CAMBRIDGE, England – How to measure economic success? Criticisms of conventional indicators, especially gross domestic product, have abounded for years, if not decades.
Environmentalists have long pointed out that GDP omits depletion of natural assets, as well as negative externalities such as global warming. And his inability to grab unpaid but undoubtedly valuable work at home is another glaring omission. But better alternatives may soon be at hand.
In 2009, a commission headed by Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi spurred efforts to find alternative ways to assess economic progress by recommending a “dashboard” of indicators. Since then, economists and statisticians, working alongside natural scientists, have gone to great lengths to develop rigorous wealth-based measures of prosperity, especially when it comes to natural assets. The central idea is to create a comprehensive national balance sheet to demonstrate that today’s economic progress is illusory when it comes at the expense of future living standards.
At a significant milestone in March this year, the United Nations approved a statistical standard for the services nature provides to the economy. This followed the publication by the British Treasury of a study by Partha Dasgupta of the University of Cambridge on how to integrate nature in general, and biodiversity in particular, into economic analysis. With the consequences of climate change starting to become too apparent, any meaningful concept of economic success in the future will surely include sustainability.
The next steps in this statistical effort will be to incorporate measures of social capital, reflecting the ability of communities or countries to act collectively, and to expand the 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 standard of living that includes the value of such activity.
Comprehensive measures such as these can be useful in guiding important policy decisions in a manner consistent with familiar economic concepts. This approach also facilitates conversation with finance ministry officials and business leaders, whose support for a longer-term perspective on prosperity will be essential in bringing about change.
But many advocate thinking of economic success and failure in terms of well-being, a broader and more vague concept. The idea that political 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 welfare policy frameworks.
However, this approach raises even more difficult measurement questions. Well-being depends on many aspects of the circumstances of an individual’s life. Certainly, there is a lot of research in psychology and economics on how to measure well-being and analyze the factors that influence it. Often the measure is to survey people’s satisfaction with their life or their level of anxiety. For example, the UK Office for National Statistics has tracked anxiety and depression throughout the pandemic.
But while decision-makers need top-down aggregate statistics to aid in their decision-making, these indicators have limitations. For example, while the links between well-being and factors identified by econometric analysis – such as employment or good mental health – are intuitive, the causal links are not well understood. A depressed person may benefit from therapy, as advocates of well-being often advocate, but adequate housing can be even more effective. Public policies based on well-being therefore still lack a theoretical basis.
In addition, some policy-making contexts will require a more granular level of detail. Qualitative research – rather than large-scale surveys with predefined questions – indicates a wider range of considerations affecting well-being. For example, a recent UK study, co-produced by researchers and people living in poverty, found that while basic material needs, including health, are important for well-being, independence and a sense of purpose were just as important. Top-down aggregate indicators designed by sociologists and statisticians cannot capture such results.
While time-consuming field research is not always practical, it is important to keep in mind that the concept of well-being is much richer than most other economic indicators. It is important to note that the holistic approaches to wealth and well-being described here are complementary: the assets measured by the first provide the means to achieve the second. Indeed, New Zealand’s policy framework makes this link explicit.
What is exciting about these alternative approaches to assess and measure the economic success of a community or country is the amount of practical progress already made in defining concepts, creating measures, and building policy. expert consensus on the direction policy development should take. Dropping GDP as the primary indicator of prosperity has always been impossible without broad agreement on what the alternative might be. And it will take many more years of work at the statistical center to develop a framework as sophisticated and well integrated as GDP and related economic indicators. But the direction of change is clear and the impetus to bring it about is strong.
Diane Coyle, professor of public policy at the University of Cambridge, is the most recent author of “Cogs and Monsters: What Economics Is, and What It Should Be” (Princeton University Press, 2021). © Project Syndicate, 2021
In a time of both disinformation and too much information, quality journalism is more crucial than ever.
By subscribing you can help us tell the story right.