Managing the economy in unprecedented times

Nevertheless, economic growth has become too narrow in its focus, and that focus has enormous costs, which we are now starting to realise. Nature is one of the obvious costs 80 years or so after the invention of GDP. We measure the toll taken on nature in terms of our use and abuse of natural resources, as well as the lack of sustainable growth we have experienced. Another cost is that GDP doesn't count many things that are hard to measure but matter a great deal to human welfare. For example, the kind of work that we do in the home, which is essential and economically valuable. GDP also fails to measure the care we have for each other as humans, nor does it measure our community relationships, what economists call social capital.

While social capital is a rather vague concept that is hard to measure, and therefore, it doesn't get measured well, it is fundamental for the trust that underpins economic growth. In particular, it is fundamental in the kind of complex, globalised societies we have now: that are diverse with many people living in big cities. These uncounted elements are gaining importance over GDP increases or the increased use and consumption of materials.

Although growth matters a lot, we need to start thinking more carefully about what parts of it matter most to us and what parts are distorting the kinds of decisions we make as individuals or that governments take as policymakers.

The thing that we truly care about is anything that benefits human life, whether it's health or it's greater well-being in different activities. Sustainability is also important because we need to take future generations into account when thinking about economic activity’s impact on the planet and the future. Therefore, we need to gain much more insight into things like our use of natural resources over time. In many cases, we have been depleting them at an unsustainable rate. As the economy shifts, we're using a lot of energy. Climate change consequences may catastrophically impact human life, which would undo many of the benefits of the economic growth we've experienced. Thus, a lot of my research involves thinking about how we can better measure things like innovation, which contributes to improved health; How can we measure distribution better? Who is benefiting from this growth? What kinds of people and where are they from? People haven’t measured these things well in the past.

This is a big research agenda. Yet, it took economists and statisticians 20 years to figure out what the framework should be and what kinds of data needed to be collected after the creation of GDP in the years during and after the Second World War. We have a lot of options nowadays. We've got satellite imagery, mobile phone data and all sorts of big data sources that we can use to start putting this new framework together. It will address human well-being more directly and enable us to collect the information we need to manage the economy and make our own decisions more sustainably and equitably.

We're at the moment when that can happen. It's a very active research agenda and the impact of what we've seen in recent decades has made many people question if the economy is doing what they would want it to do.

Part of the reason we see protest votes, or extremist votes, in many countries is that people feel that this system has not been delivering for them, nor for their children, and it needs to change. So, it's up to us as economists and researchers to figure out a better way of understanding how we can continue this extraordinary episode in human history that has delivered incredible benefits to us, without making it impossible for that to continue.

I'm particularly interested in how we're measuring what's happening in the economy and society because the measurement is fundamentally about power structures and the critical decisions that affect people's lives. However, it's a tricky area because economists talk about measurement in a way that makes many other people uncomfortable.

We have a particular terminology about the need to create a series of measures of the assets that we use that enable us to lead the kinds of lives that we want. It's analogous to a company not only looking at its cash flow from month to month but also thinking about its balance sheet and what assets it has that enable it to continue producing and delivering services to its customers into the future. No company would ever ignore its balance sheet, but we have been neglecting our societal and planetary balance sheet for far too long. This includes obvious things like the infrastructure, roads, rail and telecommunications that we use, the capital equipment that companies have in their factories, the machines that make things, the buildings, etc. All of these physical assets include financial assets, but they also include these much harder-to-measure assets that we use as a society and as an economy.

Human capital is one of the terms that economists use that refers to the investment we make in ourselves, our skills and training, our health and our capabilities. Social capital is a term that refers to our contact networks, like our family and friends. It also relates to acquaintances who might help us find a job if we get unemployed or the social networks that have helped people get food and other necessities during the pandemic. No economy functions without those kinds of relationships and trust, which we label social capital.

We also have natural capital, which are the resources that nature gives us, that we use to enjoy for their intrinsic value, but also as economic inputs. This terminology makes people uncomfortable because capital makes people think that it's all about money. In contrast, economics has little to do with money. It’s much more about things that contribute broadly to human welfare. However, I don't know a better word. I need a word that represents something that you invest and that you need to steward, that then delivers you a return for the stewardship over time. I am looking for a word that brings the concept of the future into what I measure today, and I don't have a better name for it than capital or some synonym like asset or wealth.

We have to have this conversation with people who are made uncomfortable by it. Although certain things in life hold an intrinsic value that you would not want to put a monetary price on, if you don't put a monetary price on conversations about policy and decisions, then you're implicitly valuing them at zero. We know that zero is the wrong number. Zero is why we have ignored nature for all of these decades. That's why I continue trying to measure and put numbers on it because at least that way, I get policymakers to converse about the future.

Accordingly, I'm trying to translate between these terms that affect policy, investment decisions by companies, personal choices about what kind of transport to take and the fact that we know that nature is intrinsically valuable, that biodiversity matters despite humans, whatever we think about it. From an economist framework, you're going to damage the things that so many people care about fundamentally.

One of the alternatives to measuring GDP that people sometimes suggest is to ask people how happy they are or what their well-being is when doing certain activities. I find this quite an interesting agenda, but it raises many questions. According to the data, people's reported happiness or well-being correlates with an increase in GDP, but an increase in GDP does not necessarily lead to an increase in happiness over time. If you're looking at the GDP growth rate, GDP affords people expanding opportunities that make them happier. That's quite a robust empirical finding.

People often ask ‘What's the point of growing GDP any further if happiness stops increasing once I get from 16,000 to 22,000 euros of income per capita?’ My response to this is partly democratic: if you look at people in low and middle-income societies, they want to see GDP increase. Additionally, GDP growth is linked to people's employment opportunities and income. Therefore, GDP is still going to matter, but happiness is never going to increase at the same rate as GDP, just as human heights don’t increase along with GDP. Yet, we know that nutritional and health care improvements have accompanied economic growth. These improvements have allowed people to progressively lead longer, healthier lives and be taller and stronger.

The economy hasn’t been running in the way that we want it to for about 20 years, certainly not since the financial crisis. We know that the benefits of recent growth have not been shared equitably. There are people in certain groups who have not seen their level of income or well-being increase in 20 years, and we know that there are all kinds of important issues that we do not measure well. One of these issues concerns household activities, which matters a lot.

People often call the period after the Second World War les trentes glorieuses, the golden age of economic growth when GDP grew rapidly. A lot of that increase reflected the fact that women stopped working in the home and switched to paid work outside the home, which added to the measured economy; Their wages counted and they bought ready-made and domestic appliances like microwaves and washing machines. Consequently, that period of glorious growth largely reflected a social shift, which significantly benefited a sector of society. Nonetheless, it had its costs, and because we did not measure that unpaid activity that people do at home, we missed the critical social consequences of that.

Now the issue is how we can get policymakers to stop focusing on that single quarterly increase in GDP – or even worse, on what's happening in the stock market – and start thinking about this broader array of components that matter to us. This partially presents a measurement challenge, but also a social psychology or economic challenge. How do we stop a lot of people from focusing on one number and have them focus, for instance, on six numbers instead? How would we present that in a format that makes sense to citizens and enables them to hold their politicians accountable to the decisions that they make? We don't have the answer.

There are many other alternative approaches. They're called things like the “Better Life Index” and “Social Progress Index.” It's an active area of people thinking about it. It's a bit like setting a standard: you drive on the left of the road or you drive on the right of the road. We need to know what everybody's going to switch to assessing the true, fair economic growth in our societies: How it is distributed and how it affects future generations. We're not there yet.

GDP is often used to rank countries, and politicians are rather obsessed with their country’s ranking among their peers. Companies will change the definition of GDP in ways that help nudge them above their neighbour. They're also used by international organisations to determine which countries qualify for low-interest loans, for example, by the World Bank. Financial markets also used rankings before the 2012 financial crisis in Greece. One of the reasons for the financial crisis was that Greece had inflated its GDP numbers, which meant that international investment banks lent them much more money than was justified.

There are a lot of problems with what statisticians refer to as administrative uses of GDP because the people who put the numbers together are aware of the numbers’ limitations. Still, it seems that neither in financial markets nor among economists is it understood that you can't rely on GDP as a stable thing. It's not like measuring the length of a road. It's an analytical construct and its definition changes frequently, so it's not a very good way of making comparisons. In a broad sense, GDP tells you about the countries in which incomes per capita are so low that people don't have enough to eat or that they don't have proper health care or access to technology.

GDP is not a good point of reference for how countries compare to each other. For example, you offer somebody who has no idea what their situation in life is going to be, the choice between living in inner-city South Los Angeles or the Indian state of Kerala. You present them with a suite of information about those two places, what their income levels would be, what their social networks would be, what their prospect of being imprisoned would be, and what their access to health care would be. They might not choose to go to the United States and instead, go to the Indian state. Therefore, to evaluate how countries are doing compared to each other, you need a much richer understanding because it's not the amount of money that you can spend on things or services that makes the difference in life. Social capital also plays a role, as does the provision of public goods and infrastructure, which are things that help people lead the kind of lives that they want to lead. The monetary measure is only a tiny part of the puzzle.