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Impact Investing

IPE special report May 2018

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Joseph Mariathasan: The mismeasure of human welfare

Now is the time for governments to find an acceptable set of measures of human welfare, writes Joseph Mariathasan

‘You can only manage what you measure’ is a self-evident axiom. But while gross domestic produce (GDP) may be easily measurable – and therefore held up as something to be managed – what the post-financial-crisis world has revealed is that, even when GDP growth has returned (albeit at low levels), it can hardly be argued that human welfare has increased.

The popularity of US presidential candidate Donald Trump among working and middle-class Americans is testimony to their having seen no increase in their own circumstances despite GDP growth. In the UK, the Brexit vote was, again, a protest against the fact large sections of the population have seen no increase in perceived living standards, irrespective of GDP growth figures. For governments and political parties, focusing on GDP growth as a primary measure of success has proved to be misleading and a political failure.

As the UK begins an existential debate over its long-term relationship with the European Union and its own future prospects in the wider world, it may be timely to widen the debate on the most appropriate set of metrics to measure society’s success. “GDP measures everything, in short, except that which makes life worthwhile” declared Robert F Kennedy in a famous speech given at the University of Kansas in 1968. “It can tell us everything about America except why we are proud we are Americans,” he added. “If this is true here at home, so it is true elsewhere in world.”

We now live in a topsy-turvy world, where risk-free interest rates can be negative, and where Alice in Wonderland would have felt very much at home. It was not the White Rabbit who declared that “Gross National Happiness is more important than Gross National Product”, but Jigme Singye Wangchuck, the king of Bhutan, during the 1970s.

US representative Hansen Clarke of Michigan commissioned a report a few years ago seeking to answer the overarching question: How should the US government institute supplemental national accounts that better reflect the welfare of the nation’s people? As the report points out, the US Department of Commerce has described GDP as “the crowning achievement” of 20th century US economic policy. In the eight decades since the introduction of US national income accounts, GDP has become the official barometer of business cycles, an indispensable measure of government performance and a leading benchmark of living standards. It has, in other words, become a de facto headline indicator of economic, political and social progress.

Yet GDP was never intended for such a role. Economists dating back to Simon Kuznets, the father of US national accounting systems, have warned that GDP is a specialised tool for measuring market activity rather than national welfare. The by-products of unrestrained growth in the pollution of the air we breath and the food we eat, and the difficulties in finding clean water supplies, are a testament to that. The fastest-growing megacities in emerging markets such as Beijing and Delhi are also the most afflicted by smog. China’s astounding double-digit rates of GDP growth seen in the past are not only very difficult to sustain but also entail sacrifices in the quality of life that are increasingly seen as unacceptable.

While GDP growth as currently measured may conceivably slow down in many countries to levels barely above zero, it does not mean human welfare – however it is measured – need do so. While there may be limits to GDP growth, that does not mean the welfare of any nation’s people cannot be continuously improved. Conversely, the era of zero and negative interest rates has led to owners of capital benefiting enormously at the expense of wage earners, whose incomes have not seen real increases despite GDP growth.

But, if GDP alone is the measure by which governments define their objectives, it is unsurprising that the negative externalities of misplaced GDP growth in the form of pollution, increased social inequalities, the destruction of the natural environment and so on become issues governments cannot ignore. The challenge is to find an acceptable set of measures of human welfare that can provide guidelines for government policies, irrespective of economic growth. That is not just an issue for the UK but for the whole world.

Joseph Mariathasan is a contributing editor at IPE

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