia.com)