Alternative measures of GDP

Alternative measures to GDP have been under debate since the early 1970s.  The creation of the Measured Economic Welfare (MEW) index attempted to measure welfare.  For the period studied between the 1920s through 60s, every 6 unit increase in GNP corresponded to a 3-4 unit increase in the MEW.  The economists breathed a sigh of relief, believed that the GNP continued to track national welfare, and stopped tracking the MEW.  It is important to note the context of this decision, which at the time is appropriate.  During the 1920s to 60s period, due to general lack of material wealth, welfare of a household is tied to increase in material ownership, which was implied by a rising GNP.  However, by the Law of Diminishing Returns, this trend cannot last.  At some level of material ownership, the benefit of each additional unit is reduced.  This is indeed demonstrated by the 1990s by the Index of Sustainable Economic Welfare (ISEW).  In this analysis, the correlation between GNP and ISEW was positive, until the 1980s, when the correlation turned negative for many developed countries.  It is important to note the time scale and the context for each index.  The state of the nation in time provides the context in which national welfare can be evaluated.  Therefore there is no singular index that can provide the correct answer for all nations for all time.

Time and Place define the context under which the appropriate progress index can be selected.  Culture can be interpreted as “Place.” Bhutan's Gross National Happiness (GNH) measure weighs meditation as an important part of happiness, whereas an American may derive much more happiness when his/her team wins the SuperBowl.  Time, or political and economic progress, is the other element providing context.  For illustration, let’s use Max-Neef’s matrix of human needs as a base for developing an index.  Political and economic progress within a country bounds and prioritizes the human needs that can be satisfied in the matrix.  A third world country where citizens are seeking basic food and shelter would be best served by an index that heavily weighs the Subsistence category within the matrix.  In contrast, a developed country would be best served by an index that more heavily weighs Protection, Idleness, Creation and Freedom.  In addition to the Time context, the Place, or cultural context will provide additional weighing.

So what do the Genuine Progress Indicator (GPI), UN’s Human Development Index (HDI), Bhutan’s Gross National Happiness (GNH) and the Happy Planet Index (HPI) have in common?  They all provide wellness indices in different contexts.  The “west” proliferated GDP as a measure during the race for industrialization experienced between 1920s to 80s.  The timing, or political and economic progress, of GDP measuring countries was similar.  And though the countries were culturally different, the aim for industrialization was common, and thus set the context suitable for GDP measurement.  GDP proliferated as a measure.  Today, the countries seeking wellness measures are in a different time and place.  Given the great discrepancies in political and economic progress between countries and the many different cultures represented, none of the indices can be suitable enough to be used for all countries.  For developing countries, GDP may still be an adequate measure.  But for developed countries where subsistence needs are satisfied, new and perhaps divergent indices are needed.  The argument of what is happy for a Bhutanese may not be fun for an American, infers that it may no longer make sense to force the same index on developed countries in order to enable comparison between countries.  With increased mobility and communication methods, people of similar likes congregate geographically.  Thus we may find ourselves in a world where each country measures its happiness in its own manner and we stop racing against each other for improvement, but only seek to improve against oneself.

References
Daly H. & Farley J. (2004). Ecological Economics: Principles and Applications. Washington, DC: Island Press.

Pearce, D. & Barbier, E. (2000). Blueprint for a sustainable economy. London: Earthscan Publications.