Mismeasuring Our Lives: Why GDP Doesn't Add Up

The Commission on the Measurement of Economic Performance and Social Progress (CMEPSP) was appointed by President Nicolas Sarkozy of France, in the words of the Commission's report,. . "to identify the limits of GDP as an indicator of economic performance and social progress, including the problems with its measurement;. . to consider what additional information might be required for the production of more relevant indicators of social progress;. . to assess the feasibility of alternative measurement tools, and. . to discuss how to present the statistical information in an appropriate way."This small volume in laymen's language summarizes the findings and recommendations of CMEPSP. It begins with a nine-page Foreword (pp. vii-xv) by President Sarkozy, followed by a sixteen-page Preface (pp. xvii-xxxii), which includes: "Some of our proposed reforms were far less ambitious than those proposed here--simply a better accounting of resource depletion and environmental degradation. And yet, political resistance was so great that these initiatives were thwarted. It showed the power of information. There were those who were afraid of the light that better information systems might shed. That key interest groups did not want this kind of information to be publicly disseminated suggested these reforms in our statistical system might have real impacts."In other words, the public must NEVER be allowed to find out how outrageously they are being cheated!Pages 1-22 are an "Executive Summary" of the report, which states: ". . . the report advocates a shift of emphasis from a `production-oriented' measurement system to one focused on the well-being of current and future generations, i.e. toward broader measures of social progress."No wonder "political resistance was so great." Just imagine focusing "on the well-being of current and future generations," instead of on OUR* current and next quarter's profits! Insufferable!Chapter 1 (of 3), Classical GDP Issues (pp. 23-59) deals with the shortcomings of the Gross Domestic Product (GDP) as a measure of well-being. GDP is a very useful measure of market production, but if the well-being of a country's citizens is the most desired outcome, as it should be, then GDP has some serious deficiencies as a measure of the success of the economy. For example, major storms and earthquakes increase GDP, because it measures goods and services produced and sold, including those used to repair or replace things damaged by such disasters, but the real wealth of the nation is not increased by such natural disasters, just as you are better off if you don't crash your car (no effect on GDP) than if you crash your car and have to pay for repairs (adds to GDP). In other words, too much of what GDP measures is economic activity that is more akin to spinning your wheels than to moving toward your desired destination. CMEPSP makes five recommendations to replace GDP as a proxy for measurement of well-being:. . (1) "Look at income and consumption rather than production.". . (2) "Consider income and consumption jointly with wealth.". . (3) "Emphasize the household perspective.". . (4) "Give more prominence to the distribution of income, consumption and wealth.". . (5) "Broaden income measures to non-market activities."Chapter 2, Quality of Life (pp. 61-95) deals with measuring (you guessed it!) the quality of life. "One of the reasons that most people may perceive themselves as being worse off even though average GDP is increasing is BECAUSE THEY ARE INDEED WORSE OFF," (emphasis in original, but I used caps instead of italics because Amazon's text box automatically changes italics back to regular type.)Again, CMEPSP makes five recommendations:. . (1) "Measures of subjective well-being provide key information about people's quality of life. Statistical offices should incorporate questions to capture people's life-evaluations, hedonic experiences and priorities in their own surveys.". . (2) "Quality of life also depends on people's objective conditions and opportunities. Steps should be taken to improve measures of people's health, education, personal activities, political voice, social connections, environmental conditions and security.". . (3) "Quality-of-life indicators in all the dimensions they cover should assess inequalities in a comprehensive way.". . (4) "Surveys should be designed to assess the links between various quality-of-life dimensions for each person, and this information should be used when designing policies in various fields.". . (5) "Statistical offices should provide the information needed to aggregate across quality-of-life dimensions, allowing the construction of different scalar indices."Chapter 3, Sustainable Development and Environment deals with the specified issues, which are more future-oriented; they affect the quality of life for all future generations. Right now we can't gather measurements of the quality of life in the future, but we can measure current conditions and trends which are likely to affect it. CMEPSP makes four recommendations:. . (1) "Sustainability assessment requires a well-identified sub-dashboard of the global dashboard to be recommended by the commission.". . (2) "The distinctive feature of all components of this sub-dashboard should be to inform about variations of those `stocks' that underpin human well-being.". . (3) "A monetary index of sustainability has its place in such a dashboard, but under the current state of the art, it should remain essentially focused on economic aspects of sustainability.". . (4) "The environmental aspects of sustainability deserve a separate follow-up based on a well-chosen set of physical indicators."For a fuller explanation of the recommendations and the reasoning behind them, read the book, or even get a copy of the report and read it.I have just one complaint: There are only eight notes (numbered 1 thru 9, but 1 and 2 are identical) but instead of being where they belong, on the page on which they are referenced, they are all on page 137, which is VERY annoying! It is a real pain in the . . . to have to flip back and forth to read what should be right there at the bottom of the page. I am sorely tempted to downgrade the book to four stars for this, but that would be petty; there is just too much to recommend about [email protected]* `the people who matter,' i.e. the super-rich.

I applaud the effort to detail the many ways in which GDP fails to measure national well-being, but lament the fact that this report does so little to attack the revered GDP edifice at its questionable economic foundation. Rather than conclude that over-reliance on indices might be a fundamentally flawed way to relate to a complex, evolving and unpredictable non-mechanical ecosystem, the report concludes there is a need for an abundance of new and more complex and more refined indices to be piled on top of the existing ones.It has been widely observed that GDP cannot and should not be used to measure things other than what it purports to measure (as first stated before Congress in 1934 by the very man who developed the metric). This report is a thorough and detailed, if not dry, summary of how and why GDP fails to measure those things. But what if GDP does not really even measure what it purports to measure? What if it is fatally flawed not only as a general indicator of societal well-being, but as a specific metric of productive economic output? I'm afraid that territory remains too dangerous and heretical for many mainstream economists to explore deeply.This book essentially says, let's continue to use the GDP metric but supplement it with an array of other metrics that account for non-market productivity, environmental and resource sustainability, wealth and income inequality, life expectancy and health, education outcomes, debt levels, quality of government "output", inflationary bubble effects, and the general happiness of the citizenry. Even if we could objectively quantify ALL these things (can we really quantify that which is subjective?) into ever-better metrics, how reliable would the metrics be in establishing causation, and how reliably would they be used (or abused) by policymakers in attempts to achieve "desired" changes? If certain policy promotes improvement in one set of metrics at the expense of another set, how will policy proceed (other than in the usual way, on the basis of political expediency)?No matter what supplemental metrics are developed, GDP will still be the SINGLE metric used in the headlines and by the talking heads in most public spheres of media, politics and economics. The only way this might change is to debunk the myth that GDP represents "the economy" or "productive economic output". What GDP measures is the money-value of FINAL spending/investment (minus imports) over a period of time. In so doing, it imputes dollar-values to some things that cannot be measured, and then to other things that cannot be measured it assigns values that simply equal expenditures. It supposedly accounts for the effects of inflation and monetary overvaluation while somehow also accounting for qualitative improvements and the deflationary nature of productivity gains in certain consumer goods. Most importantly, GDP growth makes no accounting for any accompanying growth in debt. These facts are touched upon in the book, but not focused upon as reasons for a wholesale rejection of the GDP metric itself, based on its being an artificial construct unable to objectively measure sustainable productive output.By assigning values equal to expenditures, spending on "bads" (things that in no way should be considered productive goods or services) is automatically deemed to be... spending on goods. When government pays a private contractor for the "service" of crushing obsolete military goods or cash-for-clunker cars, it is paying the contractor to destroy value; the GDP accounting tallies up the destruction of value as... a creation of value. The same applies to any variety of non-productive and non-beneficial "services" that are produced, or to any reduction in productivity that might occur with featherbedding or make-work jobs.The greater a society's "demand" for bads, mostly via government, the greater its GDP growth. Rather than learn this lesson in WWII, and logically reject the GDP metric, we concluded that destruction for destruction's sake is a vital source of economic growth. This ignores that the whole point of consumption, which is the destruction of produced wealth, is to satisfy the wants and needs of humans. In making zero distinction between consumption that benefits humans and consumption that harms them, embracing the GDP metric allows governments to destroy and squander wealth in untold amounts, all in the name of "growth". Not surprisingly, governments can be much better at spending than investing. (To justify his budget, and to see it increase, a bureaucrat MUST find uses for money in amounts greater than allocated - useful uses are not always required.)In addition, we immediately we see that by definition, as a final-expenditure metric, GDP ignores the spending at intermediate stages of production. So obviously the metric does not represent all economic activity, but only the final resulting dollar-value of that activity. Referring to GDP as a measure of all economic activity is false and misleading, and relying on the expenditure-method for estimating GDP gives rise to the mistaken belief that consumption is substantially more important than investment and production to a vibrant and healthy economy. "Mismeasuring Our Lives" ignores this, and concludes that more attention should be paid to consumption and less to production. This erroneous conclusion comes from considering GDP to be purely a production metric.GDP is in fact NOT really a true production metric, since some of what it measures is not of any economic value in the sense of being exchangeable for other goods and services (especially imports). When an individual (or business) seeks to measure his economic output, he measures output in terms of the purchasing power it generates. But his actual SPENDING power (NOT true "purchasing power") is potentially much greater, depending on his access to credit and/or newly created money. The value of his final expenditures is a function of BOTH his output-based income AND his change in debt/savings. His effective demand at a given real output level, and the potential value of his expenditures over time, will increase with an increase in his debt -- and that level of demand will decrease with an increase in savings. So it is with nations, and thus evident that GDP is better thought of as a demand metric and not strictly as a metric of productive economic output.By far the biggest flaw of GDP is the fact that it IS a demand metric. In measuring so-called production by measuring expenditure, one must ask, what is the source of that expenditure? Since ability to spend consists not only of income generated by production (true "ability to pay"), but also of income generated by credit growth and/or money-printing, the GDP metric cannot answer that vital question. Consumption on the basis of ever-expanding credit obviously allows for a decrease in true wealth-generating activities (such as the production of export goods and capital goods), since the need for true productive "ability to pay" is decreased.As economic activity grows on the basis of debt growth, it allows for the increased transition of a greater number of productive non-market activities, and a greater number of non-productive activities, into the formal money-economy. As these activities (childcare, housecleaning, pet grooming, personal training, government consulting/contracting, economics teaching, etc.) are formally monetized, there is not necessarily a true increase in productive output, but only an increase in the dollar-value of that output. The increase in value is partly a measure of debt-based demand, not just a measure of production-derived income. Thus GDP growth, in a regime of rapid and continual credit expansion, COULD simply be a measure of increasing debt-based demand, and not a measure of increasing productive output.Evidence that this is indeed the case for the U.S. can be seen in increased debt levels, especially financial-sector debt: after four decades of total (public and private) debt at around 150% of GDP through the early 1980s, that level more than doubled over the next three decades. That expansion of debt has played a large role in the expansion of economic activity and consumption. Any significant contraction in debt will mean a contraction in demand, and a potentially devastating contraction in GDP in the form of a deep depression.Consider also that by dramatically increasing demand for goods and services and assets, credit expansion has inflated the dollar-values of some of those things to levels that can only be sustained by further credit expansion (demonstrated by recent asset bubbles, on what may turn out to be a relatively small scale). By not accounting for growth in debt, GDP fails as a useful metric, and serves to lead us towards the brink of disaster rather than away from it.Economists will continue to use the GDP metric as though it truly represents "THE economy." Indeed, the authors at one point refer to an "economy that grew at a rate of 2.75%" when what they really should have said was an "economy whose currency-denominated expenditures reflecting domestic-based demand grew at a rate of 2.75%". Simple growth in demand should not be equated to the growth of an economy. Anyone can increase effective demand by simply increasing debt (just ask Paul Krugman). That is not true economic growth, that is borrowing from future demand to create current demand, with unknown consequences.Perhaps someday a better "all-purpose" metric will be developed. I think the best part of this book is the eloquent foreword by Nicolas Sarkozy, who warns we "have wound up mistaking our representations of reality for reality itself... but reality always ends up having the last word". The book, alas, then goes on to express the need for developing even more representations of reality, since our current ones fall short. The real need is to embrace sound principles regardless of what all the instruments on the dashboard, and all the math in the aggregate models, might be telling us.

The book is the result of the commission on reflecting on the way economic development and well-being is being measured, as set up by French president Sarkozy, and run mainly by Joseph Stiglitz, Amartya Sen and Jean Paul Fitoussi (with other current economic great peppered in as members). The main question - if and how GDP is mismeasuring our progress - is addressed insofar that the main known weaknesses, alternatives / enrichments and measures for measuring sustainability are discussed.The content and language of the report are certainly digestible enough that a non-economist will have no difficulties reading it and the points are brought over well in my opinion. It will perhaps not appeal quite so much to someone looking for an executive summary headed by several easy to follow recommendations, as a lot of the problem actually lies in the details (sufficiently but not overbearingly laid out, with pertinent examples).If one looks at the wider issue of how the choice of measurement affects behaviour, the book is an excellent example, definitely to be read in concert with  How to Measure Anything: Finding the Value of Intangibles in Business . In this respect the introduction provided by Nikolas Sarkozy is pretty inspired, too - much more than just a couple of sentences explaining the motivation, and a valuable component of the overall book itself.The less pleasant aspect for a business minded leader is that there is no easy solution and that all of the alternatives actually demand more effort in collating and more in interpreting than the commonly accepted ad flawed GDP. Whether this is the report's flaw or not will depend on the reader, of course.In my opinion, the book is a great piece of writing and a wider readership would definitely help in understanding the debate and its consequences in the political body. For an economist it will primarily act as a collection of the most pertinent arguments in the field (but not replace proper literature research); for a non economist it may very well be all you need to read on the topic. For someone using the book more from a market research / business intelligence point of view, it is full of common pitfalls and trade-offs present when engaging in such an undertaking and definitely helpful in teaching one how to strike a better balance between simplicity and accuracy.Finally, the book loses its fifth star for me because of a lack of a literature section / further reading at the end. I understand that with the authorship as is, it was deemed unnecessary to do so (many of them are actually the ones responsible for the theories presented / arguments discussed) but it would be a great addition for the more interested reader, pointing them towards sources for deepening their understanding. How to Measure Anything: Finding the Value of Intangibles in Business

Nice book.

I chose this rating, because, for now this ideas are in „no man's land,“ neither science nor policy. If they bring together people and knowledge, than it will be excellent, if they are just a tribute to two Nobel laurates and former President of Frnace, than it is harmfull.I like their effort to limit economic, but still they subordinate other measures to it. We should begin by broader thinking.I chose title of review from Abraham's deciosion. For love (to get a son, and saving a son) you need strength beyond yourself. We are not jelous for our children to go beyond us. But to help others (Sodoma) you need goodness, personal will (leadreship), critical mass (Abraham 10, Jesus 12) and organization. This is rational, human responsibility on thios planet.Personally I'm tryin to advance conferences of goodness, to create such policies, from bottom up, not tje other way. I run on that platform for European platform.Also I'm convinced that era of political parties is over.New forms and forums must be created.I rtecommend it to people who accepting the basic measure, of all people being equal, want to integratre their knowledge, experrience and will in bein among the critical group to prevent new failures and promote opportunities

Titel und Inhalt des Buches sind eine solide Begründung für die Anstrengung der globalen Gesellschaft um ihrer Nachhaltigkeit willen nach einer komplexeren Führungsgröße für das nationale Wachstum zu suchen. Sie muss nicht in der Philosophie angesiedelt sein wie beim Staat Bhutan mit "Glück der Bürger". Die neue Größe kann einen ersten Schritt weg vom GNP beinhalten und für die statistischen Landesämter noch machbar in der Erfassung sein. WOSSE Inc. (Non-Profit)[...],hat 2010 mit dieser Zielsetzung das Societal Capital Framework untersucht, die Größe "Societal Capital" definiert und den zugehörigen Faktor "Societal Capital Index" zur Einführung empfohlen. WOSSE: SOCIETAL CAPITAL FRAMEWORK Document No: NST-1060/A Version A, dated 4/05/2010. Die Definition des Begriffes hat sich bis heute zu einer in der Praxis tauglichen Version entwickelt. Dem Thema "Societal Capital" ist Kapitel 11 in dem 2015 erscheinenden Buch N. A. Choudhry, D. Feldmann "Societal Systems Engineering" ISBN 978-0-9913574-0-6 gewidmet. In Kürze findet ein White Paper zum Thema Societal Capital Framework" als pdf file auf [.....]

A lot of concepts are repeated several times and the way they are explained is really technical, that makes the reading very slow.I personally appreciated instead the high level and the quantity of informations about what has already been done in this field, I ignored the existence of alternative indicators such the ones presented in this book. Intersting but not a read for everybody.