Written on 8 Jan 2019 by Professor Diane Coyle

Measurements for a better future

Economists, and so politicians and officials, talk all the time about which policies will be best for GDP – Gross Domestic Product. But it has become increasingly clear in recent times that what’s good for GDP might not be what’s best for people.

Photo by Evgeni Tcherkasski on Unsplash

Since the depths of the financial crisis the UK’s level of GDP (adjusted for inflation) has risen by almost one fifth, yet more people are having to use foodbanks, public services are under immense pressure, and homelessness is on the increase. So the distribution of GDP growth clearly matters, including its distribution by region or locality as well as by social status.

What’s more, even if you take its distribution seriously, this standard metric of the nation’s economic progress has significant drawbacks. One of the major shortcomings is its failure to take the future seriously. GDP increases whenever current consumption rises, no matter what the effect is on future potential. Yet as many societies are manifestly being torn apart by social schisms and experiencing extreme climate events due to global warming, the time has come to embed sustainability in the way we assess progress. That cannot happen until we have regular, official statistics on societies’ assets – a social balance sheet as well as a GDP-centric income and expenditure account.

This was the thesis of the essay I co-authored with Benjamin Mitra-Kahn, which jointly won the Indigo Prize. LetterOne, which created the prize, is now supporting a programme of research here at the Bennett Institute into the measurement of social wealth, or assets. Many people find a focus on society’s wealth intuitive – indeed, it formed the basis of early attempts to measure the economy from the Domesday Book to the 18th century.

Some work to measure the ‘comprehensive wealth’ of many nations today has been undertaken by the World Bank. Our aim is to work with official statisticians to overcome the conceptual and measurement challenges involved in gathering regular statistics on two out of six types of capital. Four of the six are physical, financial, intangible, and human capital.

We are starting with the other two, natural and social capital.

In the case of natural capital, it is widely understood that human societies have been depleting many natural resources at an unsustainable rate. In addition to their contribution to economic output, access to the ‘services’ provided by nature are fundamental to human well-being, as anyone who has to breathe polluted urban air or has no access to green space or birdsong can testify. There has been some significant progress in measuring natural capital but considerable challenges remain. For example, we would like to know how to help decision-makers identify when critical ‘tipping points’ in damage to resources are close, calling for major precautionary policy intervention.

There has been less progress on the measurement of social capital even though social scientists are clear about its importance – in economics we refer to the fundamental role of ‘institutions’ and ‘trust’, for instance, yet have little to say about the social networks and relationships implied by the abstractions. However, it could not be more apparent that in many countries there is a profound breakdown of trust and social cohesion – a loss of social capital.

One might ask why it is important to focus on measurement of such concepts? After all, like GDP itself in seeking to measure total current economic activity, any statistics are bound to be imperfect and subject to uncertainty. The reason is that official statistics are the way a nation (or other political unit) understands what is happening: citizens and policymakers see what is measured. What is not measured is officially invisible, no matter what people actually experience. Not everything is measurable, and nor should we need or want to measure everything. But given that policy is going to be significantly determined by statistical indicators, the statistics produced should be guiding choices in the direction of improving economic well-being, not the reverse.

There have been many attempts to overcome the pre-eminence of GDP in economic policy, with a plethora of alternative ‘dashboards’. All have failed because the current official ‘System of National Accounts’ (of which GDP is part) is in effect an international technical standard, created under the auspices of the United Nations (and led by Cambridge University economist Richard Stone) in the years after World War Two.

The attraction of the Six Capitals approach we are further developing is that its deep roots in economic theory may give it more traction in the international community. This is a major challenge and will probably require much work. We are delighted to be able to embark on this important project, hope it will inspire others around the world, and will be publishing updates as it progresses.

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  • About the author

    Professor Diane Coyle, Inaugural Bennett Professor of Public Policy

    Professor Coyle co-directs the Institute with Professor Kenny. She is heading research under the progress and productivity themes.   Learn more

    Diane Coyle 2018