Back to how economic well-being is measured

Twelve years apart, the 2008 Global Financial Crisis (GFC) and the 2020 pandemic had a stereophonic economic impact on the world. Livelihoods, savings and discretionary spending have been threatened, reduced and lost. The impact on real household incomes across the world varies, depending in part on government responses in the form of relief and recovery (livelihoods). Inequalities have inexorably increased in almost all countries.

The world is juggling these two crises in the longer term challenge of climate change. Already in the first half of 2020 alone, we have seen climate change wreak havoc with Hurricane Amphan in West Bengal, the hottest summer in six decades in the UK, from a Desert Locust attack in Pakistan and a longer wildfire season in the western United States. States.

Let me start with a confession. I come from a Hayekian persuasion in neoclassical economics. It is in a spirit of exploration and learning that I invite you to the heterodox ideas in my columns. Since the mid-1940s, the preferred indicator of global prosperity has been growth in gross domestic product (GDP) and its close cousin GDP per capita. The noble laureate Simon Kuznets proposed the modern GDP boost as a measure of the market value of all the final goods and services produced during a given period. Kuznets pointedly pointed out that “with quantitative measurements in particular, the precision of the result suggests, often deceptively, precision and simplicity in the contours of the object being measured.” Although Kuznets was careful to point out its limitations, it was adopted as the benchmark for growth and well-being at the Bretton Woods Conference of 1944, and has remained so ever since.

In a world made even more unequal by the pandemic and where extreme weather events threaten to make it worse, a new language of “prosperity” and “well-being” will need to be explored. Many alternative approaches have been proposed to measure “well-being” beyond mere “growth”. The Idea of ​​Gross National Happiness (BNB) has remained a smart marketing slogan for Bhutan, even though it incorporates interesting ideas of harmony with nature and other “areas” of happiness. Some economists have asked whether “degrowth” can be a preferred state if it can lead to greater well-being.

A promising conceptual approach has been the “donut” theory of economic well-being proposed by Oxford economist Kate Raworth. Under Raworth, the destination of economic well-being is achieved when the goals of seven economic foundations are met without exceeding nine environmental ceilings. The donut’s inner ring represents the minimum social basics to be met, and the donut’s outer ring represents a limit or ceiling on environmental impact. The idea is to leave no one behind in the “hole” of the donut. The social foundations that Raworth postulates are Maslowian ideals like food, clothing, and shelter, combined with democratic ideals like social fairness, political voice, peace, and justice. Environmental caps, in turn, refer to things like ocean acidification, climate change, and loss of biodiversity. Metaphorically, you might think of it as driving with a speed limit, both to reduce risk and optimize fuel consumption.

Governments have tried to integrate these elements into their political objectives. The idea of ​​“inclusive growth” is an attempt to focus on social foundations while increasing GDP growth. A sectoral focus or subsidy policy for solar energy, for example, is an attempt to balance a country’s energy sources with more environmentally friendly alternatives. However, the lesson to be learned from the acceleration of climate change and the pandemic is that it is not “far enough, fast enough”.

In 2009, Tim Jackson wrote a pioneering report on prosperity without growth for the UK Commission on Sustainable Development. Jackson says that “the conventional answer to the growth dilemma is to call for ‘decoupling’: continued economic growth with steadily declining material throughput”. Decline relative to GDP in terms of growth (i.e. (say they grow more slowly). This is the case, for example, with the decline in the growth of the use of crude oil in relation to the growth of GDP. Jackson adds that “physical and mental health is important. Educational and democratic rights matter. Trust, security and a sense of community are essential for social well-being. “As we have known from the pandemic, people suffer both physically and mentally when these things are absent. society itself is threatened when they decline.

The very word prosperity is made up of “pro” in Latin, which means to be doing well for us, and “speres”, in accordance with our expectations. A period of widespread plague reminds us that future notions of prosperity and well-being will need to incorporate inclusiveness, equality and sustainability. Materialism, gratuitous consumption, and temperamental use of resources may well be on the reject pile of history. Despite the simplicity of measuring GDP, we will need to add nuances in order to more accurately measure the well-being of individuals and communities.

PS: “The well-being of a nation can hardly be deduced from a measure of national income as defined by GDP,” said Simon Kuznets.

This is the first in a two-part series on rethinking the economic wisdom received in the aftermath of the covid pandemic.

Narayan Ramachandran is President of InKlude Labs. Read Narayan’s Mint columns at

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