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synergy vol 1 issue 2

Synergy Issue 2, Oct 1999

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A better measure of how we live!
by Ross Gittins The Age, May 30th 1998

"The GDP has been elevated to a status it doesn't deserve.
In the name of pursuing GDP growth,
we do many things that are shortsigted
or even counterproductive to national wellbeing."


I've been a bean counter all my working life. I started as an accountant, then graduated to the economy. As that epithet implies, people concerned with the intricacies of counting things are not highly regarded. The glory goes to those who make the beans, or those who use the accounts to draw interesting conclusions.

But years in the counting business have convinced me of an under-rated truth: what gets measured gets taken seriously, whereas things that aren't measured tend to be ignored.

The problem is that we tend to measure what's easily measured, but many things difficult to measure are more important. The problem is compounded when we seize on a readily avaliable measurement without bothering to inquire of the boring bean counters whether it measures what we think it does.

We're going to do all that today. Today is national economy measurement day. Today the Australian statistician will issure the "national accounts", showing us by how much the gross domestic product grew in the March quarter.

You can imagine how much fuss will be made by economists, politicians and the media. If the GDP grew a lot, Peter Costello will be taking all the credit, if it grew a little, Gareth Evans will be crowing.

But Dr Clive Hamilton, director of the Australia Institute, a Canberra think-tank, says that today's figures should be issued will a bold disclaimer on the cover: "These national accounts, and the estimates of gross domestic product in particular, should in no circumstances be interpreted as a measure of national wellbeing. Without additional information, it is not possible to conclude that a higher GDP implies that Australians are any better off."

He is, of course, perfectly right. Whatever the GDP measures, it's not national wellbeing. The problem is that we don't have a decent measure of wellbeing, but the GDP looks as though it might fill the bill and is readily to hand.

The public, the media, business people and even politicians can be forgiven for knowing no better. Economists do know better but, in the absence of a better measure, have fallen into sloppy ways and thinking.

The result is that the GDP has been elevated to a status it doesn deserve. In the name of pursuing GDP growth, we do many things that are short-sigted or even counterproductive to national wellbeing. Such is the power of mismeasurement.

What the GDP measures is the value of the nation's production of goods and services, which is also the nation's income. The trap we fall into is assuming that income equals wellbeing.

The first limitation of the GDP is that it measures the production of only those goods and services that are exchanged in markets, which means it ignores the huge amount of goods and services we produce and consume in our homes without money changing hands.

But what goes unmeasured is easily overlooked and undervalued. And when goods and services go from being produced in the household to being produced in the market, the GDP exaggerates the true growth in goods and services, and the change in our wellbeing.

Another limitation of the GDP is that it treats "defensive expenditures" as a benefit. When a rise in crime prompts us to spend more on security, or an increase in smoking causes us to spend more on hospitals, the GDP grows.

This is not as crazy as it sounds. When someone has a road accident and we have to send out an ambluance, does that add to our wellbeing? No. But does it add to the income of the ambulance service? Yes. The GDP measures income, not wellbeing.

Another limitation of the GDP is that it ignores the cost of the damage to the enviornment done by our economic activity: the depletion of natural resources, land degradation, pollution of the atmosphere.

When farming and irrigation destroy our rivers, the loss isn't counted; when we spend money trying to clean up the mess, the cost counts as income.

When a tree is logged in a native forest, that counts as income, but the loss of the tree is ignored.

None of this says the GDP is a fairy tale. It's a reaonably accurate measure of what it purports to measure: the growth in national income.

But it's a hopeless measure of what it doesn't purport to measure: national wellbeing. Only a fool would use it as such, which makse us all pretty foolish.

Because the question of what's happening to our wellbeing is important, it's clear we need a decent measure of it.

The Bureau of Statistics has begun to explore the idea and is well advanced in producing a measure of environomental costs.

Dr Hamilton has calculated a version of something called GPI--the genuine progresss indicator.

He explains his results in the next issue of AQ, an Australilan Institue of Political Science journal.

The GPI starts with the main component of the GDP, personal consumption, then makes no fewer than 23 adjustments.

For instance,

  • it adjusts for whether the growth in income is going more to the rich than the poor.
  • It allows for the financial costs of unemployment and overwork.
  • It includes an estimate of the value of household and community work and the costs of environmental damage.
  • It deducts certain defensive expenditures and it takes into account the amount of foreign debt that is devoted to consumption rather than invested productively.

The most important factors preventing genuine progress have been unsustainable levels of foreign debt, the growing costs of unemployment and overwork, the combined impact of environmental problems, especially climate change and urban air pollution, and the escalating costs of energy resource depletion.

If we take the GDP as a measure of wellbeing, it tells us we've been making steady progress since 1950 and are one-and-a-half times better off today than we were then.

But many of us have trouble believing that. Dr Hamilton's measure of genuine progress offers an explanation of the gap between figures and feelings.

The growth in our incomes hasn't made us happier because it's been offset by concerns about crime, unemployment and overwork, foreign debt and damage to the environment.

I'm not sure Dr Hamilton's is the best measure of wellbeing, but I'm enough of a bean counter to be sure of this: until we get a decent measure of wellbeing, we'll continue doing things that increase our incomes without making us better off.




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