November 24, 2005

Progress by any other name

Final piece on the subject of the GDP. You may want to read my three previous ones first: Inefficiency Boost, A Good Thing and Value the walk.


Is there another measure of economic health that might measure the economy better than the GDP does?

A research institute in California called Redefining Progress has proposed one such measure. They call it the "Genuine Progress Indicator", or GPI. The GPI starts with the same data the GDP is based on, but makes some changes. As explained on this page, the GPI "adds in the economic contributions of household and volunteer work, but subtracts factors such as crime, pollution, and family breakdown."

(No mention of fluctuating voltage, but that will likely be a subtracted factor too).

The result is not perfect, but it ends up being a more realistic accounting than the GDP of the costs and benefits of growth in a country.

Here, briefly, are just a few of the factors the GPI accounts for that the GDP doesn't.

There's crime. The GPI counts the money we spend deterring and punishing crime and repairing the damage it causes. So does the GDP, of course; but these sums, like others, inflate the GDP. The GPI acknowledges that this is money spent to reverse damage to society caused by crime; thus it accounts for these expenditures as losses, not gains.

There's the household economy. Taking care of our children, cleaning the house, cooking: tasks like these are vital to our well-being and that is why we do them every day. Yet since no money is involved when we do them, the GDP does not account for them. The GPI does. By estimating how much we would have to pay someone else to do it, the GPI gives household work a value.

There's pollution and the depletion of resources. As a country uses up its oil or minerals, that should be treated as a cost, not a gain. After all, this is what a family would do if it was using up its capital. The GPI considers diminishing stocks of resources like this. In addition, it puts a price on the harm pollution does to our health and agriculture, and counts that as a cost as well.

(See this page for more).

The GPI looks at many factors, like these three, that the GDP ignores or measures perversely. Put together, the measure is a much more true-to-life reflection of how each of us views the state of our country and our lives than the GDP does.

Or at least, that's the theory. How does the GPI look when applied to real economies?

About the American economy, the GPI is revealing indeed. While GDP per capita in that country has nearly tripled since 1950, the GPI trend is startlingly different. After increasing during the 1950s and 1960s -- though much slower than the GDP -- it declined for years after 1970.

That may be the explanation for why so many Americans, through the rosy pronouncements about progress during the Reagan, Bush and Clinton years, felt fundamentally pessimistic about their lives. To that extent, the GPI is a closer match than the GDP to the daily conditions people live in.

Yet the GPI's own authors point out that the GPI is not necessarily the answer. They reiterate that, as always, measurement is a means. Not an end.

And what's almost more important than measurement is to get those who speak easily of boosting the GDP to tell us exactly what they mean by that. Are they blind to the costs of progress? It's worth finding out. For if they are, they are only as blind as the GDP itself has been for years.

Which, itself, should tell us something.


Abi said...

Thanks Dilip, for this post about an unconventional index to measure progress. It seems to cover some of the key issues.

My concern is this: Consider plastics, asbestos, or tobacco. When they were introduced, they were seen as a 'good thing'. It was much later that research caught up with their bad effects, and they are being regulated, banned or taxed heavily. In the meantime, a large number of lives have come to depend on their production, and their interests too come into play, making things difficult in terms of rolling back their production and use.

GPI cannot take into account some of these unknown things, can it? What does one do, to prevent such stuff?

Dilip D'Souza said...

Abi, what's true of plastics and so forth will, I assume, be true of any number of other technologies. I don't know that you can "prevent" such things from happening.

I also don't know if, or how, GPI accounts for the problems with these, but I think the basic philosophy is correct: some things are accounted for as losses, because of the damage they cause to our lives, or society, or the economy. The interesting exercise is to estimate the value of those losses.

Abi said...

I think the basic philosophy is correct: some things are accounted for as losses, because of the damage they cause to our lives, or society, or the economy.

I agree, absolutely.