Correction Appended: Sept. 16, 2009
We treat it with a numerologist's zeal. When it drops, we assume that grave societal consequences will follow. Macroeconomic policy is formed in its shadow. But now the granddaddy of economic statistics gross domestic product (GDP) is under attack. An assortment of economists, psychologists and sociologists are beginning to say that GDP is an imprecise measurement of economic performance that distracts policymakers from more important measures of societal well-being.
Economists have long noted imperfections in how GDP the market value of all goods and services produced in an economy is calculated. For instance, unpaid work that might benefit society, like raising children, is not included in the calculations. Societal failures, however, often are: the cost of keeping 2 million people in prison boosts the U.S.'s GDP, as does fuel sales, despite the correlation with traffic congestion and pollution. Sustainability is also ignored a heavily wooded country could see its GDP skyrocket if it turned over all its land to loggers.
Recently, however, some economists have drawn on the work of psychologists, sociologists and epidemiologists to say that economic growth as an end unto itself at least in wealthy countries is misguided, no matter how it is measured. These researchers point to surveys showing that despite the steady economic growth of developed countries over the past 50 years, those nations' citizens are no happier than they were 50 years ago, and only slightly healthier. To these thinkers, the developed world has come to the end of an epoch.
"[Economic growth] has done its work for us," says Richard Wilkinson, professor of medical epidemiology at the University of Nottingham, whose work has shown that wealth equality is far more important to population well-being than overall wealth. "We have reached the point, after millennia, in which raising material living standards is no longer the best way of improving quality of life. In wealthy countries, we now need to turn our attention to other factors, such as the quality of our social interactions."
On Sept. 14, a panel chaired by Nobel Prizewinning economists Joseph Stiglitz and Amartya Sen released a report on behalf of the French government calling for governments to form new measurements of economic vitality that account for factors other than growth. Announcing the panel's findings, French President Nicolas Sarkozy said the current economic crisis provided an opportunity to revise old wisdoms. "A great revolution is waiting for us," he said. "France will fight for all international organizations to modify their statistical methods. The crisis doesn't only make us free to imagine other models. It obliges us to do so."
The 24-person panel, called the Commission on the Measurement of Economic Performance and Social Progress, makes some concrete suggestions, like looking at household income and wealth rather than national production to avoid the false boost that debt-fueled consumer spending gives to GDP. Nonmarket activities such as raising children, caring for the elderly and housecleaning should be taken into account, the panel says, as should environmental sustainability. But most important, it suggests looking at "soft" economic indicators that are linked to well-being, such as access to education, population health and leisure time.
Included in the panel were Princeton University's Daniel Kahneman, one of the first psychologists to apply happiness studies to economics; the British economist Nicolas Stern, whose influential "Stern Report" advocated green technologies to stimulate economic growth; and Robert Putnam, the Harvard sociologist and best-selling author of Bowling Alone, which traces the decline of the U.S.'s "social capital" through the decline of 10-pin bowling leagues.
These panel members and other psychologists and sociologists have long noted that an increase in personal wealth above a certain income (about $12,000 a year per person, in some studies) has only a small effect on life satisfaction. Far more important is a person's relative position in society how big your house is compared with your neighbor's, as opposed to its absolute size. According to these studies, even if everyone's income rose at a uniform rate a rising tide lifting all boats the growth would not make anyone significantly happier, at least not in the long term, because the relative position of people would not have changed.
Does this mean we should ignore growth altogether? The panel did not come up with a single statistic to replace GDP, in the way that Bhutan a state of 600,000 people in southeast Asia has for years used Gross National Happiness as a GDP substitute. Instead, it suggests that countries publish an annual report, much like a corporation does, that includes a range of measurements of well-being.
Richard Layard of the London School of Economics, the doyen of happiness economics in the U.K., agrees with the panel's recommendations. He says policymakers need not worry about growth. "My view about economic growth is that it's absolutely inevitable," he tells TIME. "It's simply the result of human creativity, and it will go on forever. But that won't be a huge factor in making us happier. What could make us happier is better human relationships."
But Nancy Folbre, an economist at the University of Massachusetts who served on the panel, says a focus on growth can be helpful. It's just that we need to think of the concept differently. "Growth doesn't have to mean more stuff," she says. "Isn't that the point of the report, in a way? That growth doesn't have to mean growth in GDP?"
In the original version of this story, Richard Wilkinson, professor of medical epidemiology at the University of Nottingham was quoted as saying "Capitalism has done its work for us." In the interview with TIME, he stated that "It has done its work for us" and he was referring to economic growth rather than capitalism.