Redefining GDP and what we mean by growth

The economic indicators we rely are increasingly inadequate. AAP

For some time, there has been growing disquiet that using GDP to measure our national progress does not capture what is most worthwhile in our lives.

In a speech in September last year, former Treasury Secretary Ken Henry gave a cautionary warning that policy-makers needed to “appreciate (the) limitations … of GDP as a measure of economic wellbeing or progress”.

Yet, our infatuation with the GDP indicator continues unabated. Growth is taken as the general measure for economic, social and cultural advancement at every level of decision-making from the corporate to the national and global levels.

In between quarterly GDP figures, there is a daily flood of more specific indicators - company profits, interest rates, job advertisements, home loan approvals, house prices, unemployment rates, car registrations - that act as proxies for estimating annualised GDP figures and adjusting our economic goals and future plans accordingly.

Intended or not, GDP as a measure of economic growth has become the compass by which we set our course into the future, the main gauge by which nations and the global community judge their ongoing progress.

The problem is that this GDP compass is setting us off in the wrong direction if we are to secure a sustaining and sustainable environment for advancing national and international development. For example, the compass of growth, as we now define it, is exacerbating the climate change crisis. The GDP compass is leading us directly towards the climate change cliff at a time when we should thoroughly engaged in active solutions.

Endless growth - a holy grail?

Economists such as Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi have long noted the problems in how GDP growth is calculated and used.

But more than this, Executive Director of the Macroeconomic Group Department of the Treasury, David Gruen, argues that the way we currently use GDP actually risks “the wellbeing of future generations”.

In the absence of a more inclusive measure of development, the holy grail of achieving endless growth as measured by GDP is no longer something to celebrate or even aim for.

Unfortunately however, while there are several alternative measures of growth in the wings, none of them is ever likely to compete with, or even complement GDP as a universally accepted indicator of national development.

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New ways of measuring growth

What is needed is a new kind of regulatory intervention to reshape and re-contextualise the GDP indicator itself. It needs to include and integrate broader indicators of production including those that measure the input of cultural, biological and environmental systems.

As the Stiglitz-Sen-Fitoussi 2009 report states: “the time is ripe for our measurement system to shift emphasis from measuring economic production to measuring people’s wellbeing”. I would add that people’s wellbeing cannot be separated from the health of cultures and natural environments, that is, from planetary well-being.

A more inclusive and balanced measure of growth, as represented by a reformed GDP, is needed because, as Dr Henry points out, “the metrics we use to measure our goals affect the path we take to reach our goals”.

This means that our indicators of macro-level national growth regulate the micro and meso-level behaviours we engage in (as individuals, organisations and communities) in the pursuit of personal and organisational goals.

This is where the notion of meta-regulation enters the picture.

Regulating the indices we use to achieve national goals is a form of meta-regulation that can potentially guide our economic behaviour towards more sustaining and enriching national goals.

Where traditional command-and-control forms of government regulation attempt to directly control organisational and corporate activities through legislated standards, meta-regulation guides the (self-)regulatory process itself. Professor Bronwen Morgan from the University of Oxford, defines meta-regulation this way:

“[Meta-regulation] captures a desire to think reflexively about regulation, such that rather than regulating social and individual action directly, the process of regulation itself becomes regulated.”

Flickr/AMANito

Social, cultural and environmental

Supporting the recommendations of Stiglitz, Sen and Fitoussi and others, the meta-regulation of GDP would involve the deliberate broadening of the indicator to include and integrate measures of social, cultural and environmental well-being.

But even more importantly, the lens of meta-regulation provides a means for seeing how our inherent enthusiasm for achieving “growth” can be expressed via more sustainable activities and more enriching goals.

Meta-regulation provides a new lens for understanding the dynamics involved in our infatuation with GDP and how we might alter it to target more balanced goals.

For example, GDP and its ancillary indicators constitute a dynamic feedback system that we and our organisations use to inform our mindsets, behaviours, goals and intentions.

Unlocking the goal of development

Consequently, the meta-regulation of the constituent elements of GDP can unlock and guide organisations’ inherent energies for attaining more sustaining goals. Whereas direct command-and-control regulation enforces standards through imposing sanctions and restrictions, meta-regulatory interventions aimed at improving indices of success tap into our self-generated capacities for change and creativity.

Through regulating the goal of development rather than trying to control behaviour itself, the conditions for self-regulation, self-determination and innovation are supported rather than suppressed.

Professor Colin Scott of the University College Dublin School of Law sums this up by saying that the meta-regulatory task of guiding private and public organisations to achieve certain goals is “premised upon a change in mentalities or culture, rather than on coercion”. The values, mindsets and behaviours needed to support a more sustaining society will not emerge without a more informed and deliberate regulation of how we measure our national economic development.

If our measures of success, as exemplified in GDP growth, continue to tell us that unlimited production and consumption of goods and services is the great national goal and that we need not bother with the long-term, planetary implications of economic growth, then the multiple crises that face us in the 21st century will only deepen.

The meta-regulation of these indicators demands that we turn a reflexive eye onto the compasses we use to set the direction of our national economies. The alternative of staying the course with a broken compass is not a sensible option.

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