Sunday, October 12, 2014

Just another GDP alternative

GDP is a terrible measure of economic wellbeing. Among many flaws it has I’ll list just few: (1) GDP does not take into account environmental change, (2) it increases when something previously abundant becomes scarce, (3) it does not take into account public goods at their value and (4)technological progress into account, etc.

GDP was criticized by many; however there are still only few attempts to find alternatives Human Development Index being the only more widely used and far from perfect alternative.

Recent article Redefining capitalism by Eric Beinhocker and Nick Hanauer on McKinsey Quarterly explores an interesting alternative on GDP measure. They start by redefining wellbeing or, as they call it, prosperity:

“This is why prosperity in human societies can’t be properly understood by looking just at monetary measures, such as income or wealth. Prosperity in a society is the accumulation of solutions to human problems.”

The definition solves certain problems of purely monetary measure by suggesting that being wealthier is not necessary beneficial, if wealthier condition has higher number of unsolved problems. Why authors do not stress it, the approach can handle even environmental issues quite well – deteriorating environment creates new unsolved problems to humanity and harms the wellbeing.

“the great genius of capitalism—solving people’s problems—has, by necessity, a dark side: the solution to one person’s problem can create problems for someone else”

Authors also stress importance of regulation and go beyond definition of pure market driven capitalism. They suggest that main role of government is to balance conflicts arising from different needs for solutions.

The main problem with the approach, however, is that it is hard to measure. While redefining wellbeing in vague concepts is easy, finding a viable measure is not. The fact that we can obtain a relatively precise value of GDP for every year or even quarter makes it superior to vaguely defined but more holistic approaches to wellbeing.

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