The economic crisis has prompted a reassessment of our values. French President Nicolas Sarkozy says economic growth, as measured by gross domestic product, is not a sufficient measurement of our well being. And he has a point, for while GDP encompasses a host of economic variables, broadly representing a nation's economic progress over time, and in comparison with other nations, it fails to capture important measures of prosperity, such as health, personal freedom and security.
The London based Legatum Institute, which releases its Prosperity Index in two weeks (28th), may answer most of Mr. Sarkozy's demands. The Index, now in its third year, assesses myriad economic and social indicators for most of the world's population, and ranks countries according to their wide-ranging performance. Its new listing will be read far and wide, from Austria and Argentina to Yemen and Zimbabwe. The key is that the index--while encompassing many of the factors that Mr. Sarkozy laments are excluded from GDP--sticks to that which can be measured in the first place.
And it is badly needed, because GDP's failings are becoming increasingly evident. For example, prices may not exist for some goods and services, such as government provision of "free" health care or family care services, so statisticians have to impute prices to get a fairer GDP measure. Yet imputation is unreliable, given that the necessarily subjective evaluations are done by remote statisticians, and not by consumers using the services. Continual refinements in statistical methods reduce these problems of course, but the current mainstream push is away from dry, objective measures toward measuring how people feel. Robert Kennedy's famous 1968 speech lamenting that GDP "measures everything . . . except that which makes life worthwhile," articulated this concern. GDP positively reports exploitation of resources but fails to account for resource depletion, environmental damage or unhealthy working conditions.
Mr. Sarkozy wants to address these concerns. His commission of 25 scholars, including five Nobel Laureates, to reassess the "Measurement of Economic Performance and Social Progress," reported last month and raised some important issues, such as that household income may be a better prosperity indicator than GDP, and median incomes describe societal inequality better than mean averages. And while there is no one holy grail statistic which can quantify everything meaningful in a single number, his team concluded that a range of new variables should be included in measuring a nation's progress. The Commission wants to broaden indicators to include social capital, education, governance and health, and discusses how existing statistics could be used. So far so good.
But the report also wants to measure sustainability, environmental degradation, and climate change, while admitting measurement of these factors is highly subjective and even then difficult or sometimes impossible. The impossibility of operationalizing such guestimation is made worse by the report's implicit assumption that all environmental changes will be bad over time, especially in relation to issues like energy use and population growth. But things are not that simple--resource depletion can drive better management of resources, which results in an increase of those resources. Iceland's fisheries are a great example.
The report manages to stay away from supporting the wackiest evaluation ideas, but still gives them plenty of oxygen. Take the "threshold" hypothesis, which suggests that "sustainability is already far behind us, and we have already entered a phase of decline," according to the report. Furthermore, it gives no criticism or qualification to the apparently "well-known" view that we have "exceeded Earth's biocapacity by approximately 25%". Such statements have no basis in measurable observation, though are often used as the intellectual support for the dystopian drivel of the worst kind of Hollywood movies.
Despite its claim that "the report is about measurement rather than policies" it gives the impression that the data will be used to change our behavior. As it says at one point: "some members of the Commission believe that the [current financial] crisis provides heightened urgency to these [measurement] reforms". It then suggests governments should provide "alternative valuations when market prices for assets are not available or are subject to bubbles and bursts". But as with the environmental guestimates, the worry is how governments will value these assets, and when will they say a bubble is over?
More than just grating, the report's obvious political biases also undercut its value. On numerous occasions it points out how life is really better in France than the U.S., and does so by adjusting the statistics, such as on health care. While the manipulations are often justified, the report tends to pick examples where France does well. But when reporting that "people who become unemployed report lower life-evaluations, even after controlling for their lower income" we do not get a comparison of France with U.S., although the former would do less well in this regard than on a health assessment.
The only note of unintended amusement is when the report tells us that many Europeans do not trust official statistics, but neglects to explain that this is partly because successive governments across Europe, including the French, have manipulated data, especially unemployment figures.
The report reminds us that there are many indicators of solid data that can help us broaden measures of well-being far beyond GDP--some data that have been collected since the 19th century in industrialized nations, which are illuminating, publicly available and standardized across countries. And which the Legatum Institute's Prosperity Index actually operationalize.
Unfortunately, the Sarkozy team also postulates variables for which no country currently collects data, because they are simply not measurable. We should stick with what can be measured, include subjective personal and social evaluations with care, but not become sucked into a world of speculative valuations of our environment. History suggests the "values" thus generated will be used by elites to drive policies they like at our expense.
Roger Bate is the Legatum Fellow in Global Prosperity at AEI.