6.

Keeping on Track: Performance Indicators for a Better Society

‘Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.’

Kenneth Boulding, former president of the American Economics Association

How can you tell if your country, or your planet, is heading in the right direction? As we saw in the last chapter, the most important function of a democracy is to decide what things we want our cities, states or countries to do more of or less of. But after we decide on the ends, and before we start debating the means, we have to have a conversation about how we will measure our progress. How can you tell if your community is going to hell in a handbasket or is on the brink of becoming a utopia?

People who want to lose weight, run a marathon, learn a new language or write a book usually set themselves some goals, and then measure their progress towards them. So how would a country that wanted to lighten the load it placed on the environment or improve the quality of life of its citizens assess its progress towards those goals? The reality, unfortunately, is that it is a lot easier to decide that you want to measure progress than it is to decide how you will measure progress.

For the past forty years or so the main indicator of national performance has been gross domestic product. Many on the Right define their political agenda as the pursuit of a strong economy, as defined by growth in GDP. Progressive groups, on the other hand, are often divided between those who see strong economic growth as the only way to create jobs and lift people out of poverty, and those who see the pursuit of zero economic growth, or a ‘steady-state economy’, as the only path to environmental sustainability.

The inventors of GDP would be devastated to learn that their indicator of the amount of stuff that gets bought and sold each year has become the centre of our political galaxy, the thing around which far more important economic and democratic ideas now orbit. Although we run a risk that this chapter might be sucked into the political black hole that is the debate over whether GDP growth is good or bad, it is important to describe what GDP actually is, and is not, so that, with luck and determination, we can begin to escape its gravitational pull and move into a more interesting and fruitful space, where we can consider the significant policy and political trade-offs that always have to be resolved in a democracy.

WHAT IS GDP, AND WHAT ISN’T?

As we saw in Chapter 1, gross domestic product is a statistical estimate of the value of all of the goods and services (that is, all the stuff) that a country has produced in a particular time period. ‘Economic growth’ simply refers to the change in the size of GDP between one time period and the next. So if you hear someone say, ‘The economy grew by 3 per cent last year,’ what they really should have said was: ‘According to the national statistics office, the estimated size of GDP was 3 per cent larger than last year’s estimated size of GDP.’

Regardless of your politics or your goals for your country it is actually quite handy to know what the GDP is and whether it is shrinking or growing. Tracking progress and making good decisions requires information, and the national accounts on which GDP is based are jam-packed with useful information. But that doesn’t mean it contains all the information we need.

So the problem isn’t that we measure GDP. The problem is the way that GDP is used in political debate. Collecting data on production, consumption and investment is a great idea, but determining the success of a country by reference to GDP is like judging the success of your kid’s birthday party by measuring how much you spent on the catering.

Few people work on the assumption that the more that is spent on something, the more successful it is. Indeed, it is absurd to conclude that the more economic activity there is, the more efficient the economy is becoming. But that is exactly the logic behind a belief that if GDP is growing, things must be improving. By that logic, if we all went and smashed our neighbour’s windows, and then all paid a glazier to fix our own, we could make the economy stronger. The same would be true of causing climate change and then spending a fortune trying to protect ourselves from its consequences.

GDP is estimated by adding up the value of all the ‘final goods and services’ produced in an economy. It includes not just the value of the food we eat, but the food we throw in the bin. It includes the value of the landmines we produce, the value of the prisons we build and the value of cleaning up oil spills. Because it incorporates everything we spend money on, and ignores the value of housework, volunteers and the services the natural environment gives us for free, GDP is in no meaningful sense a measure of progress, as its inventors were eager to highlight; it is nothing more than a partial indicator of activity.

Here are a few things to keep in mind if you ever find yourself considering whether GDP is a good indicator of a country’s wellbeing:

•When a farmer produces carrots and sells them to a shop and then the shop sells them to you, the value of the carrots is included in GDP. If you grow carrots in your own backyard and eat them, this is not included in GDP.

•When a farmer produces carrots and sells them to a shop and then the shop sells them to you, the value of the carrots is included in GDP. If the farmer trades a crate of carrots for a crate of eggs from the farmer next door, neither the eggs nor the carrots are included in GDP. (While they were ‘produced’, there is no paper trail for such bartering, so the statisticians can’t measure it accurately.)

•When a farmer produces carrots and sells them to a shop and then the shop sells them to you, the value of the carrots is included in GDP. If you throw the carrots in the garbage bin, then the cost of collecting and disposing of the carrots will further add to GDP.

•When a farmer uses pesticide to produce carrots, and the pesticide runs off into a river and kills a large number of fish, the cost of the pesticide, which is passed on to consumers, is included in GDP. If the fish would otherwise have been caught and sold, then the death of the fish will lead to a reduction in GDP. But if not, their death has no effect on GDP. Any money spent trying to keep the pesticide out of the water supply would, however, increase GDP further.

As we have seen, Simon Kuznets, one of the inventors of GDP, was fully aware of its limitations as a measure. In 1962 he said:

The welfare of a nation can scarcely be inferred from a measure of national income. If the GDP is up, why is America down? Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.³⁷

GDP DOESN’T MISLEAD – PEOPLE DO

If you want to know how much stuff was produced and sold in your country last year, then GDP is your go-to number. But if you want to know what is happening to employment in the retail sector, then GDP isn’t that useful because it doesn’t distinguish between sales of shoes made in shoe stores and sales of shoes online. Given that shoe stores employ a lot more people than online retailers, the shift to online shopping means there is no longer a stable link between shoe sales and jobs for shoe sales-people. In turn, it is no longer safe to assume that if we all buy a lot of stuff, we will create a lot of jobs. The shape of our economies is changing, and some of it is bad news for retail workers.

The ever-changing shape of the economy is one of the main reasons that it makes little sense to pursue GDP as a national goal. Consider the following:

•It is possible to have rapid economic growth without rapid employment growth when the parts of the economy that don’t need a lot of workers (such as online retail, mining and financial services) are doing most of the growing.

•It is possible to have rapid economic growth while the incomes of low- and middle-income earners fall – as long as the incomes of the rich rise even faster; this is because GDP measures total production and says nothing about distribution.

•It is possible to have rapid economic growth and rapid destruction of natural resources; this is because the sale price of commodities such as coal, oil and wood are included in GDP, but the reduction in value of the stock of natural resources is not.

The economists and statisticians employed to estimate GDP today are fully aware of these and many more limitations. The bottom line is that it is not GDP that is at fault; the problem is its use and abuse by those who should know better. If you want an indication of whether a country is heading in the right direction, you need to consider other things.

GROWTH IS GOOD . . . SOMETIMES

When you’re talking about the development of a child, the expansion of the renewable energy industry or the proportion of people who have access to clean drinking water, growth is most likely to be good. But growth is a process, not a universal goal. It’s not whether or not growth is occurring that matters, but whether the growth of an activity or industry helps or hinders achieving your actual goals. Rapid weight growth in an infant, for example, is usually a sign of good health, but in an adult it is probably not.

Despite the economic, social and rhetorical benefits of the pursuit of growth (the pursuit of decline being a far less attractive proposition for most), many on the progressive side of politics are quick to state their opposition to, or at least their concern with, economic growth. However, being a critic of growth creates not only political difficulties but also policy problems that could be easily avoided.

Consider the following examples. Many in the environmental movement say they want to slow or even stop economic growth, but they simultaneously say they want hundreds of billions of dollars invested in renewable energy to rapidly reduce greenhouse-gas emissions. Such investment, if it were to occur, would likely stimulate economic growth. Is that good or bad? Similarly, many advocates for economic justice want big pay rises for low-income workers and a massive increase in funding for schools, hospitals and aged-care facilities. Such spending would almost certainly lead to an increase in economic growth. Would that be good or bad?

A phoney debate has raged for decades about whether economic growth is good or bad, and while this has kept both sides busy, it has come at the expense of a far more important debate: what kind of economic growth is needed to get society and the natural environment into the shape we want it in?

Middle-class people living in developed countries would do well to admit that two centuries of economic growth has produced a substantial increase in human life expectancy and a significant improvement in the physical standard of living for the majority of the population. The fact that it has also driven high rates of biodiversity loss around the world and a rapid reduction in the amount of open space per person, and done little to address the disadvantage of many of the most vulnerable groups in the community (especially segments of Indigenous communities) is, again, a reflection of the shape of economic growth, not proof that the rate of economic growth has been too slow – or too fast.

Citizens of developed countries today live in the most materially affluent societies the world has ever known. Middle-class people in countries such as Australia, Canada or the USA have access to better food, better health care, better transport and have far longer life expectancies than even pharaohs and emperors of distant eras could have imagined. Social, technological and economic change has delivered enormous benefits, but those benefits can no more be measured by the volume of stuff that is produced than a movie can be judged by how long it is.

MY FLAWED INDICATOR OF PROGRESS IS BETTER THAN YOURS

Agents of change need a clear vision. New indicators (or making better use of the old indicators) will help, but just as a compass can tell you which way you are pointing but not which way to go, no indicator of ‘progress’ or ‘wellbeing’ can tell a democracy what it should have more of and what it should be willing to give up to achieve it.

As GDP approaches its hundredth birthday it is beginning to show significant signs of age. As the ‘P’ in GDP makes clear, it is focused on production, but a growing proportion of economic activity in developed countries has very little to do with production in the sense that economists in the 1940s understood it. Furthermore, while the boundary between market production (which is included in GDP) and household production (which is not) has always been a problem, this is now becoming a central concern for economists and policy-makers. As the Economist magazine has observed:

In a world where houses are Airbnb hotels and private cars are Uber taxis, where a free software upgrade renews old computers, and Facebook and YouTube bring hours of daily entertainment to hundreds of millions at no price at all, many suspect GDP is becoming an ever more misleading measure.

If companies such as Facebook and Google decide they want their contribution to society to be recognised, they may become some of the most influential advocates for reforming GDP and developing new indicators of progress the world has ever seen.

The glaring problems with GDP have led to the creation of a wide range of alternative indicators, including the Genuine Progress Indicator, the Index of Social and Economic Wellbeing, the Human Development Index and the Sustainable Development Goals. Some of these measures start with GDP and adjust it for the things their authors believe should be included or excluded. The other common approach is to develop a broad scorecard of indicators for a wide range of social and environmental variables. But while all such efforts perform the valuable function of broadening the range of information available to voters and decision-makers, none is widely used, and none is a substitute for the democratic question: What do we want more of?

The uncomfortable truth for those who see GDP as bad is that no single indicator – of GDP, wellbeing, progress, sustainability or happiness – is ever likely to be widely recognised as good. In turn, no new indicator, no matter how worthy or how superior to GDP it might be, is ever likely to be widely accepted by tens or hundreds of millions of people. Significantly, the decisions about what to include in GDP – and what to leave out – were never voted on by the public or politicians. Nor was how health and education services should be ‘valued’. GDP was invented behind closed doors and has grown to be used in precisely the ways its inventors feared. The idea that any new alternative to GDP can be agreed to by a parliament and then embraced around the world is as absurd as the current assumption by those who construct the national accounts that Wikipedia provides no benefit to the economy and that making landmines does.

But despite the political difficulty – dare I say impossibility? – of creating a new indicator that is not just clearly superior to GDP but can be widely accepted by groups as diverse as arms manufacturers and charities, there is a steady stream of efforts to develop the ‘one true indicator’ of progress. Just as GDP gives many politicians and business leaders some simplicity and certainty, so too, it seems, many would-be reformers have invested their hopes in the development of happiness or sustainable wellbeing measures. If we had such measures, the argument goes, we would be able to ensure that the country was on track towards happiness or wellbeing. Such indicators, it is suggested, can ensure that decisions are made in the ‘true national interest’.

If only. Those on the progressive side of politics are often fierce critics of the idea that it is possible to develop a simple numerical indicator of the performance of a school-teacher, the quality of education provided by a school or even the benefits to the economy of training students in the arts or philosophy. But, strangely, many of those who are adamant that their own job or industry defies measurement by ‘simplistic indicators’ seem to believe that if we could somehow measure the value of volunteer effort, investments in crime prevention and improvements in air quality, we could then combine them in some way and – hey presto! – we would know whether our country was going in the right direction or not. Imagine getting the National Rifle Association and the health profession to agree on whether both the sale of guns and the cost of treating gunshot wounds should be included in a new measure of progress. Or imagine getting fundamentalist Christians and medical professionals to agree on whether the cost of providing abortions adds to or detracts from national wellbeing.

IT’S NEVER BEEN ‘ALL ABOUT THE ECONOMY’

There is no evidence to support the view that conservative governments, or any governments, are singularly obsessed with maximising GDP growth. If they were, these governments would invest a lot more money in early childhood education, provide a lot more support to help parents (usually women) re-enter the workforce after they have children, spend a lot more money on crime prevention and a lot more money on preventative health. Although all of these simple policies have been shown to provide large long-term economic benefits, conservative governments often prefer to cut spending in these areas in the name of reducing the size of the ‘inefficient’ public sector.

Given a choice between cutting public-sector programs or spending more money on public-sector projects that increase the size of the economy, most conservatives would opt for the cuts. While progressives often accuse conservatives of being obsessed with the economy, such criticism unduly flatters those conservatives.

Consider the following. The ‘war on drugs’ has been raging for decades, with no sign of victory in sight. Not only is the cost of such a war high in financial terms, the human cost of criminalising common cultural behaviours is also devastating for individuals and communities. Further, the benefits to individuals, government budgets and the economy more generally of harm minimisation approaches to illicit drug use have been shown to be substantial. Yet despite the costs to the budget and the economy, many conservatives insist on a tough-on-crime approach for the simple reason that they are not really obsessed by GDP. They just like sounding tough on crime. It’s cultural.

As we’ve seen, the decisions to put a man on the moon, end slavery, declare war, grant women the vote, end apartheid, build nuclear weapons, vote for Brexit or allow the sale of automatic weapons have nothing to do with maximising the rate of GDP growth. While there is no doubt that politicians in many countries are keen to see the rapid growth of the parts of the economy that they like, it is simply not the case that maximising economic growth lies at the heart of all government decisions in any country.

Ironically, while many progressives think that economists and conservative politicians are always singularly obsessed with maximising the rate of GDP growth, in reality even the most avowedly free-market economists think that economic growth is sometimes unsustainably high. As high rates of GDP growth can cause inflation, and inflation can undermine the value of bonds and other financial assets, economists often call on governments to rein in the rate of economic growth. Needless to say, when environmentalists call on governments to rein in economic growth to preserve the value of natural assets, they are far less likely to be taken seriously.

While GDP is a widely used summary indicator, it is simply not true to suggest that government policy is always directed towards its growth. In addition to the determination to neglect public investment as described above, governments around the world often seek to lower their country’s rate of growth to reduce inflation, imports and foreign borrowing. Put simply, while GDP growth is often used to justify policies, in reality elected politicians and central bank staffers are always making judgement calls about what the ‘right’ thing to do is. Using econobabble about the need to ‘reduce liquidity in order to lower inflationary expectations to ensure that GDP remains on its full employment growth path’ is just a way to conceal the implications of the judgement calls about what is ‘good for the economy’ that are being made on our behalf all the time.

CHOOSING THE BEST CAR IN THE WORLD

Formula 1 racing cars are very fast, but they can’t carry passengers, can’t go over speed bumps and fall apart in the smallest of collisions. They are loud, uncomfortable to sit in and have no room for luggage. Their fuel economy isn’t great either.

Designing a car that can travel at 300 kilometres per hour is an incredible feat of engineering, but the skill required to build such a car cannot compensate for how useless it is for many of the activities that are really important to humans. It is next to worthless in all but the most artificial of environments.

So, when designing our economy, should we aim for top speed? Or safety? Or comfort? Or low emissions? The focus in public debate on maximising the economy’s rate of growth has negated the possibility of a more nuanced, but more useful, debate about the kind of features a democracy might want from economic activity. Political and business leaders have for decades seemed determined to create an economy that is designed for speed rather than comfort or safety. Given a choice between increasing the top speed and safely transporting our children into the future, the choice seems clear: the faster, the better . . .

Adolescents often believe that their driving skill can compensate for the high speeds at which some of them drive. Adolescents are also far more likely to crash. It is not just society that needs to grow up – it is also our policy-makers. Bragging about how fast an economy is growing is like bragging about a car’s top speed. The fact that the claims might be true doesn’t make them important or meaningful, especially in a country with speed limits.

Economic growth, like a car’s top speed, is an indicator of potential. Both provide a narrow but, for many, seductive indication of performance. But just as the decisions of a family man who returns from a car dealer with a fast, expensive and impractical sports car should be carefully scrutinised before anyone applauds, so too should the decisions of any politician whose only claim to fame is that they think they can make the economy go fast. Maybe they can – but the real questions are ‘In what direction?’ and ‘At what risk?’

So which is the best car, then? Is it the one with the best fuel economy, the one with the most comfortable ride or the one that tells the neighbours how wealthy you are? The answer, of course, is that it depends on what you want the car to do. In every country, in every year, some automotive experts set out to determine the Car of the Year, but despite all the data they collect and the diversity of the judges they recruit, there is no consensus about which car is actually the best. Indeed, the vast majority of the car-buying public does not buy the ‘best’ car. They buy the one they think suits their needs.

New indicators of progress that draw on a wider range of information than GDP can play an important role in highlighting the limitations of GDP, but broad indicators that seek to place a cash value on human life, the natural environment and our sense of community are not a light on the hill to steer towards, but a mirage that often lures well-meaning reformers into an empty desert.

The purpose of elections is to set national goals and to select the policies that are best able to achieve those goals – in effect, they are a national fight about what kind of car we collectively need to move our country forward. Information can help exclude poor choices and highlight better ones, but ultimately the choice comes down to the direction we want to head in, our priorities, and the things we are willing to sacrifice to get what we want.

If you were trying to rebuild Europe after World War II, or you were trying to lift people in a poor region out of poverty, it is more likely that the faster the growth in economic activity, the better. Anyone today who is concerned with unemployment, investment in infrastructure and the capacity to shift to a low-carbon economy should be as interested in GDP as those responsible for post-war reconstruction in the 1950s. But ‘interested in’ doesn’t mean ‘obsessed by’.

Rather than simply dismissing GDP as a tool of destruction, those who seek to build a new economy need to use GDP like police use radar guns: to detect those parts of the economy that are going faster, or slower, than is socially desirable. Surely those who want to transition to a zero-carbon economy want to see rapid growth in investment in renewable energy and public transport? Surely those who want to improve aged care want to see rapid growth in the relevant parts of the construction industry? GDP figures will give them a straighter answer than a politician ever will about what is really happening. But GDP figures can never tell us what should be happening.

MEASURING WHAT MATTERS

During World War II, GDP was specifically designed to help monitor the level of production of guns, tanks and battleships. Yet many citizens (outside the United States at least) might argue that sales of guns today are linked to a decline in wellbeing, not an increase. That is, while keeping track of the value of transactions is an economic issue, evaluating what we need more of and what we need less of is a democratic issue.

In large and diverse populations, it is much easier to measure progress towards a goal than it is to achieve consensus about which goals should be pursued. Similarly, it is much easier to measure the number of children who can read when they leave school than it is to agree whether having another literate child is more or less important than the protection of an endangered species or the preservation of an endangered Indigenous language.

If children’s literacy, species protection and the preservation of Indigenous cultures seem like strange things to compare, then you can see the problem with any effort to develop the one true indicator of national progress. Those who would replace GDP with a better indicator must collect data on those and hundreds or thousands of things that matter to them but are excluded from GDP and, having collected all that information, combine it into a single indicator of national progress, decline or stasis. And in combining all the things that matter, they must make assumptions about what number of literate children outweighs the impact of a species becoming extinct. Unless a common unit of measure for education, biodiversity and Indigenous-language usage can be found, it is impossible to combine such issues into a summary indicator.

A simpler and more transparent approach would be to collect, compile and publish a wide range of raw data on the diverse range of issues that matter to people, and then to discuss them regularly, publicly and in the context that while rich countries cannot do everything that they want, they can do anything they want.

Today, of course, while GDP gets most of the headlines, data on inflation, unemployment, wage growth, trade balances and public debt are all part of a very human, very flexible and very subjective decision-making process relating to changes in interest rates and budgetary policy. Indeed, a key indicator used by those setting monetary and fiscal policy is surveys of business confidence and consumer sentiment, both of which are subjective attempts to gauge how managers and consumers are feeling.

Those who want to cure affluenza do not need to develop the one true indicator of progress. They need only ensure that voters, and those politicians who want the support of voters, are clear about the performance of the things that matter to them. They must understand that if politicians want to spend more money on key problems, they can – if they want to. Arguing that more resources can’t be devoted to health, education or renewable energy because we must grow our GDP is not a valid reason for inaction: it is simply an excuse.

IT’S TIME TO GROW UP, NOT OUT

Of course, ‘growth’ doesn’t only refer to size: it can also refer to maturity. ‘Growing up’ means much more than getting taller.

Keynes once wrote: ‘The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems of life and of human relations, of creation and behaviour and religion.’ While he might have got the timing wrong, the significance of his observation stands. At some point we will have enough stuff that we won’t have to worry so much about stuff. The question isn’t if, but when. When will national leaders feel confident enough about the size of their economy that they can start focusing on the way their society treats its people? When will we sate our hunger for more stuff and start to put something aside for our children? When will we be rich enough as a society that we can afford to be generous to our neighbours?

This simple truth has been observed not just by the economists who gave us GDP, but also by philosophers, artists and politicians. ‘It is not enough to be busy,’ said Henry David Thoreau. ‘So are the ants. The question is: What are we busy about?’

Marilyn Waring

All of the women in my family were fabulous housekeepers and beautiful gardeners. They made gardens wherever they went. These women worked really hard and didn’t get a cent but it didn’t enter my mind to think they weren’t working. But in my twenties I came to realise that the United Nations System of National Accounts, the international rules for measuring GDP, literally defined household work, most of which is done by women, as worthless. It was a source of real anger for me. I was outraged.

When I wrote Counting for Nothing in 1988 I thought it was really important to confront the public, politicians and the economics profession with the shortcomings of GDP and the way it ignored the work of women and the value of the services produced by the natural environment. I was surprised at how much interest there was in the issues it raised, and I was proud of the way that so many countries, and the UN itself, took up the challenge of collecting a wider range of data and presenting it in a wider context.

But the importance of counting is one of the major things that I’ve changed my mind about. When I was writing that book I had just stepped out of the New Zealand parliament. When you are in parliament you want data, you want numbers. But it is easy to confuse having precise numbers with having a clear picture of what’s going on. I have moved on from that way of thinking.

I now think estimating the value of the environment and of unpaid work is a pretty stupid thing to do. The dollar values that we use for air pollution or water pollution or caring for a baby can end up attracting more attention than the need for clean air or healthy babies and, in turn, putting dollar values on such things can make it easier for decision-makers to lose track of what is really important. These are abstracted indicators. They do not tell you, for example, the density of harmful particulate matter and what those particles do to a child’s lung, which is what a decision-maker needs to consider. We can’t really put a dollar value on the benefit of a child being able to breathe easily.

I began to do more work around broad measures of wellbeing and then got impatient with that too, because everybody was trying to expand GDP with a load of other indicators that were inevitably decided by some form of central committee. And the things that got added in tended to be things there was already some old data for, as opposed to the new things you thought should be measured.

It’s crucial to realise how important is the decision about which things to include in a measure of wellbeing, and which things to leave out. It’s central to the final results – but who gets to decide what’s in and out? The things that ‘matter’ depend on your gender, age, culture and even on what we have come to expect will be measured. Unfortunately I have come to believe that homogenised indicators of national wellbeing are barren for policy-making as well.

That said, I do think that measuring GDP is better than nothing, and I think that collecting and reporting broader indicators of wellbeing is better than just measuring GDP. I think some researchers and some governments have used data on household production and other non-market services well, but I don’t think it is possible, or desirable, to develop the ‘uber-indicator’ that can tell elected representatives what to do. Ultimately decisions and trade-offs have to be made by informed and well-intentioned parliamentarians who have been elected by well-informed citizens.

Professor Marilyn Waring is an economist, feminist and former member of the New Zealand parliament whose work on GDP is widely credited with changing the way the UN measured GDP and understood wellbeing.