Taking the Measure of the Real Economy

A healthy economy is a necessary but not sufficient condition for human flourishing. C.S. Lewis would call it a “second thing” rather than a “first thing”. A healthy economy should serve higher goals of justice, peace, compassion, and rest. In the same manner that Wendell Berry asked “What Are People For?” we should always ask, “what is the economy for?”

In a previous article I contrasted the whirlwind of activity chasing financial returns with the more mundane health of the real economy (and suggested that using money to chase more money is the pursuit of “no thing”). You can’t eat financial instuments, nor can you live in them, wear them, or cook with them. Like money itself, they are a social fiction only distantly related to any kind of real wealth. Their only real value is to trade them for real goods and services.

So much for the “no thing”. But what about the “second thing”—that is, the health of the economy. Do we really understand much about the real wealth that makes for a prosperous economy? How much of our economy actually does any good for the people that participate in it? Or, put in dynamic terms, is all growth in the economy economic growth? Is it possible that growth can be uneconomic?

Take, for example, the most commonly-used metric for the health of the economy, the gross domestic product (GDP). It is designed as a measure of real economic activity—in any given year it is a summary of the flow of money, to be sure, but “real GDP” is measured in a way that acknowledges the nothingness of money—real GDP is adjusted for inflation. If bread costs $1.50 a loaf last year, and $2.00 a loaf this year, today’s bread is not better. The value of money has changed, not the value of bread, and what we want GDP to measure is how much the “real” economy changes from year to year (thinking it gives us a clue to how well off we really are). So we make adjustments for inflation, recognizing that money itself is unimportant.

[As I noted last time, this is the logic that should apply to appreciation in real estate values. Since the stock of land is fixed (or declining, if you count soil erosion and fertility loss, which you should), increases in land prices don’t reflect real value, just more money chasing the same amount of real estate.]

There are other problems with GDP, though, which take us directly to the heart of measuring how well off we are, materially speaking. Money changes hands, and adds to GDP, when people buy useful products, but also when they defend themselves from crime, social disruption, and environmental pollution. Divorce by itself is a major contributor to a rising GDP. When a couple divorces, the economy rejoices, at least as measured by GDP. Someone buys a second home, pays for lawyer’s bills, takes on an additional job, pays for daycare and transportation costs so they can hold the additional job, and pays for counseling for the children. All of these transactions add to the GDP.

The growth in breast cancer and lung cancer are positive results, through the flawed lens of the gross domestic product. The costs of disease-causing environmental pollution aren’t deducted from GDP, and the economic activity that enjoys free disposal of carcinogens in the environment is counted as a pure benefit. Reliance on home and community gardens, solar energy, and neighbors helping neighbors would cause the GDP to tank.

When kids and families spend money on video games, DVD-players, and big-screen TVs instead of playing outside for free, GDP goes up. When the same distractions keep people from joining civic leagues and neighborhood clubs, GDP goes up. When people are forced to spend more time on the road fighting traffic, the money spent on auto fuel and maintenance adds to GDP. The lost parenting hours and neighboring hours? The time not spent volunteering? No worries. They were doing it for free, and the GDP valued the loss the same way it valued the previous work. At a price of zero, volunteering for the common good simply doesn’t affect GDP. Working longer hours and paying for a nanny and a maid? Counts double!

In the last column, I argued that leading up to the financial crisis, we were focusing closely on things that generally don’t increase social welfare (finance, insurance, and real estate). Now we see that we aren’t paying very much attention to many of the things that DO have an impact on social welfare, because our primary measure of the economy doesn’t distinguish between costs and benefits.

Some economists have struggled to create a (imperfect) metric that does describe the real economy (the one that serves the needs of people). Herman Daly and John Cobb, in their excellent introduction to “real” economics (For the Common Good, 2nd ed, Beacon Press, 1994), explain the history of attempts to get a better measure of economic success. They introduce their own measure, the Index of Sustainable Economic Welfare, which has since been elaborated and extended into the Genuine Progress Indicator (GPI) by the researchers at Redefining Progress. By their reckoning, healthy growth in the economy slowed in the 1970s and has since leveled off, according to the GPI.

Looking for a single index that tells us how we’re doing is not the point of these exercises. Looking hard at the data which make up the GDP can give us a richer understanding of how the economy actually operates, and help us make better decisions about the real economy, and to use it as a springboard to achieving the first things that should occupy most of our time.

A version of this article was first published in PRISM magazine.

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2 Responses to “Taking the Measure of the Real Economy”

  1. Kathy Says:

    I find myself cringing when I hear reports about GDP and growth. Thanks for articulating why. What is the ultimate result of endless “growth,” as it is conventionally measured?

  2. rustypritchard Says:

    Good question, Kathy. How do we know where we are going if we don’t really know where we are?

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