Economy

Measuring Welfare – Beyond GDP

Gross domestic product (GDP), a widely accepted measure of progress, is a market value of goods and services produced during the year. Likewise, the account provides an inflation-adjusted measure of output and income. The most recognized account and a well-thought-out product of war start gaining argumentative attention on measuring welfare, for which it is not designed to do. Simon Kuznets, the developer of GDP, cautioned to the US Congress in 1934 by stating that “the welfare of a nation can scarcely be inferred from a measure of national income” has mostly been ignored by the governments across the world, and they extensively overuse the tool as a proxy to measure welfare. Kuznets was a Russian born economist who was candid enough to confess the proneness of GDP to misuse. He cautions in his speech in the congress while presenting the tool as-

“The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements, especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification.” (Kuznets, 1955)

Further, John Maynard Keynes comes out with the modern definition of Gross Domestic product, which in contrast to Kuznets, has taken government spending instead of government income as a part of gross domestic product, arguing that otherwise, the government procurement of defense during the war will negatively affect the Gross domestic product calculation. The measure given by Keynes soon spread and widely accepted for the calculation of GDP. The measure concerned to gauge supply during wartime, at the time of peace turns its attention to manage demand and further try to flip its way to measure welfare.

However, vindictively inaccurate and primarily based on guesswork [for instance, a piece of information about the wrong calculation of GDP in India (2019) and Nigeria (2014)] still, it carries favoritism among policymakers.

Moreover, If the measure is doubtful in gauging the output of the economy, its usefulness as a measure of welfare is even more doubtful. As Diana Coyle, in her book “GDP: A Brief but Affectionate History,”(Coyle, 2015) assures it as a tool for measuring productivity but not welfare. However, an effort to measure welfare was somewhat discussed in a paper by Nordhaus and James Tobin in 1972 which was written in response to criticism by environmental defenders who pronounces that GDP adds output which acts as a threat to the planet. Besides, the measure created during the wartime seems to be more undecided during peace times. The advancement and improvement in the quality of life under various cyclical stages (For instance, the advancement in health and nutrition, improved method of sanitation, improvement in education and research, and technology) is being captured truly through a standard of living (because of inequality) is still doubtful. However, a committee constituted by Nicolas Sarkozy chaired by Joseph Stiglitz a famous economist called for the end of GDP idolatry and looked-for for the measures that are capable of gaging welfare(Stiglitz et al., 2009)

In service-oriented times of customized products, one can doubt the ability of the instrument to measure the vibrant nature of the products and service accurately. As William Nordhaus, an economist at Yale University in 1990s has rightly mentioned that each innovation is far better than the previous one. The businesses compete more on service differentiation. For instance, hotels generate experiences and charge high, but economics termed this as inflation, which lowers the GDP, but this practice fails to capture the increase in quality of life.

With the advent of e-services, the use of the measure’s ability to appropriately capture e-activities thoroughly is dubious. As the definition clearly states the word “market value.” However, services like Facebook, Google, WhatsApp, Uber, Amazon are free; hence if we go by, the definition is not a part of Gross Domestic Product. We are entering into space where the social media is providing troves of information and entertainment monetarily at no price which creates a contrast to 20th century GDP Thence, the expediency like online music stores, online banking, and online shopping and other e-space stores are boon for the customers, but simultaneously means less constructions which undermines Gross domestic product. However, it is believed that if social sites are included in the calculation of economics, it increases the economic growth of the countries manifold

At the same time, the measure is incompetent to capture the environmental impact that happens during the production. For instance, Gross Domestic Product captures the volume of cars produced during the year but unable to measure the impact on the environment, health, and quality of life during the production process. Robert Kennedy in his famous election speech in 1968 describing his idealistic approach to GDP outlines:

“Our Gross National Product, now, is over $800 billion a year, but that Gross National Product – if we judge the United States of America by that – that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman‘s rifle and Speck‘s knife, and the television programs which glorify violence in order to sell toys to our children.

Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans. If this is true here at home, so it is true elsewhere in world” (Kennedy, 1968)

The measure overlooks the numerous externalities to the environment. For instance, countries like India and China, although high on economic growth but are falling low on international environmental goals (ranks 177 and 120). The fire in Australian Bushfires and the depletion of the ozone layer creates robust concern among youngsters. Greta Thunberg in United Nations Climate Action summit says,

You have stolen my dreams and my childhood with your empty words. And yet I’m one of the lucky ones. People are suffering. People are dying. Entire ecosystems are collapsing. We are in the beginning of a mass extinction, and all you can talk about is money and fairy tales of eternal economic growth. How dare you! Greta Thunberg (UN Climate Action Summit,2019).

Moreover, the output measure fails to apprehend the distribution of income among individuals. The studies report a significant positive relationship between inequality and economic growth. The growing income inequality in the countries primes social discontentment and polarization.

(Reproduced as cited in The Populist uprising and its Victims,2019, Kapoor Amit)

Kennedy was right.  Much that is valuable is neither tangible nor tradable. By convention, whatever is bought and sold is only measurable, it makes sense because of the convention of tax exchequer, to manage aggregate demand, and because of its quantifiable nature. GDP automatically ignores the production for own sake like females managing homes, chef cooking in-home, the mother taking care of her child, and elderly being taken care of by family are excluded from Gross Domestic product, nevertheless being valuable. One of the bestsellers, Samuelson, in a sarcastic way reports that GDP falls when a man marries his maid. Finance is another activity that is measured implicitly (A case of Britain’s financial sector, 2009). Further, its calculation method, along with adjustments, is debatable.

The above paraphrase discusses that the present tool assumes the maximization of consumption or income as the principal goal of human activity and source of utility or satisfaction. However, welfare can be evaluated by taking a total of individual utilities, and there is an agreement in the society on such welfare criterion. These theoretical underpinnings need to be challenged to discover supplementary measures which, along with GDP, gauge the sustainable wellbeing along with material welfare. The tool should have a capacity to measure the impact of investing and social discontentment along with merit and demerit actives that happen during the investment process.

Although Numerous countries like Bhutan, Canada, Germany, Finland, and world organisations start developing a strategic framework to achieve the abovesaid goal of creating a more sustainable future for all, for instance, UNDP’s Human development index and world bank’s world happiness index and UNs Sustainable development goals are developed with the end objective to have a more equitable and just society that is economically thriving and offer citizens a meaningful quality of life.

-Contributed by Dr. Mandeep Mahendru & Dr. Gagan Deep Sharma (Prize Winners of Article Writing Competition 2020 in the 25-44 Years Age Group). The article supports the Gandhian economic thought which centers around the idea of non-violent and inclusive economic growth.

Picture: Alaska’s Muir Glacier in August 1941 and August 2004. Significant changes occurred in the 63 years between these two photos (Photo Credits: USGS)

References:

Coyle, D. (2015). GDP: A brief but affectionate history. In GDP: A Brief but Affectionate History (Revised). Princeton University Press, United Kingdom. https://doi.org/10.5860/choice.52-0370

Kennedy, R. F. (1968). Robert F. Kennedy Remarks at the University of Kansas, March 18, 1968. Robert F. Kennedy Speeches – John F. Kennedy Presidential Library & Museum.

Kuznets, S. (1955). Economic Growth and Income Inequality. American Economic Association, XLV(1), 31.

Stiglitz, J., Fitoussi, J.-P., & Sen, A. (2009). Rapport de la Commission sur la mesure des performances économiques et du progrès social (extraits). Regards Sur l’actualité.

https://thediplomat.com/2019/07/what-is-wrong-with-indias-gdp-numbers/

https://www.economist.com/the-economist-explains/2014/04/07/how-nigerias-economy-grew-by-89-overnight

Economic Growth, Investment, and Technological Change in Peter Diamond, Essays in Honor of Robert Solow, MIT Press, 1990.

Recalculating GDP for the Facebook age at https://www.ft.com/content/93ffec82-ed2a-11e8-8180-9cf212677a57

The Sixth IMF Statistical Forum: Measuring Economic Welfare in the Digital Age: What and How? https://www.imf.org/en/News/Seminars/Conferences/2018/04/06/6th-statistics-forum

https://www.unenvironment.org/resources/global-environment-outlook-6

https://www.nature.com/articles/s41558-020-0720-5

https://www.environment.gov.au/protection/ozone/ozone-science/ozone-layer

https://www.unicef.org/environment-and-climate-change

https://www.youtube.com/watch?v=KAJsdgTPJpU

https://www.sciencedirect.com/topics/economics-econometrics-and-finance/kuznets-curve

Causa, Orsetta, Alain de Serres and Nicolas Ruiz (2014), “Can growth-enhancing policies lift all boats? An analysis based on household disposable incomes”, OECD Economics Department Working Papers, OECD Publishing, Paris, forthcoming.

https://www.bfna.org/research/the-populist-uprising/



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