Want to know how to get beyond GDP? Start here.

Everyone agrees: we have to get beyond GDP. Yes, yes, but enough talk – let’s get this train moving.

Some say we should forget GDP and jump straight to measuring well-being. I agree well-being measures are needed, but the economic description of the world is never going to go away, so rather than push it to one side, we should try to improve it. So here’s a first go (in very simple terms, and not-drawn-to-scale graphics) of what a wider conception of economic development would include.

The starting point: good old (bad old) GDP.

GDP

Gross Domestic Product is essentially the value of goods and services exchanged within a nation’s monetized economy in one year. Whether it is going up or down matters, most especially in countries that need to increase the incomes and wealth of people living in poverty. But it is far from all that matters.

I think there are at least three broad shifts needed to reach a concept of economic development that won’t keep leading us into environmental and social crises.

1. From monetized to un-monetized goods and services too.

The first shift is to take account of the value of goods and services that contribute so much to well-being but that fall outside of the monetary economy.

Anyone who got kids washed, dressed, fed, and off to school this morning knows the value (and cost) of the unpaid care economy (aka the reproductive economy) both to the household and to industry, in terms of raising and caring for the future workforce.

Anyone who breathed in clean air and drank clean water today should be grateful to the planet’s atmospheric system and freshwater cycle for these ecosystem functions – sometimes described as ecosystem services.

And anyone who has had a heart operation knows that its value far exceeds the cost of doctors and medicines required to perform it: most public goods get valued at cost, so are undervalued in reality.

plus non-monetized goods and services

The flow of goods and services, both monetized and un-monetized, gives a much more realistic picture of the consumption that we truly value. If we ignore the ‘free’ stuff and just focus on increasing GDP, we’ll squeeze out much of what actually matters to us.

2. From goods and services to underlying assets and debts.

Any company that presented only its profit and loss account would get laughed off the stock exchange. And any country that focuses only on its GDP account should get pulled up for it too. GDP matters, but so do changes in the underlying stock of assets / wealth / capital (pick your favourite/ least offensive word) from which all goods and services flow.

National physical and financial assets (or debts) have long been counted but so too should be human, social and natural assets – after all, without this trio, there would no physical or financial capital to talk of. Finding meaningful measurements of these is no easy task, but there are some interesting (and controversial) initiatives under way, especially around ‘natural capital’ and the care economy.

plus underlying assets

Monitoring changes in this underlying wealth is crucial for providing a better sense of whether GDP is growing by running down capital (turning forests into timber, turning community centres into business centres) or by building it up and reaping the reward (richer soils producing higher yield crops, closer communities producing safer neighbourhoods).

3. From averages and aggregates to distribution.

All these shifts above are well and good, but they still focus at the aggregate level (like national GDP) or average level (like GDP per capita). As the Occupy Movement has made loud and clear, distribution matters. We also need data and indicators that reveal the distribution of goods and services, and of assets, across households by income, by sex, by ethnicity.

plus distribution

So these are three conceptual shifts needed to get from a narrow focus on economic growth to a broader concept of economic development. Imagine if this ‘dashboard’ had indicators like a car dashboard, country by country. We’d have a far richer picture of each country’s economic progress – and whether GDP was going up or down at any one moment would no longer be the only question worth asking. Take the full dashboard away again and that little black arrow of GDP suddenly seems a rather impoverished view of what an economy should be aimed at.

Of course there are still big questions. How should un-monetized goods and services be accounted for – in ‘natural metrics’ (like hours of care worked) or ‘monetary’ metrics (like the going market rate for care)? How should natural capital be accounted for, and how much should there be? (Could planetary boundaries provide a powerful starting point for defining that?) What are the trade-offs and synergies between investing in natural, human and social capital, and increasing GDP? How equally should incomes and assets be distributed across households?…

Big questions – but at least we now have the beginnings of an economic framework in which we can discuss them. And it also happens to fit pretty well with the main recommendations of the Stiglitz Sen Fitoussi Commission’s work on measuring economic performance.

So what’s the verdict? Is this a helpful (albeit very simple) way to convey the essential difference between economic growth and economic development? What is missing or misconstrued? And do the political risks of framing nature and social cohesion as ‘capital’ outweigh the importance of ending their economic exploitation when left as invisible freebies?

Suggestions please, in the name of pushing us further along the track beyond GDP…

5 thoughts on “Want to know how to get beyond GDP? Start here.

  1. Victor Anderson
    2 July 2012 at 14:41

    Although I think these suggestions amount to an enormous improvement on GDP, they still leave the figures measured in money terms, a kind of ‘super-GDP’. Surely the Doughnut approach would be to measure how near or far away we are from planetary and social boundaries, in terms of the units used to measure those boundaries (e.g. the change in chemistry of the atmosphere and oceans, or the change in infant mortality rate). And we could have a weighted index for each set of boundaries, indicating where we are overall for the human and ecological aspects of the way the world is changing.

    1. Kate Raworth
      2 July 2012 at 15:12

      Hi Victor, thanks for your comment. I agree a ‘deep doughnut’ approach would look at development primarily in natural metrics (eg tonnes of CO2) or social metrics (eg hours of caring work provided) – but such metrics could be used as part of this framework too. I didn’t mean to imply that all of the shifts I proposed should necessarily be monetized, but rather that they should be quantified and counted somehow – it’s an open question whether that is best done in monetary or natural/social metrics. I actually lean more towards exploring the use of natural and social metrics (and Oxfam will be trying that out through national doughnut analyses) but still I think that the economic description of the world is not going to go away, so we need to figure out how to broaden concepts of development, compatible with social and planetary boundaries, but starting from an economist’s starting point of GDP.

  2. Robin Stafford
    2 July 2012 at 17:26

    Good work Kate – I like the way it is trying to present the arguments in ways that might be understandable by a much broader group of people. Too often the papers and material in this area are designed only for consumption by the already converted! Though of course we need the detail to back them up. I wonder how one could get the blog more widely known…?

  3. 25 August 2012 at 23:43

    Thanks, Kate. This is interesting stuff. I think focussing on the social cohesion aspect and, we could call it, the institutional aspect of the economy is particularly interesting for the UK at present.

    Much of the value – one might say the ‘wealth’ – of our society lies in our way of life: our political structures, our institutions, and things even harder to quantify, like our values including our tolerant attitude to others. This might seem like woofly talk but it cashes out in hard money. It is the reason many millionaires from the fastest developing nations seek to live here (and in some other broadly similar Western states) as soon as they have the possibility to do so.

    Indeed, in my view, it is the direct flow of foreign money into this country by way of our education systems (foreign students coming to study here) and the purchasing of property (it is hard to get reliable figures on this, but good anecdotal evidence has it that interest from China, India and the Middle East in British property is higher than ever) that will provide reliable revenue streams for some time – when many other streams are failing. And, I maintain, these sorts of streams are more or less directly related to the way our society works and our institutions are valued.

    Even in banking, as Michael Portillo and others have pointed out, the real blow dealt by the recent cases of corruption is not the direct fraud, but the fact that the UK comes to be viewed as a less trustworthy, reliable place to do business. How does one put a price on this? Surely not just by how much revenue may be lost in terms of fines and business that decides to go elsewhere? As you intimate (at last I think you do!), measuring the value of an honest, tolerant, humane society is extremely difficult. But look at it the other way: do we really want to say there is *no* point in trying to measure such value? That seems to me to be defeatist to the point of giving up all hope of a realistic study of political-economy.

    This discussion also connects with my own area of education. Foreign students don’t just come here for the certificate which says they have a UK qualification. There is a good deal of that; it is probably still the approach of the majority. But increasingly students (and their parents and sponsors) are interested in our way of doing things, wider issues of values, ways of living and the aspects of the way we structure our lives (both internally and externally) that lead to social cohesion and well-functioning institutions.

  4. Oliver
    26 October 2012 at 21:46

    Hi Kate. I just wanted to say what a breath of fresh air your blog has given me! Since beginning studying economics at A level, I was always curious as to why environmental economics and behavioural economics (among other important topics) are always put to the side, especially when studying such influential and important theories like the circular flow of income.

    Only now that I am at University am I beginning to see learn more about environmental economics. At school, the only thing they would say about pollution would be that it causes negative externalities which shifts supply left and then straight away we go into economic jargon that has nothing to do with the unsustainability of pollution.

    I will most certainly get my vandalising pen out, and I will make sure to tell all of my other “econnerd” friends to do the same as well!

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