GNP Vs. ISEW:

DEVELOPING AN INDEX OF SUSTAINABLE WELFARE (ISEW)

The traditional formula for computing GNP has been to take the total market activity of a country and total goods and services rendered. The only factors subtracted have been such things as capital depreciation and inflation of currency. GNP is then assumed to be a statement of the country's "economic health." It is presumed to rank that country in terms of prosperity and development and where it falls vis-a-vis the "haves" and "have-nots." And when it is growing at a sufficient rate - in some newly industrialized Asian countries, much less than 5 or 6% is unsatisfactory - people's welfare is assumed to be increasing. Yet when it is not growing, economists say the economy is 'stagnant' or in a 'recession' or 'depression.' The basic problem is that GNP doesn't really measure anything meaningful, and most sociological studies do not show any correlation between GNP growth and increased personal satisfaction or 'quality of life.' We need a better index to look at development and welfare of nations - something that truly measures both tangible wealth and those intangibles that are essential to productivity.

There was a famous anecdote in which a philosopher described a curious lesson for his peers. He saw a man throw a brick through a window, and noticed that several people were able to achieve gainful employment because of this act: one was hired to blow the glass for the new window, another to put it into place, and yet another to put grillwork up to protect the window. Seeing such amazing beneficial results from this act, the philosopher concluded that it was the moral duty of every person to throw a brick through a window each day! GNP works the same way: we look at the number of things being produced without seeing whether what is produced is beneficial or detrimental. Just because some economic activity "creates jobs" does not mean it is productive, especially if those jobs are temporary, low-wage, or to fill potholes dug by other people (i.e. to solve the problems of other economic activity). B2 bombers may put people to work, but that doesn't mean that national productivity might not better be enhanced by employing those persons elsewhere, even if the things they are making do not carry as much of a price tag. A new index is needed to determine true national "prosperity," in more qualitative terms.

Such an index would be the Index of Sustainable Economic Welfare (ISEW) proposed by some international development economists. ISEW would incorporate important factors left out by GNP, such as:

  1. equity and fairness of income distribution;
  2. net durable capital growth;
  3. national economic self-reliance (how much a nation is dependent on exports such as 'cash crops' or imports such as foreign oil);
  4. natural resource depletion;
  5. environmental damage;
  6. nonmarket transactions (including household work and the 'informal' sector, such as gifts, reciprocal exchange, the "black market," and barter);
  7. the amount and quality of leisure;
  8. the extent of preventive public health measures (such as sanitation, inoculation, and disinfection);
  9. 'human capital' (especially education and training);
  10. infrastructure (such as mass transit, telecommunications networks, and scientific R & D facilities);
  11. energy efficiency (meaning productivity per KWh of energy used); and
  12. the level of public safety and services.

What would be subtracted from the ISEW would be the various 'externalities' and hidden costs that are often invisible within the formal economy. "Minuses" for the ISEW would include:

  1. costs of advertising (if you spend money to advertise it, then it's not worth buying);
  2. pollution;
  3. land loss (desertification, loss of wetlands, soil erosion, and loss of croplands);
  4. uncontrolled urbanization (so-called 'suburban sprawl' also);
  5. unnecessary commuting (no matter how 'smart' roads are in routing traffic and reducing congestion);
  6. "defensive" or responsive/reactive health spending;
  7. conspicuous consumption (especially of non-durable, non-recyclable, 'junk' goods);
  8. the costs of controlling crime (including the expenses of police and prisons);
  9. military production (no armaments ever increase anybody's welfare);
  10. "sin" production (of goods such as addictive drugs, alcohol, cigarettes, unhealthy food, and other things that lower productivity); and
  11. "non-services" where someone is paying somebody else to do something that they are fully capable of doing themselves, such as buying their groceries, simply because they don't have the time.

Also left out of the ISEW would be such things as rent (ownership of land and buildings has never been proven to be productive in any sense); the bureaucratic costs of government; the 'costs' of intellectual property (such as patents, copyrights, etc. - information should belong to all); the costs of spurious litigation (especially needless lawsuits and the fees they generate for lawyers) and the insurance one needs to be protected from it; and the costs of commercial transactions (especially interest!)

Under the ISEW, going into debt and 'corporate raiding' and credit card bingeing (things that people did eagerly throughout the 1980s) would not be seen as positive economic activities. The simple law for whether an economic activity goes into the plus or minus column under the ISEW regime is simple: if it results in increased productivity over the long term then it goes into the plus column. Cleaning up toxic waste may provide jobs, but building non-toxic products will generate more in the long run, and the toxic waste will erode productivity in other areas as workers become debilitated by cancer and other diseases.

In the ISEW, things that are not especially noted to be "plusses" under GNP would be recognized as such:

  1. the level of private investment and savings rate;
  2. the degree of energy conservation;
  3. the proximity to full employment (always assumed to be an impossibility in most modern economies);
  4. the level of workplace democracy (including involvement of workers in all the decisions of management and giving them a 'stake' or partial ownership of the company or firm); and
  5. the prevalence of 'FOF (free, open, and fair) trading practices.

The ISEW would incorporate many of the factors of the PQLI (Physical Quality of Life Index) which reflects such social factors as:

  1. level of family planning in the society (control of spacing and number of births);
  2. longevity (average life expectancy at age one);
  3. level of infant mortality (the less the better, obviously);
  4. nutrition (adequate calories for a proper diet for all the population);
  5. literacy;
  6. availability of housing and shelter; and
  7. mental health (psychological wellbeing, as measured by the absence of depression, stress, and other mental illnesses with non-physiological components.)

While it is hard to quantify the general "quality of life" - it is difficult to measure accurately such things as optimism toward the future, sense of community, career satisfaction, and other nonmaterial and noneconomic things that provide happiness such as freedom, confidence, and security - the ISEW goes much farther toward tracking it than the bland, nondescriptive GNP index. Many people realize that wealth does not translate into happiness, and many rich misers remain miserable all their lives, while some poor people enjoy what meager amount they may have because they do not want more than what they have. In the ISEW, a nation is rewarded for conservation, prevention, and "R cubed" (reducing/reusing/recycling) and penalized for needless consumption, reactive spending, and the costs of reforming and repairing earlier mistakes. Those nations which are focused on the future, and leaving a better future for their children, will fare better on the ISEW. Nations which are focused on short-term growth in GNP while creating costs down the road which they are leaving for future generations will not fare so well. Money spent to prevent social problems now is obviously better spent than reactive spending to 'cure' those problems once they have grown extensively worse due to negligence and lack of concern.

Most essentially, the ISEW rewards production that is for human needs and penalizes production that is against human needs. Production of weapons that maim and kill, toxic chemicals that cause cancer, and unsafe vehicles that injure people may be included in the calculation of GNP, but those things cannot be said to positively contribute to human wealth, health, or welfare. We need a new understanding of prosperity, from a more biocentric and ecological point of view. We may not be able to add up the number of species on the planet or completely calculate the rate at which they are disappearing or put a "price tag" on each lost species. But biologists can agree that loss of biodiversity will soon threaten human economic activity (especially agriculture) and after that human existence itself. Too long have the "captains of industry" foisted externalities on us as consumers and taxpayers - the ISEW forces a reckoning for their actions. Perhaps, under the "world order" of ISEW, we might be surprised to find countries like the USA further from the top than we might expect (despite their 'sterling' performance in terms of GNP) forcing another kind of reckoning and an appreciation of what true national prosperity means.

If current trends continue, we might see nations like the U.S. (which saves little, wastes much, conserves nothing, consumes everything, gorges on energy, sues everybody, invests little, and whose inequalities are increasing steadily) - sinking to the bottom of the ISEW scale, while "Third World" nations such as Kenya, which are agressive pursing sustainable and socially just development, continue to rise to the top. Many economists may balk at the ISEW - after all, it doesn't treat as negatives all those kinds of government interference and regulation which supposedly impede "efficiency" and "competitiveness." Nor does it assume "what's good for General Motors is good for the nation," or that all is to be done through the marketplace and its invisible hand. Or that all of us are homo economicus , acting for our "rational self-maximizing interest" or constantly pursuing unlimited wants with limited resources. As far as the ISEW is concerned, whether the public sector or private sector is spending money is unimportant - the question is what it's being used for and how (is it 'human scale', 'appropriate', and 'sustainable'?) The ISEW is a movement from the mere enumeration of quantity as an economic indicator to the more complex task of measuring quality.

Steve Mizrach, aka Seeker1

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