Economic Obesity: Current measurements of productivity ignore sustainable purpose and well-being

Feb 26, 2010 by Saleh Azizi | Story Popularity: 3

By Saleh Azizi, HPU Kalamalama v33, no 12, Dec 07, 2009

When Mahatma Gandhi mobilized the Indian independence movement against the British Empire, he reminded his followers that "There is no path to peace; peace is the path." These simple words embody an overarching goal and suggest a plan of action to reach that goal. The path to reach peace is not separate from but is intertwined with the final end peace. Gandhi exemplifies a concept that modern society has forgotten, the need to align paths and goals and moral values. Today economists are concerned with paths to sustainable development. However, our current indicator of progress, increases in the Gross Domestic Product (GDP), is outdated and forces us to continue to grow an economy that is already obese. We need, instead, to find a path that will reduce uneconomic growth by focusing on indicators that will accurately reflect the real cost of converting natural resources to financial capital and that will lead to sustainable balance between growth and ecology. This will restate our current goals, examine the problems with GDP as an indicator of progress toward those goals, and explore the link between our goals and other paths more normative progress indicators that can help lead towards sustainable development.

The founding fathers of modern economics: rationale and intentions
By the end of the 19th century, England's economic focus had shifted significantly from manufacturing to trade and finance. In this new economy, Adam Smith, the founder of modern economics and author of An Inquiry into the Nature and Causes of the Wealth of Nations (1776), argued that the economic significance of a thing lies not in its nature but in its market price. In Smith's day, the market occupied a very small part of society; few foresaw that the marketplace would outgrow society. Marjorie Kelly, author of Divine Right of Capital: Dethroning the Corporate Aristocracy (2001), argues that although Smith claimed self-interest would guide the market, he also emphasized the need for responsible corporations to keep profits small in order to prevent social upheaval.

Simon Kuznets, a 1930's economist who helped the U.S. Department of Commerce to standardize the indicator of Gross National Product (GNP), later GDP, cautioned that it should not be used as a general indication of welfare: welfare cannot be equaled to increasing national income and cannot be adequately measured unless distribution of wealth is known. Smith and
Kuznet's advice on the size of economic growth and role of social corporate responsibility were completely ignored by Milton Freedman view of economics in The Methodology of Positive Economics (1953). Freedman, awarded the Nobel Prize for Economics 1976, argued that the only purpose of all economic activity is to grow maximum profits; he rejected corporate social responsibility for providing employment, eliminating discrimination, avoiding pollution; and he steered contemporary economist to their current blind faith in GDP maximization.

The GDP is simply a gross measure of market activity it is the market value of all final goods and services made within the borders of a country each year. It makes no distinction whatsoever between the desirable and the undesirable, but is simply a measure of total output. It assumes that everything produced is by definition good and does not distinguish between costs and benefits, between productive and destructive activities, or between sustainable and unsustainable practices.

Economist Clifford Cobb, who co-authored "If GDP is Up, Why is America Down?" in Atlantic Monthly (Oct, 1995), argues that GDP is a flawed measure of well-being: it works like a calculating machine that adds but cannot subtract and treats everything that happens in the market as a gain for humanity, while ignoring everything that happens outside the exchange of money (nonmarket), regardless of its importance to human well-being.

Despite warnings from all these economists, Friedman continues to be the guide for the nation's corporations. Despite evidence that growth in GDP is currently making us worse off rather than better off, modern business continues to grow an obese economy and modern economic and political leaders continue preaching aggregate growth as the solution to our problems.

Uneconomic growth and the danger of a self-fulfilling GDP
Earlier we stated that the GDP is the measure of all economic activity within the borders of a country but that it doesn't differentiate between desirable and undesirable economic activity. This section will look at some of the current undesirable economic activities boosting GDP and in contrast to desirable non- market activities that cannot be measured by GDP.

A few immediate problems can be found when looking at GDP as a progress indicator. First, as Kuznets pointed out, the increase in money within a country's borders does not lead to equitable distribution. In fact, recent research findings show that although fewer people are suffering from extreme poverty (less than $1/day), the problem of unequal distribution of wealth has increased worldwide, and the gap between the world's rich and poor has widened. Second, the cost of environmental pollution is ignored by the market causing negative externatilities unaccounted costs of manufacturing and production. The GDP indicator will positively add the value of a sold automobile, but it will not account for the air pollution caused by the manufacture of the steel that was used to build; it will account for the production of fuel used to operate it, but not for the reduction of natural resources nor the pollution generated by its operation. This blindness to negative externalities is true of all other manufactured products measured by the GDP, which encourages the allocation of natural resources now by placing a positive net present value and reinvesting monetary profits rather than allocating a cost for the value of those resources lost to future people.

These unintended market costs, and negative externalities, are expensive, said Lester Brown, founder of the Earth Policy Institute and author of Plan B 3.0: Mobilizing to Save Civilization (2008). He writes that the current cost to society of smoking cigarettes, including both the cost of treating smoking-related illnesses and the lost worker productivity from these illnesses, is $10.47 per pack sold. Brown also suggest the domination of oil, gas, and coal as fuel sources has been made possible because these industries provide cheap fuel by omitting the indirect costs of fossil fuel burning. Brown calculates this cost at $240 per carbon ton.

Beyond the immediate problems of GDP is the normative discussion on what economic activities are desirable given our society's values. Increased business engagement in activities of trafficking, prostitution, crime, weapons, slaughtering, addictive products, and toxic substances are currently creating an increasing GDP while unpaid activities such as volunteering, leisure time, raising children, housework, and bartering are not valued. Few would disagree that spending leisure time with family increases our well- being while increased rape reduces our well-being. Yet we are allocating resources reversely. Distinctions between desirable and undesirable activities have potential to systematically interlink human daily activity with an economic indicator of progress reflecting "things as they ought to be." Given the current void of dialogue on normative values, ecological economists fear that advocates of the growth machine (increased GDP) will lead humanity on a path to destruction: unlimited production of goods in a finite world in which natural resources are disappearing, ecologies are being destroyed, and biospheres are changing in ways that are self-destructive.

Newtonian vs. Quantum Worldview a push for normative measures of economic progress
The Newtonian worldview has influenced natural and social sciences to treat modern economics as a set of one-dimensional, discrete, and separate parts while, more recently, the quantum view offers a new holistic and interrelated way of looking at the universe through noncontinuity, noncausality, and nonlocality. Where modern economics inquire into economic activity "as it is," normative economics asks what it "ought to be." The influence offered by the quantum view that "the way you view a phenomenon will affect its outcome" gives us more reason to adopt a desired future's view instead of merely watching a race to destruction.

New findings in this interrelated view includes some of the following assumptions: ends and means are completely intertwined, not separate decision-making processes; only a few means can be considered, since there are constraints of time and resources; choice of means should be determined by agreement among interested parties rather than by summary indicators such as GDP; and agreement is only one of the empirical indicators of any normative frame, as values are often not clear-cut or even shared.

Alternatives to Gross Domestic Product (GDP): A brief survey
Ed Diener and Martin Seligman, who published "Beyond Money: Toward an Economy of Well-Being" (2004) in American Psychological Society, suggest that early stages of economic development needed economic indicators: as societies grow wealthy, differences in well-being indicators need to focus less on income and more on social relationships and work enjoyment. If more consumption doesn't always add positively to well-being, a more accurate measure of these should include findings in adequacy of health, reflect finite natural resources, human education, rate of inequality, value of leisure, and prosperity for the future populations as well as total output. A new group of indicators also ought to be able to lead an already obese economy to reduce useless stuff collected during periods of manic growth. Several such indicators have juggled this new balancing act, attempting to identify current shortcomings and adapt measures that will create the world we want to see.

The Index of Sustainable Economic Welfare, now known as the Genuine Progress Indicator (GPI), was founded 1989 by economists Herman Daly and John Cobb. This measure adds the national private consumption expenditures, adjusts for distribution inequalities, nonmarket contributions to welfare (unpaid housework, for example), and subtracts out defense expenditures, police protection, and decreases in natural resource. Subtracting defense from whatever indicator we use is a crucial path to peace, because wars add to economic growth (GDP).

Another index, The Ecological Footprint, has changed many minds about human impact on larger biospheric integrity. The ecological footprint measures human demand on the earth's ecosystems and balances that demand with the planet's ecological carrying capacity and regenerative ability.

To measure distribution of wealth, the Gini Coefficient is an excellent index of wealth inequality within a country that ought to be used in combination with the GDP in order to determine the inequality of every dollar added to GDP.

In 2003, the Kingdom of Bhutan launched a measure of well-being that forced countries worldwide to rethink growth, development, and positive psychology Gross National Happiness (GNH). The four major goals of the GNH are 1) economic self-reliance, 2) environmental preservation, 3) cultural promotion, and 4) good governance; these goals indicate that the experience of happiness depends on both the individual management of the human mind and the external conditions that influence our lives.

The Human Development Index (HDI) was adopted by the United Nations in 1990 with the single goal of putting people back at the center of the development process in terms of economic and policy debate. The HDI shows that countries with similar levels of GDP have different levels of human development and welfare. Therefore a country's final HDI score depends not only on total output (GDP), but also life expectancy, education enrollment, illiteracy rate, and infant mortality, which determine if a country is developed, developing, or underdeveloped.

Looking into the future who is ready to move beyond GDP?
Given our new understanding of the need to align a philosophical cause with its process and to integrate the cause in every micro-step along the path, we can also see the need for a world leader who, like Gandhi, can not only talk the talk, but also walk the walk. French President Nicholas Sarkozy told the Associated Press (Sept. 14) that the financial crisis obliges us to seek better ways of calculating a country's economic health and to imagine another future. Twenty months ago before a financial crisis driven by the goal of short-term growth Sarkozy set up a commission of 20 economists who were asked to report on ways to replace GDP with some new measure that could be called Gross Domestic Happiness or Gross Domestic Contentment. President Barrack Obama has had similar exciting ideas about a different future and about the need for the United States to take a lead developing green initiatives, but Obama keeps holding on to the U.S.-invented GDP as a benchmark in his weekly address. He recently told U.S. citizenry (Oct. 30) that current unemployment problems should decrease due to a focus on GDP growth.

In Hawai'i, the governor's commitment to reducing total energy demand by 2020 is impressive in that it uses subtraction not addition as an economic indicator.

While the GDP is a good indicator for trade and finance activities, Hawai'i needs to rely on additional well-being indicators because of our island-specific economics, which include trade dependence, local food production, abundant leisure time, brain draining, high housing costs, high environmental costs of tourism, scare land availability, abundant sea resources, and waste management. We could call it The Pono (Hawaiian for wellbeing) Index.


Archived Comments

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  1. Brian Bell says:

    Excellent article Saleh!

  2. Saleh Azizi says:

    thank you very much, I am glad that it makes some sense

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