Ever since the invention of national accounts in the 1930s (that is, methods of measuring the total economic activity of a country), the prevailing world view has been that the higher the gross domestic product, the better off we are as a nation. Any faltering in the continued increase in this economic measure is perceived as a cause for concern, a threat of a recession and diminished opportunities for citizens.
Only within the last decade or so, with the emergence of global-sized threats to our environment, has there been a significant reappraisal of this conventional wisdom. Spearheaded by a subgroup of economists in a narrow corner of the profession called ecological economics, the re-examination of the relationship between GDP and economic health has been taken up by a number of non-governmental organizations, certain national governments and the World Bank.
The nature of the problem was neatly captured by a newspaper advertisement run several years ago by Redefining Progress, an NGO based in San Francisco, which now has affiliated Canadian offices in such diverse locales as Nova Scotia and Alberta. The ad depicts a middle-class American couple in the midst of a panic attack over their economic state of affairs. The text underneath the picture reassures the couple with the following nostrum: “Your car was stolen, your kid has asthma, and you’ve just been sued by your next-door neighbour. Congratulations!”
According to the most popular index of prosperity – the gross domestic product – the family should be celebrating. Their “personal GDP” goes higher every time they have to spend more money, no matter the reason why.
The gist of this conundrum is that we include “bads” as well as “goods” in our calculation of total economic welfare. To get a better idea of how well off we really are, we need to net out the transactions that add nothing to our well-being.
Redefining Progress and other organizations have created alternative measures of our welfare and plotted these over time against conventional measures of economic activity such as GDP. While the conventional measures continue to reflect the expansion of our national economies – thereby suggesting that we are all better off – the alternative trends are either stable or decreasing.
These findings resonate with many members of the public. When pollsters have asked whether people are happier now than a decade ago, or whether they are happier than their parents, the results are surprising. There seems to be no relationship between national economic measures and happiness. In fact, several of these surveys suggest that happiness has decreased as national income has risen. More recent cross-national surveys of “happiness” have found that perceived welfare increases with personal income up to a point and then levels off, suggesting that past a given level of wealth, the accumulation of additional assets adds little, if anything, to our perceived well-being. Ironically, the insight provided by these surveys and more rigorous academic studies was anticipated over 30 years ago in the Himalayan kingdom of Bhutan. The New York Times reported that in 1972 Bhutan’s new king proposed placing greater emphasis on measuring GNH, or “gross national happiness,” than the nation’s GDP.
The former head economist of the World Bank and a leader in the field of ecological economics, Herman Daly, has astutely observed that the conventional economics that inform our corporate and governmental decisions provide no guide as to the optimal size of a national economy. Past a certain point on its path of economic growth, a country can pass from what he terms “economic growth” to “uneconomic growth,” where our “disutility” starts to exceed our “utility.” The most important factors that drive this transition are pollution from greenhouse gases and more conventional air, water and soil contaminants as well as the accelerating depletion of the global natural-resource base, including fisheries, forests and agricultural soils.
What are the implications for us in B.C. and the rest of Canada? Although long considered an international model of enlightened governance, we have an elephant in the room. It’s the tar sands – and the tone-deaf response in Edmonton and Ottawa to the trade-off there between oil revenues and greenhouse gases and other mega-environmental impacts. We should count our blessings that B.C., at least, is beginning to appreciate that we have a problem. It remains to be seen if we can learn from Bhutan.
Peter Nemetz is a professor at UBC’s Sauder School of Business.