A. Climate Change

Natural disasters and severe weather events have wreaked havoc across the globe in record-breaking numbers last year. The United States, Russia, Turkey, Greece, Italy and Lebanon all suffered from record-setting wildfires and heat waves.¹

The Intergovernmental Panel on Climate Change (IPCC) recently published their Sixth Assessment Report which now dedicates an entire chapter to the influence that climate change has on severe weather.^{2 3} The report explains that heat waves and extreme rainfall are the clearest consequences of climate change since their increase can be directly linked to rising temperatures. More recently, world leaders met at the 2021 United Nations Climate Change Conference (referred to as COP26) and adopted the Glasgow Climate Pact, pledging climate action. Coincidentally, during the conference, many participating Nations were experiencing extreme weather events at home.⁴

Why have we as human beings been dangerously slow to enact policies to combat the rise of these climatic events? We argue that how we track “economic success” may be one of the problems. We should all care about economic growth and employment but not without assessing the consequences. Oftentimes, this leads to policy decisions that are incongruous with environmental sustainability. There is therefore a need to adopt more comprehensive metrics of economic success that would both favor higher economic activity and internalize the adverse effects of potentially harmful policies on the planet’s climate.

B. What’s wrong with GDP?

Gross Domestic Product (GDP) is a comprehensive measure of a country’s economic activity that integrates the value of the final goods and services. Though GDP is a useful tool to indicate a nation’s economic activity and is the most popular indicator of a nation’s economic health, it harbors various shortcomings when attempting to measure economic and environmental well-being.⁵

The founder of the measurement, Simon Kuznets, recognized this in his 1934 report to congress where he discussed GDP but also warned that, “The welfare of a nation can scarcely be inferred from a measurement of national income.”⁶ The main points of contention with utilizing GDP as a measure of welfare are that it excludes non-market transactions, fails to account for, or represent, the degree of income inequality in society, and fails to take into consideration any social or environmental indicators.

The economists that developed the Index of Sustainable Economic Welfare (ISEW), a more holistic alternative to the GDP (discussed later), argue that GDP’s shortcomings are precisely why GDP has continued to grow while sustainable economic welfare has plateaued since the mid-1980s. More specifically they argue that the expansion of the gap between GDP and economic welfare is perpetuated by the growth of future welfare reductions, the increase in income inequality, and the stagnation in value of unpaid household labor.⁷

Nevertheless, GDP is useful. Very useful! There is nothing inherently wrong with GDP, but we need to look beyond it to maintain a balance between economic growth and well-being. But how? What else should be considered? This blog post will explore alternative measures to GDP through two approaches: replacing GDP and supplementing GDP. As we will see, metrics aimed to replace GDP tend to build off one another as if each is trying to complete another’s blind spots. On the other hand, measurements that aim to only supplement GDP tend to be more diverse in nature, as they often prioritize different aspects of social welfare. 

C. Replacing GDP

a. Measure of Economic Welfare (MEW)

The Measure of Economic Welfare (MEW) is a foundational alternative to GDP developed in 1972 by ecological economists William Nordhaus and James Tobin. The MEW set out to investigate if the economic growth being observed at the time was also indicative of ‘meaningful’ growth.⁸ To do this, national output is adjusted by the value of leisure time, value of unpaid work, and the value of environmental damage stemming from industrial production and consumption.

A major critique of the MEW is that estimating how well individual and collective happiness are correlated with consumption is particularly difficult. Consequently, though the MEW is a fundamental step towards measuring welfare, Nordhaus and Tobin themselves describe the MEW as a ‘primitive and experimental’ metric for welfare.⁹ As a result, the MEW became an essential building block for the development of another alternative to GDP, the ISEW.  

b. Index of Sustainable Economic Welfare (ISEW)

Inspired by the GDP and MEW, Herman Daly and John Cobb developed the Index of Sustainable Economic Welfare (ISEW) in 1989.¹⁰ Daly and Cobb, along with other economists involved with the ISEW, were particularly concerned with the gap between GDP and sustainable economic welfare; they observed that this gap began to increase in the mid-1980s and continues to grow even now.¹¹ 

At first, Cobb calculated the ISEW and omitted leisure, which showed significant divergence between GDP as it continued to increase and welfare as it began to stagnate; after accounting for leisure, the gap increased substantially.¹² Those developing this metric recognize that there is no sole way to calculate welfare, but the ISEW is simply a promising attempt.¹³

Similar to the MEW, the ISEW takes into account GDP, social costs, unpaid household labor, environmental damage, and income distribution.¹⁴

c. Genuine Progress Indicator (GPI)

The Genuine Progress Indicator (GPI) was developed in 1995 by Clifford Cobb, Ted Halstead, and Jonathan Rowe. The three utilized the MEW and ISEW to further develop a way to measure sustainable economic welfare rather than just economic activity.^{15 16} A notable similarity between the MEW and GPI is the emphasis on distinguishing economic activity from well-being, particularly in the case of urban sprawl. In this scenario, the explosive growth of economic activity produced by urban sprawl is accounted for in GDP; however, it does not include the non-economic costs such as an influx in commuting time, land use conversion, and water/air pollution.¹⁷

Some integral additions of GPI are factors such as divorce, crime, unemployment, and changes in leisure time.¹⁸ This new metric is also considered less complex and more accessible to all people.

A few noteworthy contentions of this metric are that the assignment of monetary values seems arbitrary, in that they tend to vary over time and across studies. The calculations used to produce GPI are derived from estimates, which limits the validity of the measurement. However, the opportunity for the GPI to be set to use in European countries harbors the potential to “reduce the arbitrariness of the indicator and increase its policy relevance”.¹⁹

d. Green Gross Domestic Product

The Green GDP, also known as the Green National Accounting, was first introduced in 1993, in the United Nations Handbook of National Accounting: Integrated Environmental and Economic Accounting.²⁰ The developers of the Green GDP recognize that GDP is important because it addresses a critical bottom line: how much is the market economy producing? And what is it worth?²¹ The concise utility of the GDP is what the Green GDP strives to replicate with environmental factors. 

The Green GDP was developed to measure what is valuable about nature, excluding goods and services that are already accounted for in GDP. The measure attempts to provide society with the ability to observe the ways in which market consumption makes its way to the consumption of public goods (such as the aesthetic appreciation of nature and clean air and water).²²

A primary critique of the Green GDP is that ecological or health damage may take years to appear. Moreover, pollution does not necessarily engender harm locally, but may damage areas far from where it is produced.²³ As earlier before, quantifying and monetizing aspects of nature that benefit society is a primary hurdle in manifesting a practical and valid model. 

D. Supplementing GDP

a. OECD Better Life Index

The Organisation for Economic Co-operation and Development’s (OECD) ‘How’s Life’ program consists of 11 dimensions that determine whether or not life is improving for people living in OECD countries. This framework primarily employs objective measures; though there is a subjective well-being indicator in order to account for factors of welfare that may be lost in averages. This index is unique in that it assesses current well-being along with future well-being. 

The OECD has observed that the greatest gains in current welfare are often concentrated in countries that had weaker well-being at the beginning of the decade.²⁴ While these gains have frequently coincided with recent GDP growth, this has not always been so, emphasizing the need to look beyond GDP when measuring progress.²⁵

b. Index of Social Health (ISH)

The Index of Social Health (ISH) was created by the Institute for Innovation in Social Policy in order to monitor the welfare of American Society.²⁶ Similar to the social health motivations of the OECD, the ISH focuses on interpersonal well-being; however, the ISH narrows its scope to the United States, whereas the OECD collects data from a multitude of countries and regions. The index is comprised of 16 separate indicators spanning a person’s lifetime: from infant mortality and child abuse to teenage suicide, adult unemployment, and elderly poverty.

c. Thriving Places Index (TPI)

The Thriving Places Index (TPI) also looks to measure social well-being.²⁷ Different from the others, this metric is primarily concerned with local conditions and whether or not they are being implemented fairly and sustainably. Developed for cities in England and Wales, the TPI parallels an argument brought forward in the development of the MEW in that it challenges the current dominating culture of growth-at-all-costs. It consists of a broad set of indicators selected from datasets produced by established data agencies such as the Office for National Statistics (ONS), Public Health England (PHE) and the Index of Multiple Deprivation (IMD). The indicators are organized into three major elements: equality, local conditions, and sustainability.

d. Human Development Index (HDI)

The Human Development Index (HDI) stresses that the ultimate criteria for evaluating the development of a region should be people and their abilities, not economic growth alone. The index aims to encapsulate the following dimensions: long and healthy life, knowledge, and a decent standard of living. These are measured, respectively, through life expectancy, expected and mean years of schooling, and GINI per capita.

The HDI is primarily meant to evaluate the advancement of developing countries and is recognized globally. In addition, it is easily understood by the public since it is included in the annual flagship report of the UN Development Program.²⁸ The Index is mainly criticized for neglecting certain aspects of human development such as political and civil issues. Critics also argue that the knowledge parameters are one dimensional and should include more than literacy and enrollment in higher education.²⁹ Finally, obtaining data from developing countries is challenging due to incomplete coverage, measurement errors, and biases.³⁰

e. Happy Planet Index (HPI)

The Happy Planet Index (HPI) measures social welfare by utilizing a subjective indicator of global surveys that ask the respondents questions on how they perceive their lives to be going. The index also uses the objective measures life expectancy and ecological footprint per capita as indicators.³¹ 

Because this index implements subjective and objective aspects in its formula, the HPI is able to account for individual circumstances as well as encompassing overall state of well-being. However, implementing subjective indicators such as ‘happiness’ produces a new set of concerns. For example, how one measures such a complex issue while accounting for diversity in cultural moods in different regions, as well as whether or not targeting happiness is even relevant. Another important note is that the name of the HPI is misleading in that it does not technically aim to measure ‘happiness’ but “the environmental efficiency of supporting well-being”.³²

f. Animal Welfare Measures

As we share many of our experiences with companion animals, and the majority of human beings consume animal-based products on a daily basis, animal welfare is a concern for our welfare, indirectly at the very least. Hence, existing measures can be supplemented by measures that track animal welfare. 

The Animal Protection Index (API) assesses 50 different countries utilizing 10 indicators that are then categorized into 4 goals. The goals of this measurement are to increase the recognition of animal sentience and to prohibit animal cruelty, to supplement the presence of animal welfare legislation, to establish supportive government bodies, and to grow support for international animal welfare standards.³³ The indicators used cover a variety of animals, from farm animals to animals in captivity, to pets, to those used for scientific research. Each of the 50 countries examined are given a letter grade (from A to G) for each indicator, followed by an overall grade.³⁴

Much like the API, the Voiceless Animal Cruelty Index (VACI) also evaluates social well-being through animal cruelty. This index is meant to increase awareness on the cruelty of human induced animal suffering, as well as create accountability for harming animals. The VACI also selects 50 different countries to observe, though this measurement implements a different formula. The VACI formula is broken down into 3 separate sub-indexes: (1) Producing Cruelty, (2) Consuming Cruelty, and (3) Sanctioning Cruelty.³⁵

E. Conclusion

The substantial influx in extreme weather events and global warming engenders the discussion of alternatives to GDP to now, more than ever. The primary difficulty with replacing GDP is that not only are the indicators often subjective, but so is the interpretation of social welfare itself. 

Various partial solution concepts based on existing measures have been summarized throughout this report. Though most can agree on the general topics that are encompassed in the concept of social welfare, it is still open to a variety of interpretations. In conclusion, it is imperative to not only clearly define the metrics used within a model, but also the parameters for which the model is meant to be used.  Therefore, more research and policy interventions are needed to compose meaningful and accurate measures that truly reflect our well-being.