GDP Needs Help: Let's Build a Second Measure of Economic Strength

If the crowning achievement of 20th-century economics was constructing a national income statement, the crowning achievement of 21st-century  economics should be a national balance sheet

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Here's a tale of two equations that represent human exchange. The first is the standard macroeconomist's recipe for an economy:

Y = C+G+I+NX

It says: output equals consumption, plus government expenditure, plus investment, plus net exports. Now here's a crude approximation of what eudaimonia might look like:

W = N+F+I+H+S+E+O

It says: real human welfare equals natural capital, plus financial capital, plus intellectual capital, plus human capital, plus social, emotional, and organizational capital. Not all these kinds of wealth are created equal; I'd suggest that higher-order wealth, to the right, is scarcer, stickier, more enduring, and more productive.

The first equation might be said to neatly represent the industrial-age paradigm of business: the implicit question it answers is maximizing the volume of output or "product." But the second answers a very different question. It's our economy's real balance sheet.

The Bureau of Economic Analysis calls GDP "the crowning achievement of 20th century economics"--and it is not overstating the case. It single-handedly allowed America to begin optimizing its economy for a then-compelling definition of prosperity: industrial output. GDP is an income statement for an economy--to use my auto allegory, a rev counter. But a balance sheet is like a speedometer. It tells us whether our effort--our busyness--is actually getting us anywhere.

Just as the crowning achievement of twentieth-century economics was constructing a national income statement, so the crowning achievement of twenty-first-century economics is likely to be conceptualizing and constructing a national balance sheet, a speedometer for the economy. While I can't build a full-blown balance sheet for you--that's a grand, generational project--we can take a brief glimpse across the different kinds of capital and try to ascertain whether their buckets are filling or emptying, whether the speedometer's needle is rising or falling.

You might see social capital--the wealth of relationships--crashing. According to Ohio State University's Pamela Paxton, declines in trust among individuals of half a percent per year from 1975 to 1994. A life rich in relationships and connections seems to be a more and more elusive goal.

You might notice human capital--the wealth in people--splintering. Perhaps the most essential component of human capital is education. Yet, the Brookings Institution found that, for the first time, older generations have attained more higher education than younger ones. That points to an inflection point in human capital, marking a peak in American educational attainment.

Human capital is also composed of mental and physical health. Both mental illness and obesity rates have risen steadily for the last century in America. And rates of happiness in the United States, United Kingdom, and Japan have flatlined--and by some measures, fallen--over recent decades.

You might see intellectual capital--the wealth of ideas--struggling to develop. Intellectual capital is often assessed simply by looking at the sheer number of patents, but I'd choose a higher bar: the creation not merely of patents, but of new industries, sectors, and markets. Fewer industries were created in the noughties than in any decade since 1930: just two, by my count--search and nanotech. Though patent applications have skyrocketed, patent quality has dropped. They are now less expressions of true intellectual wealth than tools for strategic control.

You might see organizational capital--the wealth that harmonizes and synchronizes the other kinds of wealth--cratering. Organizational capital is the toughest kind of capital to measure and observe. I'd roughly gauge it by looking at the creation rate of new jobs, because new jobs often represent new roles, gains in the division of labor, the raw stuff of organizational capital. America is often said to be the most dynamic economy in the world, but the net creation rate of new jobs has dropped steadily since 1970. I'd also look at an alternative measure of organizational capital: political decision-making. Here, we find more "gridlock": filibusters in the Senate have risen exponentially over the last three decades to an unprecedented high.

Here's what the glimpse I've given suggests: the state of the Common Wealth is in crisis. In terms of an authentically good life, we're going nowhere fast. The rev counter is buzzing, but the speedometer's needle is barely moving. We're very busy, but we're not better for it.

How would a better metric than GDP help us solve this conundrum? A balance sheet makes it possible to distinguish between "good" and "bad" income, income earned through reinvestment or by selling yesterday's capital assets. It's as if we're pawning our stocks of higher-order capital--whether social, intellectual, or emotional--for cash in hand today, but the consequence of such real underinvestment is that we're left with fewer, poorer assets with which to pioneer opportunities and enjoy higher standards of living tomorrow--whether denominated in jobs, net worth, income, meaning, or fulfillment.

Excerpt from Betterness, by Umair Haque, published by Amazon Digital Services, 2011.