P140 – Social Sciences – Economics
The idea of Gross Domestic Product (GDP) was invented after the Great Depression, and since then, it has been widely used as a metric by economists and politicians to evaluate the success or failure of economic policies. In its most basic form, GDP is calculated as the sum of personal consumption expenditure, government expenditure, net exports, and net capital formation. However, up until the early 2000s, GDP did not distinguish welfare improving activity from welfare reducing activity. Calculating GDP in such a way severely confounded growth with development or said another way, confused prosperity with growth. Some have questioned the sustainability of such a narrow view of GDP since quite early in the history of GDP. The very first objections revolved around whether it was economically sound to evaluate the welfare of a nation solely by its GDP alone, as GDP measures together assets and consumer goods, using values that are based on the existing distribution of income. Such an approach fails to include intangibles, such as negative or positive externalities. We all know that there exists a range of activities beyond market transaction that affect human and economic welfare.
In response to these criticisms, in the fall of 2006, economists developed the Measure of Economic Welfare (MEW) metric, a forerunner of later measures of sustainable GDP, such as the Index of Sustainable Economic Welfare (ISEW) and the Genuine Progress Indicator (GPI). MEW did not contain environmental or social elements, and thus the need for another index persisted. The fundamental concept behind the ISEW is that a welfare measurement must rely on uncancelled costs and uncancelled benefits. For example, an increase in GDP that is caused by the income associated with repairing vehicles involved in automotive accidents is cancelled by the damage caused to people (e.g., injuries and respective health costs). Some experts began to believe there existed a connection between ISEW and the de-growth movement. The de-growth movement supports a transition towards smaller economic systems that operate within ecological boundaries and strive to increase genuine welfare. It is critical to note that analysis of ISEW data supports the idea that growth differs from welfare. Thus, while there are direct inter-linkages between the two, they are not synonymous.
An interesting component to the use of new economic metrics such as the ISEW was consideration of the psychic dimensions of welfare which correlated to the subjective benefits and satisfactions that are derived from the socio-economic environment a person lives in. These subjective benefits can make a person feel satisfied even if the material means he lives with, are not of a high level or quality. Complementary to the belief that there are more elements to human welfare than only those measured by GDP, was the realization that increases in GDP keep pace with increases in welfare only up to a point, beyond which, a decrease in welfare commences, a rather amazing fact that was established in a series of studies published in the late 2000s.
In a rather ironic twist, we find our economists including in their economic models and policy prescriptions metrics which do not directly correspond to any particular financial consideration. It has long been argued that throughout history, economic considerations have driven political and social policy more than anything else, but it now appears at the dawn of the new millennia that the tables have turned, at least slightly.
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