Diane Coyle, Professor, University of Manchester – 18th January, 2018.
The idea that Gross Domestic Product (GDP) is inadequate as a measure of economic well-being dates back to the 1960s, when environmentalists and feminist scholars pointed out some obvious shortcomings: the failure to account for environmental externalities and the failure to count valuable non-market services such as work in the home. But it is only in the past decade that the need to go ‘beyond GDP’ in measuring economic progress has become increasingly mainstream.
One particular landmark was the Sen-Stiglitz-Fitoussi commission, which published its report in 2009. In fact, according to Google’s Ngram, which tracks the use of specific words in books and reports over time, we were already past peak ‘GDP’ when the Commission reported. Alternative measures are now being widely debated.
However, it is hard to see anything finally dislodging GDP from the headlines, and hence policy, until there is enough consensus about what should replace it. There has been a proliferation of alternative indices, from the well-known Human Development Index on, and a proliferation of dashboards, which themselves can have many components. These ideas overlap but as they lack the kind of foundations GDP has had in economic theory, they are not going to become mainstream.
In recent work with Benjamin Mitra-Kahn, chief economist at Australia’s intellectual property office, we proposed an entirely different kind of approach to measuring economic progress, one grounded in a different understanding of social welfare.
Economics has for over a century rested on utilitarian ethics – anyone who has studied the subject will be aware that people are assumed to maximise their ‘utility’. In terms of the statistics, utility is regarded as being generated by the flow of income and expenditure in any given time period. This explains the well-known paradox that natural disasters look like they are good for the economy, because despite the destruction, they will be followed by an increase in spending. The fact that it is spent on repairing damaged houses and roads does not register.
Instead, we are proposing basing the measurement of economic progress on the Nobel economist Amartya Sen’s concept of ‘capabilities’. The question he posed was: what do people need to allow them to lead the kind of life they want? This is most naturally measured in terms of access to several kinds of assets. Do they have financial capital? But also human capital (education and skills), physical capital (infrastructure such as roads, housing), intangible capital (examples include patents, goodwill, or data), natural capital (clean air, green space, a healthy ecosystem), and social capital (a well-functioning community or nation)?
Our approach inherently captures the potential for sustainable growth. If assets are being run down, then growth is not sustainable. Unless our system of economic measurement includes assets, it will be impossible to track sustainability. National totals for any of these assets are uninformative about well-being. We need to know about the access different groups, or different places, have to each of them.
This is not an easy switch to make. It would mark a big shift in conceptual thinking in economics, and the discipline has not paid much attention to the concepts of economic welfare – the overlap with philosophy and ethics – for some decades now. Sen’s work has had a big influence on the field of development economics but has not been much applied elsewhere. What’s more, although statistical agencies have quite a lot of the underlying data, they would need to build a dashboard of assets. There is also a lot they do not have, and where both large data collection efforts and some serious research are needed. For example, social capital is known to be important for economic outcomes, but there is no settled definition or settled theory about how exactly it influences the economy.
The fact that there is so much debate about measurement taking place at the moment is encouraging. It is a sign of the extensive interest that our work jointly won the Indigo Prize, a prominent new prize for proposals for reforming economic measurement (along with a team led by Professor Jonathan Haskel of Imperial College Business School). There have now been numerous books on GDP and how to replace it. New research projects have got under way, including the UK’s Economic Statistics Centre of Excellence.
So perhaps our proposal for six kinds of capital (financial, human, physical, intangible, natural and social) will not end up being the replacement for GDP. But something will, something that captures sustainability and the extent to which economic progress is – or is not – being widely shared.
To book Diane Coyle to deliver a talk at your next Conference: email [email protected] or call + 353 1 2354905.