Living Wealth Indicators

We Get What We Measure

Agenda: Advance the transition from growth in GDP as the measure and goal of economic activity to improvements in human, social, and environmental health as the proper measure and goal.

The indicators we use to evaluate economic performance guide the priorities we build into our economic institutions and policies. Current practice relies primarily on financial indicators, specifically growth in GDP (gross domestic product) and stock market indices. By the prevailing wisdom, the faster GDP and share prices grow, the better the economy is performing. This premise in turn drives economic policy choices.

Growing Rich? Or Growing Poor?

Yet, it is now widely acknowledged that GDP, which measures the monetary value of the exchange of goods and services in the market place, tells us little or nothing about the health and well-being of people, community, and natural systems. (See GDP: A Flawed Measure of Progress) Indeed, among the affluent countries, continued growth in measured GDP has not in recent decades yielded greater well-being and has certainly contributed to greater greenhouse gas emissions and other environmental problems. 

In the United States GDP has continued to rise in the face of disintegrating families, a vanishing middle class, increasing rates of homelessness and incarceration, rising unemployment, the disruption of community, collapsing environmental systems, the hollowing out of domestic manufacturing capabilities, failing schools, growing trade deficits, and other problems. GDP tells us we are growing richer and the economy is recovering even as unemployment continues to rise and real wealth indicators reveal that we are growing poorer. Our rate of consumption may be increasing, but our state or stock of well-being is declining.

Ecological economist Joshua Farley observes that GDP is actually a measure of the economic cost of producing a given level of well being. Managing an economy to maximize economic cost may benefit corporate bottom lines, but is disastrous for society.  

Managing for Well-Being

Economist Kenneth Boulding noted in a 1966 paper titled "The Economics of the Coming Spaceship Earth" that in a spaceship world well-being is properly measured by the condition of stocks of food, oxygen, water, crew health and other essentials, not by the rate of use or throughput. GDP is a measure of throughput.

The focus on GDP growth supports a misleading cultural belief that well-being is a function of consumption. GDP takes no account of the depletion of human, social, and natural capital or the distribution of wealth between rich and poor. The focus on share prices leads to a similarly misleading belief that inflating financial bubbles increases the wealth of the society, when in fact it is simply increasing the financial power of the already economically advantaged relative to the rest.   

If our primary concern is with increasing the financial assets of the rich, then financial indicators are the appropriate measure. 

If, however, we believe that the purpose of the economy is to enhance human and natural health and well-being, then we properly evaluate economic performance against indicators of what we really want: healthy and happy children, healthy and creative people, strong families, caring communities, and flourishing natural systems. 

In general, money metrics serve poorly as indicators of life values. Rather than continuing to manage our economies to grow GDP, we should be converting to the use of indicators of the state of health of people, communities, and natural systems as the basis for assessing economic performance at all levels from the local to the global.