MEASURING WELL-BEING

TO JUDGE FROM how gross domestic product (GDP) is discussed in the media, one would think that everything good flows from it. Yet GDP is not a measure of well-being or even of income. Rather it is a measure of overall economic activity. It is defined as the annual market value of final goods and services purchased in a nation, plus all exports net of imports. "Final" means that intermediate goods and services, those that are inputs to further production, are excluded.

GDP does not subtract either depreciation of man-made capital [such as roads and factories] or depletion of natural capital (such as fish and fossil fuels). GDP also counts so-called defensive expenditures in the plus column. These expenditures are made to protect ourselves from the unwanted consequences of the production and consumption of goods by others-for example, the expense of cleaning up pollution. Defensive expenditures are like intermediate costs of production, and therefore they should not be included as a part of GDP. Some economists argue for their inclusion because they improve both the economy and the environment. We can all get rich cleaning up one another's pollution!

GDP To go from GDP to a measure of sustainable well-being requires many more positive and negative adjustments. These adjustments include uncounted household services (such as those performed for free by spouses); increased international debt; loss of well-being resulting from increasing concentration of income [the well-being induced by an extra do liar for the poor is greater than that for the rich); long-term environmental damage such as ozone layer depletion or loss of wetlands and estuaries; and water, air and noise pollution. When all these adjustments are made, the result is the index of sustainable economic welfare (ISEW], as developed by Cliff ord W. Cobb and John B.Cobb,Jr.,and related measures. These indices have been used by ecological economists but are largely ignored by others in the field.

For the U.S., it appears that, beginning in the 198Ds, the negative factors in the ISEW have been increasing faster than the positive ones. Similar results have been found for the U.K., Austria, Germany and Sweden. In other words, for some countries in recent years, the costs of growth are rising faster than the benefits.

As important as empirical measurement is, it is worth remembering that when one jumps out of an airplane, a parachute is more beneficial than an altimeter. First principles make it abundantly clear that we need an economic parachute. Casual empiricism makes it clear that we need it sooner rather than later. More precise information, though not to be disdained, is not necessary, and waiting for it may prove very costly.

By Herman E. Daly. From Scientific American, September, 2005


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Last Updated on September 19, 2005