Poor indicators make poor policy

In his new book Measuring Tomorrow: Accounting for Well-Being, Resilience, and Sustainability in the Twenty-First Century, OCFE* researcher Eloi Laurent challenges existing economic indicators and invites us to rethink the economy from top to bottom. We asked Dr Laurent more.

In your new book, Measuring Tomorrow, growth and gross domestic product (or GDP) get a bad name. Why?

Because “growth”, that is the growth of GDP, captures only a tiny fraction of what goes on in complex human societies. It tracks some but not all of economic well-being (saying nothing about fundamental issues such as income inequality), it fails to account for most dimensions of well-being (think about the importance of health, education or happiness for your own quality of life), and it completely ignores sustainability, which basically means well-being in the future as well as the present (imagine your quality of life in a world where the temperature is six degrees higher).

My point is that because well-being (human fulfillment), resilience (resistance to shocks) and sustainability (caring about the future) have been overlooked by mainstream economics in the last three decades, our economic world has been mismanaged and our prosperity is now threatened by inequality and ecological crises. Understanding how the things that matter to human beings can be properly accounted for is the first step towards valuing and taking care of what really counts.

Economics, as I understand it, is precisely the discipline that measures what really matters for human beings, then designs incentives and provides policy makers with tools to shape human behaviours and attitudes so that societies have a chance of reaching the goals they set themselves. At its best, economics measures what counts and provides societies with the means to make it count. Among the most powerful of these are good indicators.

Can you give an example of how conventional economic indicators can mislead policy makers?

Take the US economy today. One of the things Donald Trump likes to brag about is the record-breaking mood his election triggered on stock markets. Markets were indeed driven up all through 2017 by the prospect of large increases in corporate profits, themselves conditioned on considerable federal tax cuts, which are eventually likely to boost growth. But stock markets, profits and growth are the holy trinity of economic mismeasurement.

Consider another US trinity—inequality, health and trust—and the picture changes radically. Recent data show that income inequality is higher today than it was during the Gilded Age and is relentlessly fracturing the American society; that Americans in large numbers have been “dying of despair” since the late 1990s while the economy (not to mention corporate profits) was growing; and that the level of trust in Congress is now three-and-a-half times lower than in the mid-1970s with political polarisation at an all-time high, while GDP per capita roughly doubled over the same period. There is every reason to believe that, once enacted, the Republican tax bill that the US Congress passed last year will degrade the country on all three counts while further increasing corporate profits, stock market indices and GDP growth.

Quite simply, growth, profits and stock markets cannot help us understand let alone solve either of the major crises that mark the early twenty-first century: inequality (the growing gap between the haves and the have-nots) and ecology (the alarming degradation of the climate, ecosystems and biodiversity that threatens human well-being).

But alternative indicators themselves are debatable, aren’t they?

Of course they are and they should be! We have plenty of pointed critiques of GDP but we also need to address the limitations of alternative indicators. Dozens of these are created or updated each year, but their conceptual and empirical foundations are sometimes obscure or weak. What exactly do they measure? How well do they measure it? This book is not only a (necessarily partial) guide to alternative indicators, but a guide to understanding their meaning, accuracy, and usefulness.

So how can we accelerate what you call in the book the “well-being and sustainability transition”?

This transition is actually already under way—it is part of the “Great Transition” which we explore with Marie-Laure Djelic and Dominique Cardon in a new class at the School of Management and Innovation. Economic research is devoting far more attention to the question of inequality, while sustainability analysis has made valuable progress in recent years. To take just two examples, US scholars and (some) policy makers increasingly recognise the importance of paying attention to inequality rather than just growth, while China’s leaders acknowledge that sustainability is a much better policy target than explosive economic expansion. But progress toward well-being and sustainability should indeed be accelerated.

First, we need to engage in a transition in values to change behaviours and attitudes. We live in a world where many dimensions of human well-being already have a value and often a price; it is the pluralism of value that can therefore protect those dimensions from the dictatorship of the single price.

Next we need to understand that the challenge is not just to interpret or even analyse this new economic world, but to change it. We therefore need to understand how indicators of well-being and sustainability can become performative and not just descriptive. This can be done by integrating indicators into policy through representative democracy, regulatory democracy and democratic activism. If private and public decision makers apply them carefully, well-being and sustainability indicators can foster genuine progress.

Finally, we need to build tangible transitions at the local level. Well-being is best measured where it is actually experienced. Localities (cities, regions) are more agile than states, not to mention international institutions, and better able to bring well-being indicators into play and translate them into new policies. We need what the late Elinor Ostrom called a “polycentric transition,” where each level of government seizes the well-being and sustainability transition as an opportunity. There is so much exciting work to be done!

Eloi Laurent, Measuring Tomorrow: Accounting for Well-Being, Resilience, and Sustainability in the Twenty-First Century, Princeton University Press

*The Observatoire français des conjonctures économiques (OFCE), or French Economic Observatory, is a Sciences Po research unit.

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