An important debate is currently taking place between neo-classical economists, whose influence predominates in business and government circles around the world, and the so-called New Economists, often referred to also as alternative economists. Many of them have questioned the narrow focus of economic measures such as GDP (Gross Domestic Product, or all the goods and services produced in a given year). In their efforts to go beyond this type of measurement or indicator, more modern economists involved with the New Economics have attempted to develop a different type of index of measurement. This measurement involves transactions which are not based on money; work which is regular but unpaid and which, in important ways, underpins the money-based economy; informal, barter-based exchanges; and qualitative factors such as environmental impacts.
Much work is done in the United States and in Britain, where the New Economics Foundation is located. The focus of the New Economics concerns the development of sustainable economics. In a recent interview with Ed Mayo, the current Director of the New Economics Foundation in London, I mentioned that sustainability sometimes seems a vague term, and has been used in a variety of ways. He agreed, but thinks that the many definitions the concept embraces argue in its favour. Sustainability is really a term that points to concerns about unrestrained growth, which depletes non-renewable resources or creates environmental impacts which severely damage animal, plant and human health. The quantity-versus-quality debate can also be understood as the growth-versus-sustainability debate, and ultimately is an important philosophical debate about values. The urgency of the debate, however, relates to real and alarming reductions in the quality of life for many.
What we measure matters, because government policies rely on these measurements. On current GDP measures, a country may be measuring growth without costing-in harmful impacts from that growth. An obvious example is the incidence of asthma and other respiratory diseases, which has risen apace with increased traffic in major cities of the world. In the United Kingdom, asthma is now the third most frequent cause of all hospital admissions, and the major medical societies are leading the way in pointing to the urgent need for revision of transport policies. In simple terms, this will mean fewer cars on the road, restricted areas and improved public transport, as well as continued research into non-toxic fuels. For the health of urban dwellers everywhere to improve, and the increased costs of ill-health to decline, this type of research needs to be given a high priority. Governments need to take a firm lead in informing people about the real costs, to the nation as a whole, of increased pollution and attendant ill-health. For this to happen, a change of thinking is required, and a corresponding change in what is measured would help towards that goal. Prices need to be separated from real costs.
Another way of looking at the striking limitations of the much-used GDP measurement is to focus on how much it leaves out, as well as on the notion that measuring economic activity per se tells us nothing about whether it is harmful or beneficial. For example, what appears to be growth in a nation may be skewed very much in favour of a particular sector of the population, so that a significant segment of the population is excluded. Yet this exclusion from economic activity might result in a growing and dangerous lack of social cohesion and attendant rising crime, which is very expensive for the nation as a whole, despite good annual growth figures on conventional measurements. The measurements might mask successful non-money strategies involving barter. Some economic activity masks social disasters which ultimately can cost the tax-payer a great deal.
A famous example of the limitations of GDP comes from the work of Ted Halstead and Clifford Cobb: a terminal cancer patient who has recently undergone a divorce and has moved house would count as an “economic hero” because of all the economic activity generated in the wake of his illness, his divorce and his move to a new home.
Work on new indicators which broaden what is measured and attempt to mirror more closely what happens in people’s lives includes the Index of Sustainable Economic Welfare (ISEW). It looks at ozone depletion costs; the costs of car accidents; loss of habitats and farmlands; defensive private expenditures on education and health; and attempts to cost activities such as unpaid household work by comparing it, in a given country, with the cost of paid domestic work, as well as including other factors.
Interesting graphs published recently in a briefing paper by Ed Mayo show that in both Britain and the United States, GDP and the ISEW grew apace from the 1950s to the end of the 1970s, after which GDP continues to grow whereas the ISEW begins to decline. This seems to indicate that growth is good up to a point, beyond which social and environmental costs begin to appear. This is now known as the “threshold”. For many, these comparisons mean that while some people may have more money in their pockets, the quality of their lives seems to have declined. As many of the quality-oriented economists point out, the trouble with relying so much on GDP is that it can only add; it cannot subtract. They also point out that, when it was first developed, it was never meant to acquire its current predominance as an indicator. Failure to take into account real costs and quality of life issues such as increased air, water and land pollution, increasing noise, the rise of particular diseases, a more frantic pace of work with decreasing time spent with the family, and so on, can result in important policy failures.
The idea, still fashionable among neo-classical economists, that economics should not go beyond measuring quantity is itself a value. It avoids issues of context as well as of quality, and therefore can lead to mistaken decisions which are unresponsive to genuine human needs.