More to life than GDP

A report prepared for the French government questions the use of GDP as the sole indicator of social progress.
William West | Oct 8 2009 | comment  

 For too long industrialised nations have measured progress in terms of "gross domestic production" giving scant attention to other measures of social progress. But at last, it seems, the pendulum may be swinging. A report just completed for French President Nicolas Sarkozy by two Nobel prize-winning economists -- Joseph Stiglitz and Amartya Sen -- has called for a global debate about widening the measure of progress to take in other factors associated with human "well being".

In its report, the Commission on the Measurement of Economic Performance and Social Progress (CMEPSP) makes the point that "what we measure affects what we do; and if our measurements are flawed, decisions may be distorted". Its report also suggests that if what we measure is too narrow, our decisions will also be distorted.

In essence, the Commission is suggesting that putting emphasis only on the production of goods and services in the marketplace takes attention away from other, equally important, goods and services -- most notably, goods and services produced in the home.

As the commission points out, many of the services people used to receive from other family members are now purchased on the market. "This shift translates into a rise in income as measured in the national accounts and may give a false impression of a change in living standards, while it merely reflects a shift from non-market to market provision of services," its report says.

Even more importantly, the commission points out that many services that households produce for themselves are not recognized in official income and production measures, "yet they constitute an important aspect of economic activity".

The obvious example is all the work that goes under the heading of "homemaking", traditionally carried out by mothers, but increasingly shared by fathers. The commission acknowledges that parents engaged in homemaking forego income from the marketplace in order to carry out the services that they provide within the home. Thanks to the move of women into the workplace and the subsequent "outsourcing" of homemaking tasks such as childcare, economists are now more willing to consider such services as having economic value.

The commission says much is already being done in this area. One example, featured last year on MercatorNet, is the work being done at one of Europe’s leading business schools, Spain’s IESE. As IESE’s Professor in Managing People in Organisations, Dr Nuria Chinchilla, pointed out in an address to FEMM, the women's committee of the European Parliament: "We need to revise our concept of work so that it includes and properly values work done in the home."

For its part, IESE has been pushing for businesses to take more account of the role of parents – both mothers and fathers – in the home. It has called for greater parental leave, including paternity leave. As Dr Chinchilla said: "Paternity leave is a very positive practice because it allows men to ‘come into the home’ to live in it and enjoy it so that later both husband and wife may decide who is going to do what and how." One concrete step taken by IESE in this area has been the establishment of an Index of Family-Responsible Businesses, maintained by the school’s International Centre of Labour and Family.

The French Commission acknowledges such moves when it says that a start has been made in taking labour in the home into account, but it emphasises that more needs to be done. One reason that the home is important to the Commission is because, instead of looking at short-term production, it takes into account long-term "sustainability" of the means of production.

"Current well-being has to do with both economic resources, such as income, and with non-economic aspects of peoples’ life…" it says. "Whether these levels of well-being can be sustained over time depends on whether stocks of capital that matter for our lives (natural, physical, human, social) are passed on to future generations."

In other words, if a nation ignores work done in the home that ensures the "production" of future workers, its short-term GDP will not be sustainable.

On the question of sustainability, the commission calls for a "broad statistical system that captures as many of the relevant dimensions as possible" to take in "non-market activities".

It says that once one starts focusing on non-market activities, one question that becomes crucial is the number of hours spent on work outside the home and time available to be spent in the home.

But hours worked is only one factor it would like to see included in an index of well being.

"To define what well-being means a multidimensional definition has to be used," it says. Based on academic research and a number of concrete initiatives developed around the world, the Commission lists a range of factors that could be used, including levels of health; education, personal activities other than work and "social connections and relationships".

Capturing such concepts in an indexing system would, of course, be a great challenge, but the important thing is that work outside the marketplace is now on the agenda.

The report touches on many other important questions as well that come under the heading of social justice. An example is what it regards as the failure of existing GDP measurements to take into account the fact that increases in a nation’s income may not be evenly distributed.

"Most people can be worse off even though average income is increasing," it says. "The way in which statistical figures are reported or used may provide a distorted view of the trends of economic phenomena. For example, much emphasis is usually put on GDP although net national product (which takes into account the effect of depreciation), or real household income (which focuses on the real income of households within the economy) may be more relevant."

In plain terms, what the commission is suggesting is that while production may be expanding, the income of many, or most, individuals and families may be decreasing.

"While it is informative to track the performance of economies as a whole, trends in citizens’ material living standards are better followed through measures of household income and consumption," it says. "Indeed, the available national accounts data shows that in a number of OECD countries real household income has grown quite differently from real GDP per capita, and typically at a lower rate. The household perspective entails taking account of payments between sectors, such as taxes going to government, social benefits coming from government, and interest payments on household loans going to financial corporations."

Given all this, the commission recommends that more prominence be given to the distribution of income, consumption and wealth: "Average income, consumption and wealth are meaningful statistics, but they do not tell the whole story about living standards ... Average measures of income, consumption and wealth should be accompanied by indicators that reflect their distribution. Median consumption (income or wealth) provides a better measure of what is happening to the ‘typical’ individual or household than average consumption (income or wealth). But for many purposes, it is also important to know what is happening at the bottom of the income/wealth distribution (captured in poverty statistics), or at the top. Ideally, such information should not come in isolation but be linked, i.e. one would like information about how well-off households are with regard to different dimensions of material living standards: income, consumption and wealth."

Overall, it could be argued, the commission raises more questions than it answers, but that at least is an important first step. As the Commission itself says, the report was designed for opening a discussion rather than closing it. It wants a discussion of societal values "for what we, as a society, care about, and whether we are really striving for what is important".

Such a discussion will hopefully refocus economic indicators away from basic GDP towards much more meaningful and relevant concerns of families.

William West is a Sydney-based freelance journalist and Editor of Perspective magazine.

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