As several European countries fall into massive debt and old solutions fail, creditors must now share the burden.
|Studies have shown that, above a threshold level, increasing GDP does not correlate to increased well-being or happiness [GALLO/GETTY]|
Gross Domestic Product (GDP) growth has become virtually every society’s default measure of progress, yet it is neither fit for this purpose nor was it ever designed to be – and it is now long overdue that we find a much better replacement.
Indeed, Simon Kuznets, one of the principal architects of what became the standard way of creating national accounting systems, declared as long ago as 1933 that “the welfare of a nation can scarcely be inferred from a measurement of the national income”.
So, if one of the creators of GDP never thought it was supposed to be a measure of welfare, how has it come to be used as precisely that? The answer is probably due to World War II.
Understandably, with the advent of war, maximising the production of armaments and supplies became one of the primary focuses of the war effort and John Maynard Keynes helped to set up a national accounting framework of income and expenditure that reflected this.
Following the war there was an urgent need to literally rebuild nations – and so at that time the maximisation of production was again strongly linked to improving the material welfare of people. However, the fact that this production focus became the main foundation of the United Nations System of National Accounts meant that direct measures of welfare and societal progress were pretty much abandoned.
Abandoned but not entirely forgotten, as in March 1968, just 20 years after the UN’s first guidelines were published, Robert Kennedy delivered a (now famous) speech in Kansas on the limitations of measuring economic growth:
“It counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl…Yet…[it]…does not allow for the health of our children, the quality of their education or the joy of their play.
“It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything in short, except that which makes life worthwhile.”
Since then, in other spheres of life, we have witnessed some quite fundamental changes, such as the end of the cold war, the rise of China, the advent of the internet, advances in medical care, increased multiculturalism, and the recognition of the risks of global climate change. Yet here we are another 40 years on and still stuck with GDP as our indicator of societal progress.
Evolving the way we measure progress
GDP has of course continued to be criticised since Kennedy’s speech. There is now a long list of its shortcomings.
GDP not only includes things which are “bads” such as the costs of health problems, accidents, family breakdown, crime and pollution, it also excludes things which are “goods” such as unpaid activities like child-rearing, running a household, helping friends and neighbours, volunteering and local political participation.
All of these activities are outside the market, yet they are at the very core of our economies. As well as not valuing what matters most, GDP doesn’t account for the social and environmental costs of economic development, with perhaps the most pressing example being the long-term costs of climate change, which economist Nicholas Stern has called “the greatest and widest-ranging market failure ever”.
All in all, GDP cannot be considered a reliable or desirable measure of progress.
Classical economists tend to put forward the argument that that even if GDP is not a good measure of progress, this does not matter if increasing it automatically leads to increases in well-being anyway. Neatly, the assumptions they make have allowed them to argue precisely this.
Orthodox economic theory assumes that people have rational and stable preferences and that their well-being is greatest when they have the maximum opportunities to satisfy them. So more choice is always better, and more income increases choices, so the way to make life better is to increase people’s incomes.
This theory is all well and good, but is it in fact true?
Well back in the early 1970s, Richard Easterlin, an economist from California, started to explore the relationship between GDP growth and well-being using a new type of subjective well-being measures. These subjective measures used the data from large-scale surveys where respondents have been asked to rate their own happiness or satisfaction with life.
While simple, these measures have been shown to be reliable, and in experiments people who score highly on them have been observed to smile more and are rated as happy by people who know them well.
So what did Easterlin find? A paradox no less! He found that if he looked within a given country, at a given time, then people with the highest incomes did indeed report the greatest happiness and well-being. He did not find any evidence, however, that rising per-capita GDP caused average national well-being to also rise. Instead he found that levels stayed the same.
So while richer people are happier at any point in time, we do not all get happier as we all get richer. This perplexing finding has become known as the “Easterlin paradox”.
Money doesn’t buy happiness
While recently the paradox has been challenged using new international data collected during the intervening years, it is absolutely clear that the magnitude of any increases in happiness is very small. Many countries, such as the US or the UK, which have had substantial economic growth over the past few decades have not had any discernable increases in national well-being over the same period. This reflects a threshold hypothesis, that when GDP rises above a certain level per capita, around $15,000, gains in well-being drop off very considerably.
It is worth pausing for a second and reflecting on why these findings are so startling.
They represent the direct uncovering of a false logic at the heart of our economic system. We have organised our modern societies around a particular model of how to pursue happiness. Our business models are focused almost exclusively on maximising profits for shareholders, often ignoring the needs of their broader stakeholder groups, such as local communities, employees and suppliers.
Meanwhile, people are led to believe that the more disposable income they have, the more they will be able to consume, and that this is the route to happiness. The truth is we have simply assumed that increasing economic output would lead straightforwardly to increases in the standard of living and thereby human well-being and happiness – but this assumption is not true.
Not only is organising our economies almost exclusively around increasing GDP inefficient at delivering human well-being, but we also fail to account fully for the negative impacts on our environment.
How we ensure that human activities become sustainable is one of the most critical challenges of the 21st century – and no measure of “progress” that ignores sustainability issues can be taken seriously.
However there are signs that economists and politicians are starting to think about addressing these issues and maybe that things are starting to change. At the end of last year, the British government announced that it would create National Indicators of Well-being and has started a national debate led by the Office of National Statistics as to what they should encompass.
The UK interest in well-being indicators is not in isolation and builds on a lot of recent activity by governments and international agencies. The European Commission has held a series of conferences focusing on measuring sustainable development and the need to think Beyond GDP , and its statistics agency Eurostat has started to work on developing well-being indicators for the European Union.
The OECD (Organisation for Economic Cooperation and Development – effectively a group of the wealthiest nations) has had a whole stream of high-level engagement work and conferences on measuring the progress of societies.
Probably most comprehensive has been the work that has been carried out by the French government.
This work started in January 2008, when French president Nicolas Sarkozy recruited Nobel Prize-winning economists Joseph Stiglitz and Amartya Sen to form a special commission on the measurement of economic performance and social progress. As they outlined the scope of their work, the commissioners were well aware of the challenges they faced:
“There is a huge distance between standard measures of important socioeconomic variables like growth, inflation, inequalities etc … and widespread perceptions. Our statistical apparatus, which may have served us well in a not-too-distant past, is in need of serious revisions.”
Their recognition of the need for serious revisions to the statistical apparatus echoes calls we have been making for some time at nef (the new economics foundation), the London-based policy think tank. In a recent report, Measuring our Progress, written as part of our contribution to the current UK debate, we suggested that:
• A successful society is one that provides high and stable levels of well-being for its citizens sustainably over time.
• That governments should adopt new headline measures of sustainable well-being and progress that encapsulate this vision of national success.
• But that these new measures will only matter if they actually influence government policy.
Creating new measures of progress will be a statistical and political challenge. But if we want to create a world that is happier, fairer and more sustainable then we really do urgently need to find a replacement for GDP.
Nic Marks is the founder of the Centre for Well-being at the new economics foundation and the author of The Happiness Manifesto, a TEDbook available for download on Amazon.
This article is based on the three major reports written by the Centre for Well-being:
Measuring our progress; January 2011; Abdallah S, Mahony S, Marks N, Michaelson J, Seaford C, Stoll L and Thompson S; London; nef;
National accounts of well-being; January 2009; Michaelson, J; Abdallah, S; Steuer, N; Thompson, S and Marks, N; London; nef;
The (un)Happy Planet Index 2.0; July 2009; Abdallah, S; Thompson, S; Michaelson, J; Marks, N and Steuer, N; London; nef;
The views expressed in this article are the author’s own and do not necessarily represent Al Jazeera’s editorial policy.