THERE IS GROWING RECOGNITION that we need to evolve a healthier, more just economic system. One step towards this is creating better tools to evaluate how the economy is actually performing.
Currently, economists and politicans use the gross domestic product (GDP) to assess the health of the economy. If the GDP is going up, the economy is seen to be doing well. If it is going down, the economy is seen to be doing poorly. But the problem is that the only thing GDP measures is how many dollars are flowing through the system; not whether those dollars are making us healthier, happier or more secure.
According to the GDP, the money spent to keep a child in the foster care system or jail registers is just as positive as the same amount of money spent to give a child an education. The funeral costs for the victims of mass shootings boost the GDP. So does the flurry of gun purchases as people react to growing fear and insecurity. The GDP registers both of those things as an economic gain. Nowhere does it account for the human capital – the potential and talent and social connections – that was lost.
The GDP also fails to account for damage caused to the environment. One of the most glaring examples appeared in an article in The Wall Street Journal on June 15, 2010. It suggested that the BP Deepwater Horizon oil spill might actually benefit the economy. The article noted the loss of thousands of jobs in the fishing and tourism sectors but predicted that this would be offset by the high costs of the clean up and that the likely net impact on the GDP, and by inference the United States economy, would be positive.
The GDP fails to acccount for the erosion of human well being, natural resource supplies and environmental health. It also perpetuates a limitless growth economic model, suggesting that so long as the economy is growing in size it is growing in the right direction. Fortunately, there is a growing global movement working on developing more effective tools for measuring the comprehensive outcomes of our economy. One of the best known is the Genuine Progress Indicator (GPI). The goal of the GPI is to measure the true societal well being and health generated or harmed by economic activity.
The GPI starts with the same personal consumption data that the GDP is based on, but then makes some crucial distinctions. It adjusts for factors such as income distribution, adds factors such as the value of household and volunteer work, and subtracts factors such as the costs of crime and pollution.
Because GDP and GPI are both measured in monetary terms they can be commpared on the same scale. The organisations Redefining Progress and the Center For Sustainable Economy have regularly calculated the US GPI.
These calculations show that even when GDP has been growing, the health of our national human capital and natural capital has been eroding. Plans are under way for an updated US GPI calculation in 2016.
Transitioning to a new economy will require a multitude of steps and pieces from cooperative ownership models, to reformed corporate structures, to new clean energy and environmental restoration products.
One important piece is a more effective and accurate metric. As is oft stated in business circles, we manage what we measure. The GPI is a useful tool for measuring not only the overall size of the economy, but also how that economy is affecting our well being and the health of our environment.
Cylvia Haynes is a “new economy” expert who is the chief executive officer of American company 3EStrategies.
