"WHAT'S WRONG WITH MARKET ECONOMICS AND GDP?" by HAZEL HENDERSON: 24/04/2008
UNITED NATIONS - / MaximsNews Network / 24 April 2008 -- The credibility of the economics profession and its macroeconomic and risk models has been shattered by the Wall Street-led financial meltdown. Many analysts see this worst crisis since World War II as the beginning of the end of market fundamentalism as the driver of globalization. Coming into focus is also the fact that the USA is no longer the world’s lone super power. Military force is giving way to the new weapons of choice in today’s geopolitics: currency and cyber-attacks.
Even US Treasury Secretary Henry Paulson (former head of one of the over-leveraged Wall Street investment banks – Goldman Sachs) now calls for regulation of these reckless, risk-taking, private banks. Former options-trader/mathematician Nassim Nicholas Taleb predicted their downfall in The Black Swan (2007), as did former hedge fund "quant" Richard Bookstaber in A Demon of Our Own Design (2007). Ivory tower mathematicians lured to Wall Street’s big bucks simply didn't understand the real behavior of markets – as was demonstrated back in 1998 when their faulty models led to the collapse of hedge fund Long-Term Capital Management and its bail-out orchestrated by the US Federal Reserve.
The Nobel Prize Committee shares some blame by its recognition of the faulty options pricing model, Black-Scholes Merton, with its Bank of Sweden Prize in 1993. In recent editorials, Taleb has called on the Nobel Committee to withdraw this prize while Peter Nobel himself says that the Bank of Sweden should de-link its prize in economics from the Nobels. As I have noted in my previous editorials for IPS, many other scientists agree, since economics is not a science but a profession.
Meanwhile, the long-simmering critiques of money-based GDP/GNP national accounts are coming to a head. These popular critiques, including my own, were summarized by the late Senator Robert F. Kennedy in 1968 in a speech delivered to the University of Kansas. Even GDP's creator, Simon Kuznets, worried about using GDP as an overall indicator of national progress and well-being, saying that “the welfare of a nation can scarcely be informed from a measure of national income.”
The cracks in GDP as a scorecard of national progress began appearing at the UN Earth Summit in Rio de Janeiro in 1992, followed by the European Parliament's conference in 1995 on "Taking Nature Into Account." In November 2007, the European Parliament again took up the issue at the urging of the European Commission (www.beyond-gdp.eu). Its “Beyond GDP” debate was keynoted by EU President José Manuel Barroso of Portugal before almost 700 parliamentarians and statisticians of sustainability and quality of life. Statisticians themselves also emphasized the need for better measures of national progress, with over 13,000 attending their conference in Istanbul, convened by the OECD (Organization for Economic Co-operation and Development) in June 2007. And, EU Commissioner of Economic Policy Joaquín Almunia noted that GDP “cannot distinguish between economic activities that have a negative or positive impact on wellbeing. In fact, war and natural disasters may register as an increase in GDP.”
By March 2008, the US Senate picked up these critical debates and the plethora of new, broader indicators of health, education and environment. The Senate's Committee on Commerce held its own hearing on "Rethinking GDP as a Measure of National Strength" – a low-key academic exploration on how all of these new measures of overall quality could be used to correct all the now-recognized errors in GDP that economic textbooks perpetuate.
In its March 13, 2008 issue, even The Economist weighed in with "Grossly Distorted Picture," criticizing the widespread focus on GDP-growth. This "growth fetish" has long been the subject of countless critiques by environmentalists and even a few economists. To see this journal of economic and free-trade orthodoxy now also criticizing GDP-growth signals a tipping point in this long debate. Echoing so many earlier critiques, The Economist pointed out that a better measure than rates of GDP-growth would be to compare GDP per head – a much more tangible sign of progress that takes into account the growth of population. For example, Japan's GDP growth has been about 2.1% over the past five years, while GDP in the USA has grown 2.9%.
Yet, comparing the average growth of income per capita between the two countries, a different story emerges: the USA saw only a 1.9% increase while Japanese citizens’ income grew by 2.1%. This was among the reasons I have urged Japan to shift from GDP growth to quality-of-life indicators (Nikkei Ecology, August 2000). I pointed out that Japan had matured beyond the need for more material growth and could now concentrate on higher-level services and improving quality of life. Japan’s average income-per-head also was greater because Japan's population is shrinking while the US population is rising. India has enjoyed rapid GDP-growth, but its population has grown much faster, leaving more people to share that income.
The Economist is correct that the growth of average income per capita is the more realistic indicator. But, they omit another problem with these GDP measures: averaging per capita of growth in incomes masks how that income is distributed. Averaging incomes across the whole population could mean that a country might have a few billionaires while most of its citizens live in poverty.
Let’s agree that GDP has outlived its usefulness (started as a World War II measure of war production). There are now many new, better indicators, from the Canadian Index of Wellbeing (CIW), the UN's Human Development Index (HDI), the World Bank’s Wealth Index to Genuine Progress Index (GPI), Bhutan's Gross National Happiness (GNH) to the Calvert-Henderson Quality of Life Indicators I created with the Calvert Group of socially responsible mutual funds (the only private-sector effort so far, updated regularly at www.calvert-henderson.com).
Once again, the public is ahead of the experts and politicians on this issue. A GlobeScan survey in 10 countries in November 2007, in conjunction with the Beyond GDP Conference in the European Parliament, found large majorities in India, Russia, Germany, France, Italy, Britain as well as Australia, Brazil and Kenya favored broader scorecards of progress beyond money-based GDP, including indicators of health, education and environment. Real wealth and progress can never be quantified only in money. The economics textbooks are overdue for revision.
Hazel Henderson is author of Ethical Markets: Growing the Green Economy (2007) and other books. She co-organized the Beyond GDP Conference in Brussels, representing the Club of Rome. www.hazelhenderson.com