The Wealth Economy Framework enables decision-makers to develop a rigorous and holistic framework for making effective use of all their resources in a way that embeds sustainability and de-silos decision-making. Diane Coyle explains why businesses need to know about it.
We are all familiar with the term Gross Domestic Product (GDP). We also all know that it affects us in some way. But few understand the effect using GDP as the measure of success, has on businesses and other organisations, or the implications that a move “Beyond GDP” would have.
Yet moves to develop broader economic measures are on the horizon so it is important to appreciate what this will mean. And with the deadline for new definitions fast approaching, business owners and organisations need to be ready.
Defining GDP
Gross Domestic Product, or GDP, is a headline number measuring how well an economy is doing; it steers the decisions governments and other organisations including businesses take.
It has long faced valid criticisms – such as ignoring unpaid care work, and leaving the natural world out of economic calculations. It includes spending on burglar alarms but ignores the crime that makes their purchase necessary. It counts disasters such as floods as a positive thanks to the rebuilding and repair that has to occur.
Since the 1980s there have been various alternative proposals aimed at tackling some of these shortcomings, but none have gained wide traction.
Now, though, economists and statisticians working through the United Nations process that defines the economic metrics all member governments have to implement, have begun intensive work to develop statistics that give a better indication of whether or not things are improving.
The metrics will account better for the environmental cost of our activities, human and social aspects of the economy, and digital innovation.
What does this mean in practice?
As an example, let’s look at when government spending on a new road, or a company’s new plant alters the flow of a nearby river or emits some chemicals. In the past the impact on GDP or on profits has been counted, but there has been a zero for nature; for the air pollution or the loss of ecosystems or habitats. The environment has literally been painted out of the statistical picture.
But not anymore. Incorporating environmental data into international definitions for economic statistics will be part of the official publication by the United Nations in 2025 with countries expected to adopt the new processes as soon as they can.
But how will these developments affect you and your organisation? The Wealth Economy approach is the way to understand the change.
The Wealth Economy
The Wealth Economy approach to measurement involves ensuring changes in the full balance sheet are factored into decisions. It includes not only financial assets and familiar assets such as buildings and machines, but also human, natural and social capital.
Any policymaker or business strategist – and any voter or shareholder – with this (literally) much richer picture of the impact of their actions, will be able to weigh up the trade-offs that might be involved between conventional short-term gains (higher GDP or profits this year) and long-term viability.
Taking the Wealth Economy approach as an example, this is what it means for your organisation.
1. Decision-making process
It will mean that there is a lot more to take into consideration when making decisions about new strategies or initiatives.
This is a positive consequence, as it means organisations can take a broader and more strategic perspective on the consequences of their decisions. Environmental impacts will be embedded in the assessment.
2. Productivity and growth
One of the misleading things about measuring the economy according to GDP is that typically, the unmeasured environmental costs of business activity take longer to become visible than it does for profit to stream into a company’s bank accounts.
Take the previous scenario of the building of a new road as an example.
The new by-pass might increase growth short-term for the company that it was built for. However, the environmental costs (air pollution, noise) could, with time, harm the health of anyone living nearby. This will likely reduce their productivity and increase healthcare and welfare costs. This ultimately leads to lower growth in future.
There will therefore be greater visibility on decisions and allow people to make more informed decisions about potentially sacrificing short-term wins for long-term prosperity, and so protecting the present and future interests of the organisation.
There is no reason not to plan now to anticipate this new way of looking at things, and develop more robust strategies.
3. Return on investment
Currently, a factory damaging its local environment as it increases production and drives more profit is doing so in unmeasured ways. Whilst increasing its profits, the damage it inflicts on the local area may limit its useful life or deplete resources it needs to continue production and so reduce the eventual return on investment.
Measurement in the Wealth Economy framework would aid companies like this in weighing their financial profits against the impact on the local environment and local community so their production can be sustained on a permanent basis, securing their long-term return on investment, as well as short-term.
Using the Wealth Economy framework does not make decisions easier – on the contrary, it will expose dilemmas – but it does make those decisions better. There are many ways you can make the most out of the move beyond GDP and the University of Cambridge’s online course on ‘The Wealth Economy Framework’ can help get you there.
Learn more about the online course: The Wealth Economy: a Framework for Sustainable Prosperity ‘Beyond GDP’
This blog was originally written for Cambridge Advance Online.
Image: “gdp” by mikecohen1872 is licensed under CC BY 2.0.
The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.
