Accomplishment, laughter and the love of friends, in an ecology able to sustain community, peace and freedom. No problem so far, but do we need to measure it? And, if so, can the national accounts help us to do so?W2

Well, the items in that short list of uplifting things that comprise well-being are hard to quantify, and one measure that clearly does not do so is that which is usually taken as a guide to the performance of the economy—Gross Domestic Product (GDP). Indeed, GDP and its related economic indicators were never designed to tell us about the well-being of a nation and the people living in it.

Shortly after the design of reliable measures of national income in the early 1930s, for which the economist Simon Kuznets was mainly responsible, he wrote a celebrated report about what “national income” really means. While it is true, he explains, that “economic welfare cannot be adequately measured unless the personal distribution of income is known”, yet . . .

. . . no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income.W3

The shortcomings of GDP as a measure of well-being are many and profound. Here are some of them:

1. The vital contribution of the informal economy is not measured in national income

The informal economy includes all the things we do for each other as families or for the local community. They are unpaid, so are not registered in the national accounts. As the informal economy shrinks, with more of its work shifting into the formal economy and being paid for, GDP (other things being equal) rises, but this by no means suggests that there has been an improvement in well-being.W4

2. Externalities are not measured

Externalities are the things that we get for free: good things, such as work friendships and the services beyond value that we need from a healthy ecology, and bad things such as pollution, climate change and congestion. They affect well-being for good or ill, without any direct representation in the national accounts (see Economics > #5).W5

3. Defensive expenditure protects well-being, up to a point, but it does not improve it

Defensive expenditure is the cost of the things we have to do as a consequence of living in a society that has grown to a very large scale. The economist E.J. Mishan included the following in his radical analysis of defensive expenditure: internal and external defence (the costs of law and order as well as armies); travel and transport (the transport of goods and people needed in order to cope with the centralised structure and remote supply that comes with large scale); education (the training in technology and other skills needed for the specialist roles required by a large-scale economy); media information (we need to know what is going on); healthcare (the cost of treating the impact of urban and industrial pollution and congestion on our mental and physical health); vacations (the cost of getting away from it all); and institutional lubricants (the whole establishment of administration and services—tax collectors, public relations companies, trade associations—which we have to pay for either directly or through taxes).W6

Another way of looking at this is to note the paradoxical effect of trouble: an accident on the motorway—calling for emergency repairs to cars and people—will add to GDP. Delinquency—requiring police time, psychologists and long stays in prison—shows up as a boost to GDP.

And yet, hold your scorn: if we didn’t have the ambulances and prisons on hand when we needed them, we would object. And they provide work. More generally, if you are out of a job, what you want to hear is news of GDP’s growth, for it brings you a better chance of finding one. From the point of view of employment, it is output that matters—what sort of output doesn’t really matter. Here the abstractions of economics and the abstractions of someone looking for a job join up (Leisure, Needs and Wants).

Lean Logic usually refers to defensive expenditure as the cost of the intermediate economy.

4. Positional goods

In a congested market economy, it is high relative incomes rather than average national incomes which tend to be correlated with well-being because relative advantage can confer absolute benefits in the contest for positional goods, such as being able to live in the most sought-after part of town. In the case of key assets and advantages which are allocated by auction—such as housing—it is the relative size of bids, not their absolute size, that settles it. A general rise in incomes or wealth would make no difference to the outcome of this auction.W7

5. The decline in social capital and stimulus

As the industrial psychologist Frederick Herzberg outlined in a celebrated study, our wants can be divided into two different kinds:W8

1. We want to prevent things we don’t like—such as poor working conditions, poor management and inadequate equipment. He called these “hygiene factors”, and their key characteristic is that, once we have sorted them out, we do not look for any further improvement: that’s enough for now; we hit a ceiling.

2. We also want things we do like—such as achievement, recognition, the friendships, projects and play of social capital, and interesting work. These he called “motivators”, and there is no particular ceiling: we always want more.

This distinction is key to understanding the value we place on things in an affluent market economy. The things we spend money on—food, electric kettles, clothes, cars—are relevant to both hygiene factors and motivators, but the distribution between the two is uneven: electric kettles, for instance, tend to be more relevant as hygiene factors than as motivators.

The things we unequivocally recognise as motivators are things we tend not to buy: rewarding friendships, shared achievements, making music, being uplifted by the sight of the stars. A larger GDP does not increase the supply of such things. On the contrary, in an increasingly boring, excitement-lite, congested and regulated society, the attempt to compensate for the decline in motivators by spending money on stuff—trying to squeeze excitement from things intended to do no more than just keep us ticking over—is not only unstimulating, it is depressing. The psychologist Oliver James sees the clinical consequences of this in the form of a fall in the levels of serotonin—the hormone which makes us feel good after having accomplished something—and he sets out exhaustive evidence for the proposition . . .

. . . that we are unhappier, that people who are unhappy tend to have low levels of serotonin and that levels thereof are largely caused by our social psychological environment. . . . If angst in general and depression in particular have increased since the Second World War, then it is highly probable that more of us suffer from low levels of serotonin . . . For once, it is no exaggeration to use the word “epidemic” in describing a social trend.W9


Nonetheless, GDP is undoubtedly a valuable measure. By giving us the value of output per capita (per person), and comparing that with other nations and with other years, it can tell us something about the wealth of the economy and its rate of growth; about its character and the well-being of the people in it: if GDP is falling, for instance, the level of unemployment will probably be rising, and that has a big effect on well-being. Since our lives depend on the economy, it is a good idea to have some data on its size and growth, even though we also know it isn’t going to last.

Adjustments and alternatives to the measurement of GDP have value, but criticism of it on the grounds that it does not measure well-being (taken sometimes to the point of proposing its abolition) is a straw man argument. GDP can no more be criticised as a poor measure of well-being than an apple can be criticised for not being a potato. GDP is simply a necessary but not a sufficient condition for understanding the state of the economy.

And if, having got the quantitative information we need about the economy, we want to know something about the impact of its growth and scale, GDP can be elaborated in ways that will provide it.

Many other measures have been devised which attempt to give a better idea of well-being, such as the Genuine Progress Indicator (GPI), which corrects the raw numbers provided by GDP, showing its costs in terms of resource depletion and environmental impact (see “Vital Statistics” sidebar). And, on a smaller scale, if the projected revenue from projects is corrected to take account of (for instance) the forests that have to be felled to make way for them, that can help to force the application of intelligence to their evaluation.W10

Some economic indicators and supporting cast
(annual measurements implied)

Gross Domestic Product (GDP): the monetary value of all goods and services produced in the domestic economy.

Gross National Product (GNP): GDP plus net property income from abroad.W11

National Income: GNP less depreciation.

Externalities: The good and bad things arising from production and consumption decisions, but not represented in prices.

Net Economic Welfare (NEW): GNP adjusted for externalities, plus the value of leisure.W12

Genuine Progress Indicator (GPI): NEW adjusted for resource depletion and environmental damage.W13

Happy Planet Index (HPI): A measure of Happy Life Years, adjusted for their ecological footprint (i.e., environmental damage).W14

Nominal values: values measured at current prices.

Real values: values adjusted by inflation.

Per capita. Per person: the expression of national accounts per person, rather than as an aggregate for the whole economy.W15


And yet, it is bigger than that. We are in trouble. What is in prospect is a climacteric. Observation of subtle changes in average well-being do not, even remotely, capture the nature of the problem. We can probably come closer to it by taking a walk.


Related entries:

Public Sphere and Private Sphere, Planned Economy, Generalisation Fallacies, Reflection, Local Wisdom.

« Back to List of Entries
David Fleming
Dr David Fleming (2 January 1940 – 29 November 2010) was an economist, historian and writer, based in London. He was among the first to reveal the possibility of peak oil's approach and invented the influential TEQs scheme, designed to address this and climate change. He was also a significant figure in the development of the UK Green Party, the Transition Towns movement and the New Economics Foundation, as well as a Chairman of the Soil Association. His wide-ranging independent analysis culminated in two critically acclaimed books, Lean Logic and Surviving the Future. A film about his perspective and legacy - The Sequel: What Will Follow Our Troubled Civilisation? - was released in 2019, directed by BAFTA-winning director Peter Armstrong. For more information, including on Lean Logic, click the little globe below!

Comment on this entry: