Measure well-being rather than economic production
September 25th, 2009 by Jim JustNobel prize-winning economists Joseph E. Stiglitz and Amartya Sen say in a new study that our traditional economic indicators measure the wrong things, resulting in harmful policy choices. They urge the adoption of new assessment tools that measure human welfare rather than just economic growth.
The New York Times quotes Stiglitz:
What you measure affects what you do. If you don’t measure the right thing, you don’t do the right thing.
We looked to G.D.P. as a measure of how well we were doing, and that doesn’t tell us whether it’s sustainable. Your measure of output is grossly distorted by the failure of our accounting system. What began as a measure of market performance has increasingly become a measure of social performance, and that’s wrong.
The study, Report by the Commission on the Measurement of Economic Performance and Social Progress, was commissioned by French President Nicholas Sarkozy.
The report states our current economic metrics fail to provide a timely and complete set of wealth accounts – the ‘balance sheets’ of the economy – and thus fail to provide a comprehensive picture of assets, debts and liabilities or to capture environmental costs, especially those associated with global warming.
The report also distinguishes between current well-being and sustainability, whether well-being can last over time.
Current well-being has to do with both economic resources, such as income, and with non-economic aspects of peoples’ life (what they do and what they can do, how they feel, and the natural environment they live in). Whether these levels of well-being can be sustained over time depends on whether stocks of capital that matter for our lives (natural, physical, human, social) are passed on to future generations.
The Times article cites an example of the bad results from measuring the wrong things:
The resulting report amounts to a treatise on the inadequacy of G.D.P. growth as an indication of overall economic health. It cites the example of increased driving, which weighs in as a positive within the framework of economic growth, as it requires greater production of gasoline and cars, yet fails to account for the hours of leisure and work time squandered in traffic jams, and the environmental costs of pollutants unleashed on the atmosphere.
During the real estate bubble that preceded the financial crisis, the focus on economic growth helped encourage overbuilding and investment in real estate. Mr. Stiglitz argues that the single-minded focus on growth gave American policy makers a false sense of assurance that their policies were virtuous, as they allowed financial institutions to direct virtually unlimited sums of money into real estate and as consumer debt levels built with unrestrained momentum.
Credit enabled spending, and spending translated into faster growth – an outcome that was intrinsically good, and never mind how long it might last or the convulsions that would accompany the end of easy money.
A growth-oriented policy encouraged homeowners to borrow as if money need never be repaid, and industry to produce products as if the real cost of pollution were zero.
The unifying theme and key message of the report is that the time is ripe for our measurement system to shift emphasis from measuring economic production to measuring people’s well-being.