Saturday, March 29, 2008

The Happy State of World Progress

Don't worry, be happy. Simple advice, and an annoying song (Bobby McFerrin, what were you thinking?). But not the type of advice one associates with economists, especially these days.

A growing number of economists, and even the Economist itself, are starting to feel that GDP just isn't up to the task of determining how we are doing. Since "what gets measured, gets managed" it is important to measure the right things about our world. Like happiness and health, in addition to income.*

WorldWatch's 2008 State of the World Report conains a nice summary of the field. In "A New Bottom Line for Progress," John Talberth outlines the approaches to improving and expanding both macroeconomic and microeconomic measurements of progress. The big problem is that "GDP gives no indication of sustainability because it fails to account for the depletion of either human or natural capital." Talberth provides some useful examples, including a disturbing graph showing the escalating GDP in Sudan during the Darfur genocide and in Sri Lanka after the tsunami. These disasters are simply not captured by the GDP accounting system.

While rising GDP is correlated to genuine progress in the early stages of development, Talberth proposes that there is a threshold effect, beyond which social and environmental costs offset the benefits of economic growth. He cites work in China showing that their recent economic growth may have been entirely offset by these costs in some provinces. Yup, it appears that those dang "off balance sheet items" weren't just a problem for Enron, but are a growing problem for our global eco(nomic)system. And we all own stock in the Gaia 401(k).

Talberth also provides a summary of new ways to measure progress for enterprises, covering certification, waste streams, eco-efficiency, and both work place and community well being. For entrepreneurs, his table of microeconomic indicators would be a good checklist for building a green business. And for companies starting to develop and implement sustainable business strategies, this report would be an excellent place to begin.


*Amartya Sen's book "Development as Freedom" is my personal favorite on this topic.

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