GDP and Well-Being: A More Comprehensive Measure of Economic Progress

[finaquant]

Hello all

Here is an article about GDP and well-being:
Well-being and GDP: why we need them both

The general idea is something like this: GDP is a fine measure for material wealth, but well-being needs more than just material wealth like social and environmental factors. So we need them both.

But GDP is a poor measure for even material wealth. The primary reason for this is, it ignores the production, technology and services of the environment which is actually the primary producer of our planet.

Consequently, if the production capacity of the environment is deteriorated due to some industrial activities, the adverse effects and destruction are not considered in GDP. Sometimes even worse; environmental deterioration may increase GDP while decreasing average well-being. Such negative developments are well documented in many countries that are fooled by GDP (GDP fetishism) as the primary indicator for economic progress.

As a model example, consider a country with abundant and sustainable clean water sources. Note that clean water is a produce of an intact fauna especially along the river beds, as the plants are best water purifiers (technology of nature). Clean water is everywhere, and nobody pays anything for water. Because a man-made water industry does not exist (filtering, bottling, marketing distribution etc.), the clean-water services of the nature won't be reflected in GDP.

If the plant fauna is destroyed by some industrial activities, clean water will become a scarce enough product to be sold for money, and a water industry will emerge for filtering, bottling and distribution. All the transactions of this industry will be recorded as GDP growth whereas the average citizen is much worse off than before. The ultimate outcome will be a wealth transfer from the average citizen to water companies. A few central water companies will be the winners, and the majority of the society will be the losers.

Replacing car traffic in a city (like in Munich) partially with bicycles is another good example for increased well-being accompanied by GDP reduction.

I have been observing the developments in the theory of economy in the last 20 years. Even the hard-core industrialist China (once totally ignoring the environment) is trying to adopt green accounting as a more balanced measure than GDP.

I wonder, why economists and universities are so slow in updating the outdated GDP as a measure for material wealth. There are still many governments with a one-sided focus on GDP.

Do the water companies have too much influence on the whole education system and the literature for economy?

Opinions?

Tunc

 

[Ryan_m_b]

An interesting way of looking at natural resources is natural capital. For this resources are treated like any other capital and in some circumstances even have dollar figures attached to them. There are a myriad if extant and speculative measures other than GDP like HDI and the proposed gross national happiness index. IMO it's not that the world lacks efficient ways to measure societies but that GDP is incredibly overused.

 

[aquitaine]

Having actually lived in the third world for several years I think I should chime in on this:

I would say GDP per capita does do a reasonable job of measuring the material well being of the average person. A good comparison would be Shanghai and some inland villages. For a third world city Shanghai is fairly well developed, so much so that in some parts of it like People's Square and other areas in the Pudong district it's easy to forget that you're in a third world country. The average inland village, that is untouched by the level of economic development that Shanghai has experienced through industrialization, is quite literally dirt poor, despite depending on "the primary producer of the planet". Not surprisingly Shanghai's GDP per capita is substantially higher than that of the countryside.

Industrial development generates wealth, period. There have been countries that tried to mostly bypass it, like Costa Rica, but unless they have a big natural resources extraction sector it hasn't really ended well. It's easy to talk about "well being" not being counted when we have the material abundance in the first world as compared to the truly stunning poverty in non-industrialized nations.

And by the way, when I was overseas I did ride mass transit and my bicycle because I didn't have a choice. Once I'm able to get a car and a license, I'll never do that again. I don't blame the Chinese for wanting cars, not one bit.