Measuring Human Well-Being

Most of us are aware of the limitations of using GDP as a measure of a nation’s well-being, it places no value on environmental costs, it does not value leisure, non-market production is not counted, it involves imputed prices, it counts “bads” the same as “goods,” it does not account for variety or distribution, there are lots of reasons why GDP, which is a measure of economic activity, is an imperfect measure of well-being.  This article by Partha Dasgupta from Scientific American argues that GDP per capita should be disposed of altogether in favor of wealth per capita as a starting point for assessing well-being, with wealth defined very broadly to include physical, human, and natural capital so as to capture factors such as the depletion of natural resources over time.  This is part of a larger article called "Economics in a Full World" by Herman E. Daly:

A Measured Approach, By Partha Dasgupta, Scientific American:  Most contemporary economists … observe that the Western world’s economic output has increased remarkably since the industrial revolution. They note that this increase has been fueled by the accumulation of produced capital assets … and improvements in knowledge, human skills and institutions … They argue that if knowledge and skills are allowed to accumulate through education and research and development, productivity can be further increased and the world economy will enjoy growth in output for a very long while. Some economists, however, note that the earth is finite and reject this brand of optimism, instead insisting that we are already using nature’s services at or beyond the maximum rate that the biosphere can support in the long term. They argue that policies should immediately be put in place to stop the growth in the use of nature’s services.

These economists … are right to question the optimistic view for its neglect of nature’s limits, but they themselves … are silent on how to reach policy conclusions, and they do not provide a meaningful way to judge the human costs and benefits of stopping any further growth in the use of resources. A few economists … seek to avoid both sets of weaknesses by refining the concept of sustainable development—a path along which well-being across the generations does not decline with the passage of time and may even improve. … To achieve this result, each generation should bequeath to its successor at least as much wealth per capita as it itself inherited. … Economic development should be viewed as growth in wealth per capita, not growth in gross domestic product per capita. There is a big difference between GDP and wealth. … GDP per capita can increase even while wealth per capita declines. GDP can be a hopelessly misleading index of human well-being.

How have nations been doing when judged by the criterion of sustainable development? Figures recently published by the World Bank for the depreciation of several natural resources (oil, natural gas, minerals, the atmosphere as a sink for carbon dioxide, and forests as sources of timber) indicate that in sub-Saharan Africa both GDP per capita and wealth per capita have declined in the past three decades (graphs above). In contrast, in the Indian subcontinent, even while GDP per capita has increased, wealth per capita has declined. The decline has occurred because relative to population growth, investment in produced capital and improvements in institutions have not compensated for the degradation of natural capital. Moreover, countries that have experienced higher population growth have also lost wealth per capita at a faster rate.

Better news comes from the economies of China and most of the OECD (Organization for Economic Cooperation and Development) countries: they have grown in terms of both GDP per capita and wealth per capita. … It would seem, therefore, that during the past three decades the rich world has enjoyed sustainable development, while development in the poor world (barring China) has been unsustainable. One can argue, however, that the above estimates of wealth movements are biased. Among the many types of natural capital whose depreciation do not appear in the World Bank figures are freshwater, soil, ocean fisheries, forests and wetlands as providers of ecosystem services, as well as the atmosphere, which serves as a sink for particulates and nitrogen and sulfur oxides. Moreover, the prices the World Bank has estimated to value the natural assets on its list are based on assumptions that ignore the limited capacity of natural systems to recover from disturbances. If both sets of biases were removed, we could well discover that the growth in wealth in China and the world’s wealthy nations has also been negative. … Humanity must design institutions and policies that will enable economies to attain sustainable development. To that end, economists now have in hand a framework (estimates of wealth such as the ones given above) for making policy suggestions that are a lot sharper than the cry that humanity must implement a steady-state economy now.

Note:  there is also an index of sustainable economic welfare discussed in the article that I will try and cover soon.