Changing Metrics – Is Replacing Our Economic Indicators Enough?

Source: Studentreporter

As our societies develop and evolve, the question of measuring progress through different metrics has gained a more prominent place. Simple measures, such as the Gross Domestic Product (GDP), do not perhaps capture all the complexities of development that we want them to and this is where purpose-built replacements such as Gross National Happiness (GNH) come into play.

The Student Reporter team at the World Resources Forum 2012 in Beijing, China was reminded of this problem when interviewing the 2007 Nobel peace prize winner Dr. Mohan Munasinghe. Although there were a myriad of topics such as sustainable consumption and production (SCP) and greening the economy, the question of the importance of alternative metrics is one that stuck.

During his many talks at the conference, Dr. Munasinghe explored and encouraged the usage of alternative economic indicators in lieu of the ubiquitous GDP; indicators that could capture many other elements of economic, cultural, and societal value. The idea of shifting to GNH from GDP has long been touted as a desirable alternative; however, for GNH to be used in lieu of GDP, they both need to serve the same purpose. So what is GDP measuring, and why is it measuring this? After considering the answers, one may postulate that the shift of focus should perhaps not be from GDP to GNH, but rather, to an altogether new mode of economy with altogether new metrics.

From One Recession to the Next: A History of GDP

For an economic indicator to replace another, they have to – at least – roughly be measuring the same thing (otherwise you end up missing the causal link). When Nobel laureate Simon Kuznets started constructing the National Income Accounts (NIA) after the Great Depression, he already mentioned to the U.S. congress in 1934 that “the welfare of a nation can scarcely be inferred from a measure of national income.” (The original report seems to have disappeared off the internet, but here’s a bea.gov report quoting it [pdf], which should give it enough legitimacy). Thus, the original purpose of GDP (or Gross National Product – GNP – as that was used back then) was not to gauge wellbeing but rather to measure economic growth.

In order to see what GDP is specifically measuring, we need to have a quick lesson in economic history. GDP and its counterpart GNP are both NIA and measure the market value of a country’s economy. This market value can be measured in several ways, which include, but are not limited to, the production and expenditure approaches; i.e., either we measure the value added at each stage of production or what we consume. This is achieved by using something named input-output modelling, which Wassily Leontief originally used to divide the U.S. economy into sectors and then measure which inputs were needed for a given measure of output. This method was extended to measuring GDP, as it works in the same way by tallying-up the value-added of all the inputs in relation to the final goods.

What GDP can measure then is merely the economic value of the goods produced or services rendered at each stage of the production of a final good or service. Relating this to a real world example of the 2008 financial crisis, we can see the limitations of this method in assessing the welfare of a country. When considering the events leading up to the 2008 financial crisis, GDP was still showing a growing economy, whilst missing the growing inequality and debt.

Gross National Happiness – A realistic alternative?

If GDP was never meant to measure wellbeing, then this raises the question of whether GNH could really serve the same purpose as GDP. For GNH be a realistic counterpart to GDP, it has to measure similar things… and this is really the crux of the matter. Being a very different metric, GNH would inevitably provide very different indications compared to GDP. This could be problematic for those who are used to using a metric such as GDP to measure economic growth.

Adopting a new economic growth metric might be fine for policy-makers who could construct the measure as they see fit, this, however, still leaves the question of businesses. In a capitalistic system, corporations, whether state-owned or not, are what keep our system going around, and GNH might not be a suitable replacement for them. To consider this, we need to look a bit more in-depth at a GNH Index, specifically the one that was constructed for the Bhutanese government. The components that make up the nine domains that construct the index are the following: psychological wellbeing, health, education, time use, cultural diversity and resilience, good governance, community vitality, ecological diversity and resilience, and living standards.

Whilst many of the individual sub-sections could feed into a business’s long-term model, realistically, few would find themselves in a business’s short-term operation’s calculation. For example, how could a business adjust its production or hiring based on cultural diversity and resilience (assuming we’ve reached an acceptable threshold)? But this is not even the major problem. As long as we live in a capitalistic system that measures its health by material output and services rendered, talking about replacing GDP by GNH is a moot point.

If GNH can’t allow businesses to gauge the development of an economy, then of what use is it? Of course, businesses don’t actually use GDP instead since it’s a trailing indicator (i.e. it tells you too late what has happened). However, employment projections, amongst other things, need metrics tied to a variable that measures pure economic growth in order to gauge the demand for services and goods.

In the end, businesses and politics are linked through the economy. If the economy isn’t doing well because businesses aren’t hiring, then you cannot expect a government to do well either (as long as the alternative isn’t worse). Consequently, in our system, it is the corporations that create profits, that hire workers, and that produce the material wealth that drives progress in our societies, and they need to be able to gauge economic growth.

What, Not How

For us to change our fixation with GDP, we would initially have to amend our mode of production, and then start to change our use of indicators. I don’t believe that this view fundamentally differs from Dr. Munasinghe’s, and whilst he did say that we need to change our societal values amongst other things, he perhaps wasn’t radical enough to suggest that a complete upheaval of our current mode of production was needed instead of merely replacing our indicators.

Given the current socio-economic system, GDP drives everything from elections to hiring cycles. However, these are consequences from the current state of the economy, which the GDP measures, and are consequently not the measure’s fault per se. If we could reorient our economic system to gauge the health of the economy through an index such as GNH, then it might serve the same purpose as what GDP currently does. This, however, requires a more gargantuan task, namely of finding the next step from capitalism – not communism, but perhaps some sort amalgamation of capitalism, environmentalism, and socialism. Perhaps a hybrid aptly titled sustainabilism.