Rethinking the GDP

As promised, this post is a follow-up to my previous article in which I posited the idea of major economic reforms that could lead to real environmental change and sustainability.

While in Hong Kong I stumbled upon an organization called Civic Exchange, a self-proclaimed public policy think-tank, that recently published a book titled “The Great Disconnect” (available in PDF form here).

The book probes the driving factors of environmental change and makes some interesting insights related to the economic crisis of 2008. Of these insights, I found the most interesting to be the author’s analysis of the GDP (Gross Domestic Product) as the prime indicator of a country’s economic state. The Government of Canada defines GDP as “the unduplicated value of all goods and services produced in a year within Canada’s borders measured at market prices.” This is to say that it is a measure of economic throughput – it measures the final value of goods and services. This style of book-keeping is problematic from the perspective of environmental policy because it focuses on the value of production without considering the upfront cost of consumption.

The book provides a useful example – consider the sale of lumber. A tree by itself does not have value in our economy. However, if that tree is cut down and sold as lumber it adds value to our GDP. A cost can only be associated with consuming this resource if we pay to reforest the region.

Now consider that a widely adopted practice to battle the ongoing recession has been the distribution of stimulus funds to encourage spending. Since we gauge the health of our economy by the size of the GDP, there must be an increase in the production of goods and services to improve our economy. Ultimately, the world-wide reaction to the global recession has been to consume more resources. Understandably, when unemployment rates are rising governments may find it difficult to focus attention on sustainability, but it is clear that on a planet with finite resources this model cannot go on forever. What is needed is a new economic performance indicator that values more than just the production of goods and services.

The crux of the problem with achieving environmental sustainability, as I see it, is that our economic model awards growth at all costs. This is not to say that capitalism is flawed, but that our means of measuring its inputs and outputs are primitive. In a suitable analogy I see our economy as a car. Our current model rates vehicles by their speed and acceleration without considering the fuel-efficiency and safety performance – it is outdated. We are being sold a Ferrari as a family vehicle, and while it currently offers a glamorous lifestyle we have put ourselves at serious risk of a catastrophic crash. Without considering all inputs to a system, we cannot control the outputs or make sufficiently educated decisions. A key input that I believe is being neglected in our economic model is the value (and condition) of resources – particularly non-renewable fuels, and plant-life capable of absorbing CO2.

With a debit-credit system of tracking our resources, a more natural economic goal could be to achieve a balance (where a deficit represents the wasteful use of resources, and a surplus represents the creation of value from limited resources). The beauty of a balance-based system is that the terms “waste” and “value” can always be redefined. As standards of quality improve the cost of resources can be increased, thus making it more difficult to produce a valuable product, which in turn would spur the creativity and innovation required to drive an economy forward.

The cornerstone of this model rests in the interpretation of “quality.” Standards of quality in life would have to be redefined for such a model to work. Stature in society must be driven from psychological, physical and emotional satisfaction rather than the accrual of material goods.

The concepts I have put forth are obviously far easier said than done. Every nuance of a new economic system requires serious global agreement (and participation), and a change in the core values of entire nations. Such value shifts have happened before (consider how quickly values surrounding personal privacy and social connectedness have changed with the adoption of the Internet). It is my hope that the shift away from blind consumption (and towards true sustainability) can be achieved before the consequences become visible, because, as with the speeding Ferrari – by the time we can clearly see what lies ahead it may be too late to avoid the crash.