The forecasts by economists provide feel good statistics about the economic health. But on the ground nearly two-third of the citizens feels the heat of economic crisis. They do not have enough means to sustain their lives. Inadequate food, clothing, shelter and other essentials frustrate them. Without taking common people’s living standards economic data simply bracket them into Purchasing Power Parity and bundle them into the larger GDP dimension. The result of macro definition of the economic health without fine tuning the problems on the surface twists the tale and offers it all rosy. Countries like Bhutan define human happiness index along with the GDP. It is a tiny mountainous nation with no big income. People in Bhutan are bubbling with happiness despite low incomes and no skyscrapers to boost. France is trying to redefine its economic outlook. It is high time that all nations go beyond GDP and bring out the crux of the crisis and minimize people’s problems.
Sanjeev Sanyal writes in The Times of India (10.2.2009, p.14) “The world is reeling from two major crises, the financial/economic crisis and the crisis of climate change and ecological collapse. Both are a result of the same human error, a colossal misallocation of resources, financial capital in one case and natural capital on the other. A combination of counter-cyclical policies and time will eventually get us out of the financial mess. However, climate change and catastrophic environmental degradation threaten human civilization as we know it.
Many blame globalization and capitalism for the large-scale misallocation of resources. However, isolationism and socialism provide no alternative we tried them for decades with disastrous results. A market-based system is clearly more efficient. The problem is not with the tools of capitalism but the failure to define its goals. The power of the markets is being harnessed to maximize the wrong paradigm.
The most commonly used paradigm for measuring human progress is provided by national income accounts and, more specifically gross domestic product (GDP). Virtually all economic policy-making is oriented directly or indirectly towards maximizing GDP growth. It is so ubiquitous that people forget it as an entirely artificial construct created in the 1940s as part of the war effort.
Of course, rulers from ancient times have kept some record of economic activity for taxation purposes. National accounts as we know them were created during World War II by Richard Stone and James Meade with support from John Maynard Keynes, as a way to keep track of war-time economic activity. Given the circumstances, their framework was necessarily ‘industrial’ in its essence, without space for niceties like environmental degradation and socio-demographic developments.
Post-war, this framework was adapted to create the GDP number now used. Unfortunately, the system remains an arbitrary way to measure value creation, especially in areas relating to externalities and natural capital. For instance, if we cut down a pristine rain forest we are destroying value in terms of biodiversity, watersheds, carbon sequestration, flood control, non-timber forest produce and so on. Yet, in the current system, destruction of value will show up as GDP growth from logging!
This does not mean the creators of GDP were unaware of its limitation. In his Nobel Memorial Lecture in 1984, Richard Stone stated, “The three pillars on which analysis of society ought to rest are studies of economic, socio-demographic and environmental phenomena.” He added that his work had focused mostly on economic accounting and he had not spent much time on environmental accounting even though “environmental issues, such as pollution, land use and non-renewable resources offer plenty of scope for accounting.” In short, the creators of GDP thought of it as work-in progress. Unfortunately, the world has continued to focus much of its energy on maximizing an incomplete and out-of-date paradigm.
There are ways to adjust for the short comings of GDP. One is to create additional matrices for measuring progress. The Human Development Index and Carbon Footprint are concepts that can be used to enhance the raw GDP approach. Unfortunately, they failed to gain a serious following beyond the world of activists and conferences because these measures lack the simplicity of a single GDP number.
The only real alternative then is to recalibrate GDP itself to reflect genuine value generation. This can be done by assigning monetary values to things like water pollution, deforestation, land degradation and other changes in the stock of natural capital. Similar adjustments can be made to account for changes in human capital stock (health, education etc). The result would be a new GDP number more closely reflecting true value generated by various human activities.
Economists should redefine GDP and incorporate ground situation. They should make economy fly in the air when there is no possibility of sustaining its stay on the sky. By infusing a course correction they can perform a social reengineering which is need of the hour. Poor must get the attention and priority. Simply giving the number of poor people is not sufficient. Using the latest technological prowess economists should filter down the most needy people and those in the seat of power should help those identified poor people to improve their lives. There is no alternative to this model.
Sanjeev Sanyal writes in The Times of India (10.2.2009, p.14) “The world is reeling from two major crises, the financial/economic crisis and the crisis of climate change and ecological collapse. Both are a result of the same human error, a colossal misallocation of resources, financial capital in one case and natural capital on the other. A combination of counter-cyclical policies and time will eventually get us out of the financial mess. However, climate change and catastrophic environmental degradation threaten human civilization as we know it.
Many blame globalization and capitalism for the large-scale misallocation of resources. However, isolationism and socialism provide no alternative we tried them for decades with disastrous results. A market-based system is clearly more efficient. The problem is not with the tools of capitalism but the failure to define its goals. The power of the markets is being harnessed to maximize the wrong paradigm.
The most commonly used paradigm for measuring human progress is provided by national income accounts and, more specifically gross domestic product (GDP). Virtually all economic policy-making is oriented directly or indirectly towards maximizing GDP growth. It is so ubiquitous that people forget it as an entirely artificial construct created in the 1940s as part of the war effort.
Of course, rulers from ancient times have kept some record of economic activity for taxation purposes. National accounts as we know them were created during World War II by Richard Stone and James Meade with support from John Maynard Keynes, as a way to keep track of war-time economic activity. Given the circumstances, their framework was necessarily ‘industrial’ in its essence, without space for niceties like environmental degradation and socio-demographic developments.
Post-war, this framework was adapted to create the GDP number now used. Unfortunately, the system remains an arbitrary way to measure value creation, especially in areas relating to externalities and natural capital. For instance, if we cut down a pristine rain forest we are destroying value in terms of biodiversity, watersheds, carbon sequestration, flood control, non-timber forest produce and so on. Yet, in the current system, destruction of value will show up as GDP growth from logging!
This does not mean the creators of GDP were unaware of its limitation. In his Nobel Memorial Lecture in 1984, Richard Stone stated, “The three pillars on which analysis of society ought to rest are studies of economic, socio-demographic and environmental phenomena.” He added that his work had focused mostly on economic accounting and he had not spent much time on environmental accounting even though “environmental issues, such as pollution, land use and non-renewable resources offer plenty of scope for accounting.” In short, the creators of GDP thought of it as work-in progress. Unfortunately, the world has continued to focus much of its energy on maximizing an incomplete and out-of-date paradigm.
There are ways to adjust for the short comings of GDP. One is to create additional matrices for measuring progress. The Human Development Index and Carbon Footprint are concepts that can be used to enhance the raw GDP approach. Unfortunately, they failed to gain a serious following beyond the world of activists and conferences because these measures lack the simplicity of a single GDP number.
The only real alternative then is to recalibrate GDP itself to reflect genuine value generation. This can be done by assigning monetary values to things like water pollution, deforestation, land degradation and other changes in the stock of natural capital. Similar adjustments can be made to account for changes in human capital stock (health, education etc). The result would be a new GDP number more closely reflecting true value generated by various human activities.
Economists should redefine GDP and incorporate ground situation. They should make economy fly in the air when there is no possibility of sustaining its stay on the sky. By infusing a course correction they can perform a social reengineering which is need of the hour. Poor must get the attention and priority. Simply giving the number of poor people is not sufficient. Using the latest technological prowess economists should filter down the most needy people and those in the seat of power should help those identified poor people to improve their lives. There is no alternative to this model.
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