Agenda: Advance the transition from growth in GDP as the measure and goal of economic activity to improvements in human, social, and environmental health as the proper measure and goal.
We get what we measure. The indicators we use to evaluate economic performance guide the priorities we build into our economic institutions and policies. Current practice relies primarily on financial indicators, specifically growth in GDP (gross domestic product) and stock market indices. By the prevailing wisdom, the faster GDP and share prices grow, the better the economy is performing. This premise in turn drives economic policy choices.
Growing Rich? Or Growing Poor?
Yet, it is now widely acknowledged that GDP, which measures the monetary value of the exchange of goods and services in the market place, tells us little or nothing about the health and well-being of people, community, and natural systems. (See GDP: A Flawed Measure of Progress) Indeed, among the affluent countries, continued growth in measured GDP has not in recent decades yielded greater well-being and has certainly contributed to greater greenhouse gas emissions and other environmental problems.
In the United States GDP has continued to rise in the face of disintegrating families, a vanishing middle class, increasing rates of homelessness and incarceration, rising unemployment, the disruption of community, collapsing environmental systems, the hollowing out of domestic manufacturing capabilities, failing schools, growing trade deficits, and other problems. GDP tells us we are growing richer and the economy is recovering even as unemployment continues to rise and real wealth indicators reveal that we are growing poorer. Our rate of consumption may be increasing, but our state or stock of well-being is declining.
Ecological economist Joshua Farley observes that GDP is actually a measure of the economic cost of producing a given level of well being. Managing an economy to maximize economic cost may benefit corporate bottom lines, but is disastrous for society.
Managing for Well-Being
Economist Kenneth Boulding noted in a 1966 paper titled “The Economics of the Coming Spaceship Earth” that in a spaceship world well-being is properly measured by the condition of stocks of food, oxygen, water, crew health and other essentials, not by the rate of use or throughput. GDP is a measure of throughput.
The focus on GDP growth supports a misleading cultural belief that well-being is a function of consumption. GDP takes no account of the depletion of human, social, and natural capital or the distribution of wealth between rich and poor. The focus on share prices leads to a similarly misleading belief that inflating financial bubbles increases the wealth of the society, when in fact it is simply increasing the financial power of the already economically advantaged relative to the rest.
If our primary concern is with increasing the financial assets of the rich, then financial indicators are the appropriate measure.
If, however, we believe that the purpose of the economy is to enhance human and natural health and well-being, then we properly evaluate economic performance against indicators of what we really want: healthy and happy children, healthy and creative people, strong families, caring communities, and flourishing natural systems.
In general, money metrics serve poorly as indicators of life values. Rather than continuing to manage our economies to grow GDP, we should be converting to the use of indicators of the state of health of people, communities, and natural systems as the basis for assessing economic performance at all levels from the local to the global.
Financial Indicators in the New Economy
As the challenge to GDP growth gains traction it will become ever more important to build support for the institutional changes needed to eliminate the economic expansion imperative—call it our “growth fetish”—built into our existing economic institutions. This imperative is built into the current design of our financial system. Here are two examples.
- First, if it appears that wages are rising, the Federal Reserve raises interest rates to slow the economy to increase unemployment and maintain a downward pressure on wages. The announced purpose is to prevent wage “inflation.” The unstated purpose is to make sure that the gains of economic growth and productivity are captured by money people rather than by working people. This means that unless the economy is not growing fast enough to create sufficient new jobs, not only to accommodate for natural population increase but as well to absorb workers whose labor has been made redundant by productivity gains, unemployment will spread, wages will be depressed, and the economy will ultimately collapse unless action is taken to stimulate growth in consumption.
- Second, because our current financial system depends on private banks to create money by issuing loans at interest, the overall economy must grow fast enough to stimulate sufficient new borrowing to put enough money into the pockets of previous borrowers to allow them to pay the principle and interest due to the bank as payments become due. Otherwise, borrowers are forced into default and the issuing banks face bankruptcy unless bailed out with public funds.
Financial indicators properly serve two useful functions in the New Economy.
- First, to assess progress toward a more equitable distribution of wealth. Well documented studies suggest that a more equitable distribution of wealth reduces the stress of competition for status and security, and therefore is associated with higher levels of physical and emotional health, increased trust, greater cooperation, and improved environmental health.
- Second, as a measure of the economic cost of producing a given level of health and well-being. Managing either a firm or an economy to maximize cost is a path to bankruptcy, as the world’s current economic path demonstrates. We we properly seek to reduce GDP as we work to increase health and well-being.
Other uses of financial indicators to assess economic performance risk reproducing the same distortions built into GDP indicators and their variants.
Historical Background on Economic Indicators
The United States developed a system of national income accounts during World War II to assess the productive capacity available to support the war effort. Growth in gross national product subsequently became the leading indicator against which policy makers assessed national well-being and progress.
Why GDP Is a Flawed Measure of Progress
Gross Domestic Product (GDP) has many deficiencies as a measure of economic well-being. Most often noted is the fact that it can only add, which means it makes no distinction between beneficial and harmful economic activity. Gun sales to children, divorce, and oil spills all generate new economic activity and all count as additions to GDP. Accelerating the depletion of precious nonrenewable resources like oil and coal accelerates GDP growth even as it destroys the essential resource on which that growth depends.
Others note that beneficial activities based on caring relationships rather than on financial transactions count for nothing. Parents who care for their own children contribute nothing to GDP. Those who hire a nanny or place their children in day care do. In substantial measure, GDP growth measures the rate at which home production and relationships of mutual caring are being eroded and replaced by market relationships.
Then there is also the fact that GDP takes no account of how income is distributed. There could be complete income equality with everyone’s purchasing power growing equally. Or the society may be divided between a small minority of the extremely affluent and a majority of the extremely destitute—or anything in between. GDP gives no clue one way or the other. Growth in the incomes of a few billionaires can produce impressive growth in GDP even as a majority of people starve.
Underlying all these deficiencies is the simple fact that GDP is based on market transactions, which means GDP is a measure of the rate at which money is flowing through the economy. Anything that increases the flow is therefore treated as a positive, even if it is clearly a negative for the society. Furthermore, because money metrics make no distinction between phantom wealth and real wealth, activities that generate profits from purely financial transactions unrelated to the creation of anything of real value count as additions to GDP and presumably to national well-being.
That is why restructuring the economy to shrink the manufacturing sector and grow the financial sector could appear to make us richer as a nation, when in fact it reduced our capacity to produce real things in favor of giving priority to generating profits from the exchange of worthless financial assets. It is why the World Bank can celebrate moving people from subsistence farming communities in which they have no need for money to urban slums in which they struggle to survive on minuscule incomes of a dollar a day as progress even though it means people are giving up lives of marginal sufficiency for lives of desperation and violence.
Any financial measure has the potential to introduce serious distortions into our assessments of economic performance, which is why there is a strong case to be made for using indicators of human, social, and natural system health to assess economic performance makes more sense than using financial indicators like GDP. A reduction in GDP may be a positive indicator that caring relationships are being restored, fewer toxins are being emitted into our air, land, and water, and the resource depletion is slowing—all of which contribute to real well being.
So in summation, because we get what we measure, let us measure what we really want.
The Growth Imperative Is a Construction of Corporate Interests
As the essential challenge to GDP growth gains traction it will become ever more important to build support for the institutional changes needed to eliminate the politically constructed growth imperative of the Wall Street financial system. Here are two examples.
- If it appears that wages are rising, the Federal Reserve raises interest rates to slow the economy to increase unemployment and maintain a downward pressure on wages. The announced purpose is to prevent wage “inflation.” The unstated purpose is to make sure that the gains of economic growth and productivity are captured by money people rather than by working people. This means that unless the economy is growing fast enough to create sufficient new jobs, not only to accommodate natural population increase, but as well to absorb workers whose labor has been made redundant by productivity gains, unemployment will spread and the economy will ultimately collapse unless action is taken to stimulate consumption growth.
- Because our current financial system depends on private banks to create money by issuing loans at interest, the overall economy must grow fast enough to stimulate sufficient new borrowing to put enough money into the pockets of previous borrowers to allow them to pay the principle and interest due to Wall Street bankers as payments become due. Otherwise, borrowers are forced into default and the issuing banks face bankruptcy unless bailed out with public funds. There is no inherent need for perpetual economic expansion. What appears to be a systemic imperative for GDP growth is the result of politically motivated system design and management choices that enhance Wall Street profits. These can and must be identified and changed as part of the transition to an economic system that supports ecological balance, shared prosperity, and living democracy.
Other Resources on Living Wealth Indicators
Origionally published on The New Press.
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