Reforming Gross Domestic Product

The material economy is roughly measured by the annual Gross Domestic Product (GDP).  GDP is defined by spending, which depends on income; but during the 2000s GDP in western countries became largely composed of non-productive financial services.

Under the United Nations System of National Accounts (UNSNA), the primary measure of how well a nation's economy is doing is the Gross Domestic Product (GDP), which is a measure of the total goods and services produced by a country during a year. GDP is criticized because it is geared towards awarding higher GDPs the faster the nation converts its resources into goods and goods into wastes, in essence valuing a nations resources only after they are used, without taking any account of declining natural capital. Attempts are being made to reform the UNSNA and GDP. 

The raison d'être of production is to create human welfare. Conventional wisdom dictates that increasing production creates increasing wealth. However, welfare is more than wealth and consumption. It includes factors such as income, consumption, employment, education, health, safety (freedom from violence), environmental quality, social security, leisure and equity. In most western developed economies, recent GNP growth has failed to translate into welfare gains. In fact, the very pattern of economic growth has been a cause of the decline in sustainable economic welfare. A major part of this decline can be attributed to the growing impact of resource depletion and long-term environmental damage. A second negative factor is increasing income inequality. Such rising social and environmental costs (economic 'externalities'), which are increasingly reflected as real losses in terms of welfare, are not accounted for by neo-classical economics.

Current definitions and measures of progress and development, such as Gross National or Domestic Product, are known to be both inadequate as measures of welfare and for taking into account the destruction of the ecosphere. They can give skewed signals to the markets by externalizing costs such as pollution, resource depletion, human suffering etc. Additional measures and accounting systems, addressing full social and environmental costs and benefits, need to be included and integrated into financial systems of accounts. Accounts should increasingly reflect true wealth. The concepts of progress and development should be decoupled from growth and profits, recognizing that people do not exist for the market, the market exists for the people. Evidence of the ways growth simply for the sake of growth can be destructive to communities and societies needs to be made available and factored into social and economic policy decisions.

Nordhaus and Tobin introduced the Measure of Economic Welfare (MEW) in 1974 to prove the adequacy of the GDP as a surrogate. This seemed justified by the then available data. However, divergence of the two measures observed since the mid 1970s has encouraged the development of other measures, the Index of Sustainable Economic Welfare (ISEW) and the Genuine Progress Indicator (GPI). Using these calculations, which include some of the missing factors in the GDP-measures, the current economic and resource crisis is clearly manifest. GPI figures show that the factors of welfare mentioned are either levelling off or have been on the decline in countries so far examined, such as the USA, UK, Denmark, Austria and the Netherlands.