Tuesday, November 16, 2010

Beyond GDP: policy by numbers

David Cameron has announced that he wants UK policy to be directed more by a measure of its citizens' general well-being than national GDP alone.

This is an important development.

The problems with basing government policy on GDP (as most nations do) are manifold. A war, an increase in the divorce rate or a natural disaster can each increase GDP, illustrating the fact that human economic activity is not identical with human flourishing. Of course, there is a basic level of material well-being required for a good life: nourishing and reliable food, safe water, shelter from the elements, somewhere comfortable to sleep, access to human relationships and perhaps a few other things (a dram of whisky from time to time, perhaps). But the bigger picture on which we base our social policy has to be bigger than just GDP. Yet in our obsession with measurement, we end up measuring GDP because it is so easily measured.

What can be counted, counts. That is at the heart of why GDP sends us up the wrong policy paths. Measuring what is easily measurable, we find we end up prioritising quantity over quality. The economy may be growing, but are our lives any better as a result?

There are various attempts at alternative indices. The UN supports the Human Development Index (HDI), a measure that relates per capita GDP to both life expectancy and education in order to suggest a more rounded picture of flourishing. This has the advantage of being still quite measureable, but still has GDP has a very significant component of the index, despite the fact that numerous studies (as well as traditional wisdom from many cultures) point out that beyond a certain level of material well-being, the benefits of extra personal wealth suffer from rapidly diminishing marginal returns. It also lacks any account of the ecological cost of the development in question, which could be (and often is) being gained at the expense of future generations.

Another measure is the Happy Planet Index (HPI), which focuses on the relation of life expectancy, subjective level of well-being and ecological footprint, thus claiming to measure how efficiently human well-being is delivered per unit of ecological impact. This approach gives a very different list of national rankings to the HDI (for instance, the USA comes 114th out of 143 countries studied, between Madagascar and Nigeria). Including ecological footprint sinks pretty much all the "developed" countries. For comparison, here are recent rankings of GDP per capita and here are recent HDI rankings.

Yet relying so heavily on self-reported levels of satisfaction (while trendy) has its drawbacks, as can be noted via the observation that the inhabitants of Huxley's Brave New World would have scored off the charts, and from counting the suspicious number of totalitarian, autocratic, repressive and/or highly corrupt societies that make it into the HPI top twenty.

And so while I am actually a big supporter of moving away from GDP-obsessed policies, I am ambivalent about the apparent necessity of replacing it with another number. Measurements are not irrelevant, and evidence-based policy making is a step forward in many areas. If we must have metrics, by all means let us develop better ones than GDP. But let the numbers be our servants, not our masters, since so much that is of the highest importance in the life of a society cannot easily be measured in numbers. Quality is not always reducible into quantities.

11 comments:

Jeremy said...

Byron, I couldn't agree more with your sentiment here. Numbers and this reductive tendency seem to be much of the source of our troubles, and thus can hardly be a good measure of a solution to them. I wonder whether you've read through the "Report by the Commission on the Measurement of Economic Performance and Social Progress" authored by Stiglitz, Sen, and Fitoussi? Cameron seems to be trailing behind Sarkozy here (oh, horror of horrors!) though I do wonder whether the French report gets some things right? They're particularly honest about their limitations - I wonder what sort of whitepapers will emerge from the newly announced British focus?

byron smith said...

Thanks Jeremy - I hadn't seen that. I'll have a look when I get a chance.

byron smith said...

Ross Gittins: Green GDP.

byron smith said...

Orion: Breaking the Spell of Money

"As a nation, we need to quit using the flow of money as the chief measure of our well-being. The U.S. Gross Domestic Product is the dollar value of our nation’s economic output in a given period, without regard to the purpose of that output. So the cost of cleaning up an oil spill in the Gulf of Mexico adds to the GDP, as does an epidemic of cancer, a recall of salmonella-laced eggs, a bombing campaign in Afghanistan, lawsuits against Ponzi schemers, prison construction, and every other sort of ill. The GDP does not reflect work done at home without pay, volunteer work in the community, or mutual aid exchanged between neighbors. It counts junk food you buy on the highway but not food you grow in your backyard. It counts the child care you purchase but not the care you provide. If you lead a healthy life, you contribute little to the GDP through medical expenditures, but if you smoke, become addicted to drugs or alcohol, become dangerously obese, neglect your health in any way at all, you’re sure to boost the GDP. War also swells the GDP, but peacemaking does not. We need to devise measures of well-being that take into account the actual quality of life in our society, from the rate of incarceration (currently the highest in the world) to the rate of infant mortality (currently thirty-third in the world), from the condition of our soils and rivers and air to the safety of our streets.

byron smith said...

MWH: Jeremy posts a follow-up on this topic.

byron smith said...

"Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things. Our Gross National Product, now, is over $800 billion dollars a year, but that Gross National Product - if we judge the United States of America by that - that Gross National Product 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. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children. Yet the gross national product 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. And it can tell us everything about America except why we are proud that we are Americans."
- Robert Kennedy (1968)

byron smith said...

The Conversation: Re-thinking GDP - what is the point of development?.

byron smith said...

The Conversation: There's more to good policy than increasing GDP.

byron smith said...

CC: Another suggestion: Inclusive Wealth Index.

byron smith said...

Orion: The (mis)measure of all things.

byron smith said...

Guardian: In many African states, GDP figures are hopelessly inaccurate.