Monday, August 10, 2009

After GDP

A good op-ed in the NYT this morning by Eric Zencey, arguing that it's time we dispensed with the idea of a Gross Domestic Product as a plausible measure of the national economy: "it’s a deeply foolish indicator of how the economy is doing. It ought to join buggy whips and VCRs on the dust-heap of history."

Central to Zencey's argument is that GDP has a built-in perverse incentive to replace "natural-capital" services (sunlight, wetlands, fertile soil) with "built-capital services" (electricity, dams and treatment plants, fertilizer).  The latter are counted as adding to GDP, the former taken for granted (or written off) as "free," i.e. non-productive.  So if I care for the land I add nothing to GDP, whereas if I pump depleted soil full of chemical fertilizers, I've supposedly added to the nation's wealth, by engaging in an economic transaction.  

In summing all economic activity in the economy, gross domestic product makes no distinction between items that are costs and items that are benefits. If you get into a fender-bender and have your car fixed, G.D.P. goes up.

A similarly counterintuitive result comes from other kinds of defensive and remedial spending, like health care, pollution abatement, flood control and costs associated with population growth and increasing urbanization — including crime prevention, highway construction, water treatment and school expansion. Expenditures on all of these increase gross domestic product, although mostly what we aim to buy isn’t an improved standard of living but the restoration or protection of the quality of life we already had.
 "Natural capital" is a bit of a misnomer, however, since nature includes values irreducible to economic calculation (ethical and aesthetic values, for instance).  GDP is deeply flawed, Zencey points out, but abandoning it poses difficulties of its own:

Several alternatives to gross domestic product have been proposed, and each tackles the central problem of placing a value on goods and services that never had a dollar price. The alternatives are controversial, because that kind of valuation creates room for subjectivity — for the expression of personal values, of ideology and political belief.
More evidence of the limits of purely economic thinking: in order to get values right, we have to be able to make substantive judgments, decisions about what's good.  These look "subjective"--someone has to make them--even if they're grounded and reasonable.  What we need, then, are social and political structures and processes that can develop these evaluations: a culture of environmental citizenship. 

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