Friday, November 19, 2010

How we measure

Our society is obsessed with indexes and rankings. One of the most pervasive measures has been the Gross Domestic Product, GDP, supposedly a measure of economic wealth. There is perhaps no one that claims that it is a perfect index and many think it is not even a good index even for economic things. For example, while GDP is supposed to measure the value of output of goods and services, in one key sector—government—we typically have no way of doing it, so we often measure the output simply by the inputs. If government spends more—even if inefficiently—output goes up. In the last 60 years, the share of government output in GDP has increased from 21.4 percent to 38.6 percent in the United States, from 27.6 percent to 52.7 percent in France, from 34.2 percent to 47.6 percent in the United Kingdom, and from 30.4 percent to 44.0 percent in Germany (Stiglitz 2009). We also know that even directly harmful things, like a car accident will increase the GDP, and if I chose not to cook my own dinner, but go out, suddenly our ”wealth” has increased. We have discussed how the costs for curbing green house gas emissions also will become a plus in the GDP, and how the exploitation of limited resources is reflected as a GDP increase. The GDP is sometimes used as a statement of ”standard of living”, but there is no such direct correlation. GDP doesn't reflect inequalities, so some people can be dead poor even in a country with high GDP. The GDP also understates the benefits sometimes, because GDP is a measure in monetary values; the price of goods or services. A lot of consumer items, such as electronics and food has long-term falling prices, which means that we will get more and more ”stuff” for the same money, so even with a stagnant GDP materials wealth can improve considerably. Even when it was first developed, its main architect, Simon Kuznets, said that ”...the welfare of a nation can, therefore, scarcely be inferred from a measure of national income (Talberth and others 2006)” and later on he said ”Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what" (Kuznets 1962). One would wish that politicians and economists would follow that advice more often.
Clearly, GDP is not an appropriate measure of progress of human societies. A number of alternatives have been promoted such as:
- Human development index (HDI) promoted by the UN Development Program (UNDP). HDI uses GDP as a part of its calculation and then factors in indicators of life expectancy and education levels. Notably it doesn't include anything on ecological sustainability. Scandinavia “scores” well in the HDI (UNDP 2005).
- Genuine progress indicator (GPI) or Index of Sustainable Economic Welfare (ISEW) - The GPI and the ISEW attempt to address many of the above criticisms by taking the same raw information supplied for GDP and then adjust for income distribution, add for the value of household and volunteer work, and subtract for crime, pollution and depletion of national resources. E.g. loss of farm land, erosion and compaction of farm land are joined together to be one of the 29 indicators. The GDP of Australia grew with 3.9% between 1950 and 2000, while the GPI only grew with 1.47%, and the disconnect between GDP and GPI growth has increased (Talberth and others 2007).

Talberth, John, Clifford Cobb and Noah Slattery 2007, The Genuine Progress Indicator 2006, Redefining Progress,

- Gross National Happiness – the country of Bhutan is working on a complex set of subjective and objective indicators to measure "national happiness" in various domains, such as living standards, health, education, ecosystem diversity and resilience, cultural vitality and diversity, time use and balance, good governance, community vitality and psychological well-being.
- Happy Planet Index - The happy planet index (HPI) is an index of human well-being and environmental impact, introduced by the New Economics Foundation (NEF) in 2006. It measures the environmental efficiency with which human well-being is achieved within a given country or group. Human well-being is defined in terms of subjective life satisfaction and life expectancy while environmental impact is defined by the Ecological Footprint. In the Happy Planet Index, Latin America and the Caribbean scores very well (Abdallah and others 2009).
-The Ecological Wealth of Nations compares a nations “bio-capacity” with its “ecological foot” print. This measure can be combined with other measures, e.g. the Human Development Index (Global Footprint Network 2009).

Seeing the whole

There are reasons to question measurements that come up with one single figure. For instance, it is not really meaningful to combine current well-being and sustainability into a single indicator. That amounts to mixing up the profit and loss statement with the balance sheet, or have one combined speedometer and gas meter in a car. Even when speaking about sustainability to treat natural and social capital as interchangeable is dangerous. Once we passed a certain threshold of erosion of a nature resource, the loss of that resource can't be balanced by any other resource. All in all the various indexes have their strength and weaknesses. It is not my task here to sort out which one is the best one. Most people seem to be very impressed by these rankings and it is certainly a good way to make people more aware of the complexities in this world to adopt some other measures beside the GDP. Introducing other indexes and measurements has the benefit of using another perspective.

While it would be good to find other measures, we should also not exaggerate the effects of doing so. We have measured the number of hungry people in the world for many decades and the numbers are still appalling. We measure climate change, but it hasn't impressed politicians or citizens enough the take radical action. We need to keep separate the efforts to analyse our economy with alternative measures and terms and possibilities to manage our economy in that way. These various measures and indicators don't change the reality of economic agents, in particular companies. Companies are not trying to grow the GDP, they try to increase their profit or simply survive the competition. Even when they speak about "triple bottom line" and other niceties, increasing the profit will always be the overarching driver. And this will remain the same even if societies trash GDP as a measure. I have explained earlier how the market and technology logic by themselves drive (GDP) growth. Similarly, consumers don't buy more stuff to contribute to the GDP, they buy more stuff because it gives status or satisfaction or simply because they have money to spend, "money burning a hole in my pocket" as the saying goes. The effect of these measurements is on the political discourse mainly. 

(Extract from Garden Earth, update latest 1 May 2011)

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