Amid the climate change crisis, the GDP metric’s days are numbered

CAMBRIDGE, England – How can we measure economic achievement? Critiques of traditional indicators, especially gross domestic product, have been rife for years, if certainly decades.

Environmentalists have long pointed to the fact that GDP does not account for depletion and negative externalities like global warming. Another glaring oversight is the failure to pay for unpaid, but undoubtedly valuable, work in the home. However, there may be better alternatives.

In 2009, a commission led by Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi spurred efforts to find alternative ways to gauge economic progress by recommending a “dashboard” of indicators. In the years since, statisticians and economists have been working together with natural scientists to create robust wealth-based prosperity metrics. The basic idea behind the creation of a comprehensive national financial balance sheet is to demonstrate that economic progress can be deceitful if it is at the expense future living standards.

In March, the United Nations approved a new statistical standard that relates to the services nature provides to the economy. That followed the U.K. Treasury’s publication of a review by the University of Cambridge’s Partha Dasgupta setting out how to integrate nature in general, and biodiversity in particular, into economic analysis. Any meaningful definition of economic success in the future must include sustainability, as the effects of climate change are becoming all too obvious.

Next steps in this statistical endeavor are to include measures of social capital, which reflect the ability of countries or communities to act collectively, as well as to expand measurement of the household sector. The COVID-19 pandemic has highlighted how crucial this unpaid work is to a country’s economic health. The U.S. Bureau of Labor Statistics plans to create a more comprehensive concept of living standards that incorporates the value of such activities.

These aggregate measures can be helpful in guiding policy decisions that are consistent with economic concepts. This approach helps to have a conversation with finance ministry officials as well as business executives. Their support for a longer-term view of prosperity is essential in order to effect change.

Many advocate referring to economic success and loss in terms of well being, which is a wider and more fuzzy concept. The idea that policy decisions should focus on what ultimately matters in people’s lives is intuitively appealing. A number of countries, from New Zealand to Scotland have adopted explicit well-being policies.

However, this approach raises more difficult measurement questions. Well-being depends on many aspects of individuals’ life circumstances. There is a lot of research in psychology and economics on how to measure well-being, and the factors that affect it. Often, the measurement involves surveying people’s satisfaction with their lives or their level of anxiety. For example, the United Kingdom’s Office for National Statistics has been tracking anxiety and depression throughout the pandemic.

These indicators are not perfect, and policymakers will need more aggregate statistics. For example, whereas the links between well-being and factors identified by econometric analysis — such as being employed or in good mental health — are intuitive, the causal connections are not well understood. As well-being advocates advocate, therapy may be helpful for someone who is depressed. However, decent housing might prove more beneficial. The theoretical underpinning of public policy that is based on well being is still lacking.

Certain policymaking contexts, however, will require a greater level of detail. Qualitative research — rather than large-scale surveys with predefined questions — points to a wider range of considerations affecting well-being. One recent U.K. study that was co-produced by researchers with people living in poverty found that basic material needs, such as health, were important for well-being. However, autonomy and a sense or purpose were equally important. These findings cannot be captured by top-down aggregate indicators created by statisticians and social scientists.

Although ground-level research is not always feasible due to its time-consuming nature, it is important for everyone to remember that the concept and measure of well-being are much more valuable than most other economic indicators. Importantly, the comprehensive wealth approach and the well-being approach are complementary. The assets that are measured by the first provide the means to attain the latter. Indeed, New Zealand’s policy framework makes this link explicit.

These alternative ways of measuring and assessing economic success in a country and community are very exciting. They show how much work has been done to define concepts, create metrics, and build expert consensus about the direction that policymaking should go. In the absence of consensus on the alternative, it was impossible to ditch GDP as the primary indicator of prosperity. To develop a framework that is as sophisticated and well-integrated as GDP and the related economic indicators, it will take years of hard work at the statistical coalface. However, the direction of change is clear. The impetus to bring about it is strong.

Diane Coyle, professor of public policy at the University of Cambridge, is the author, most recently, of “Cogs and Monsters: What Economics Is, and What It Should Be” (Princeton University Press, 2021). © Project Syndicate, 2021