July 30, 2019
GDP should be replaced by new indicators of prosperity and wellbeing
As the consequences of climate change, social tensions and high levels of inequality are increasingly evident, the Bennett Institute for Public Policy at the University of Cambridge, led by Professor Diane Coyle, has published its initial report on how to improve economic measurement by replacing GDP as the standard measure for national prosperity with others that include wellbeing and social and environmental capital.
The report, Measuring wealth, delivering prosperity, recommends focusing on an alternative measurement framework based on the “wealth economy” rather than just GDP: wealth is determined by the access to a range of economic assets people need to fulfil their economic potential and the long-term capacity of the economy to deliver sustainable growth and improving living standards.
The forward-looking element of this new economic framework makes it a better indicator of sustainability in terms of the economy and society as well as the natural environment than annual output or GDP.
This framework requires measurement of access to six types of economic assets that add up to what is known as comprehensive wealth of the nation.
1. Physical assets and produced capital, including access to infrastructure and to new technologies
2. Net financial capital
3. Natural capital, the resources and services provided by nature
4. Intangible assets such as intellectual property and data
5. Human capital, the accumulated skills and the physical and mental health of individuals
6. Social and institutional capital
Measures for the 21st Century
Without measuring changes in these assets there is little prospect of delivering sustainability
Commenting on the report, Professor Diane Coyle said: “21st century progress cannot be measured with 20th century statistics. We chose to focus on the wealth economy as a guide to whether or not there is any increase in prosperity because it measures the long-term capacity of an economy to deliver sustained growth and improved living standards. Without measuring changes in these assets there is little prospect of delivering sustainability, in terms of the economy and society as well as the natural environment.”
The Cambridge researchers have started with a focus on natural and social capital, as the first steps to developing a comprehensive framework.
Natural capital, which provides the building blocks of all the other forms of capital, is generally in decline. This poses grave risks for wellbeing. GDP growth derived from depleting natural capital, which includes water, air, soil, minerals and renewable capital such as forests or marine ecosystems which are prone to collapse, deprives future generations of wellbeing, which is why it is important to measure natural capital.
Covering a first set of research results, the report provides an initial view of the direction of the research, with early indications of findings, including how we could better report on carbon emissions.
The carbon problem
Trust in fellow citizens and institutions as well as the quality of governance are the result and the cause of productivity growth and higher reported wellbeing
Mathew Agarwala, research leader on the project, comments: “Carbon emissions degrade natural capital. This new wealth economy approach forces us to think about adjusting national balance sheets according to the impacts of climate change, alongside contributions to it. Preliminary results indicate that constructing accounts from multiple perspectives – each attributing emissions to a different point on the global supply chain – is the only way to have a comprehensive understanding of the carbon footprints of nations.”
Social capital is often referred to as the glue that holds societies together. It encompasses personal relationships, civic engagements and social networks. Without it there can be little or no economic growth. The report argues that trust in fellow citizens and institutions as well as the quality of governance are the result and the cause of productivity growth and higher reported wellbeing.
As a fundamental element of social capital, the formation of trust relies on cumulative experiences of trustworthy interactions with other people or organisations or broader social settings such as shared ethical views, cultural norms and rules.
The research team have performed statistical analyses on European data exploring trust in societies and how this correlates with economies. This showed that overall, trust is highest for people in Scandinavia and lowest for those in Mediterranean and Eastern countries, that it generally increases with income, and that building trust may help boost productivity.
The Wealth Economy project seeks to ultimately augment GDP with a small dashboard recording access to key assets and have been working with many of the biggest environmental economic initiatives from the United Kingdom to the United Nations.
Dimitri Zenghelis, Wealth Economy project leader, said: “Statistics are the lens through which we observe the economy: policymakers, businesses and individuals change their behaviour in response to the picture they see through that lens. Our statistical tools need to be fit for capturing value in an uncertain and rapidly changing world where decisions today will lock in our ability to prosper in the future.”