Beyond Gdp Paper

Special attention is devoted to recent developments in the analysis of sustainability, in the study of happiness, in the theory of social choice and fair allocation, and in the capability approach. It is suggested in the conclusion that, although convergence toward a consensual approach is not impossible, for the moment not one but three alternatives to GDP are worth developing. ( JEL I31, E23, E01) 1. Introduction G

DP is recurrently criticized for being a poor indicator of social welfare and, therefore, leading governments astray in their assessment of economic policies. As is well known, GDP statistics measure current economic aactivity but ignore wealth variation, international income flows, household production of services, destruction of the natural environment, and many determinants of well-being such as the quality of social relations, economic security and personal safety, health, and longevity.

Even worse, GDP increases when convivial reciprocity is replaced by anonymous market relations and when rising crime, pollution, catastrophes, or health hazards trigger * Fleurbaey: CNRS, University Paris Descartes, CORE (Universite de Louvain) and IDEP. Comments, suggestions and advice by S. Alkire, G. Asheim, A. Atkinson, A. Deaton, E. Diewert, R. Guesnerie, D. Kahneman, A. Krueger, I. Robeyns, P. Schreyer, three referees and Roger Gordon (the Editor) are gratefully acknowledged. defensive or repair expenditures.

Not surprisingly, the construction of better indicators of social welfare is also, recurrently, a hot issue in public debate and a concern for politicians and governments. The last two decades have witnessed an explosion in the number of alternative indicators and a surge of initiatives from important institutions such as the OECD, the UNDP, the European Union—more recently the French government has appointed a committee, chaired by Joseph E. Stiglitz and including four other Nobel Prize winners, to propose new indicators of “economic performance and social progress. In the meantime, welfare economics1 has burgeoned in various directions, involving the theory of social choice, the theory of 1 The expression “welfare economics” is used here in a very broad sense, including all branches of economics that bear on the definition of criteria for the evaluation of social states and public policies. It is not restricted to the narrow confines of Old and New (or New New) Welfare Economics. 1029 1030 Journal of Economic Literature, Vol.

XLVII (December 2009) is much less supported by economic theory than is commonly assumed. The extension of this approach to intertemporal welfare as attempted in “green” accounting adds even more complications. In view of recent developments in the theory of social choice and fairness, it will be argued that the idea of a “corrected GDP” is still defendable but implies different accounting methods than usually thought. Second, there is the idea of “Gross National Happiness,” which has been revived by the burgeoning happiness studies.

It will be argued here that the happiness revolution might, instead of bringing about the return of “utility,” ultimately condemn this concept for being simplistic, and reveal that subjective well-being cannot serve as a metric for social evaluation without serious precautions. Third, there is the “capability approach ” proposed by Amartya Sen, primarily as a framework for thinking rather than a precise method of measurement. This approach has now inspired a vvariety of applications, but most of its premoters are reluctant to seek a synthetic index, a famous exception being the Human Development Index (HDI).

It will be argued here that a key aspect of this problem is whether individual valuations of the relevant dimensions of capability can and should be taken into account— an issue over which a dialogue with the two previous approaches might prove very useful. Fourth, there is the growing number of “synthetic indicators” that, following the lead of the HDI, are constructed as weighted averages of summary measures of social performance in various domains.

It will be argued here that, if the three other approaches were fully exploited, there would be little reason to keep this fourth approach alive because it is ill-equipped to take account of the distribution of well-being and advantage among the members of society. The paper is structured as follows. Sections 2–4 deal with monetary measures that are linked to the project of a corrected fair allocation, the capability approach, the study of happiness and its determinants, in conjunction with new developments in the philosophy of social justice and the psychology of well-being.

These conceptual developments provide new analytical tools that may be directly useful for concrete measurements. About a decade ago, Daniel T. Slesnick (1998) made the following observation: “While centrally important to many problems of economic analysis, confusion persists concerning the relationship between commonly used welfare indicators and well-established theoretical formulations” (p. 2108). It is probably safe to say that much the same now holds about the relationship between concrete measures of welfare—old, new, and potential—and upto-date theories.

It appears timely to ask what the existing academic literature has to say about alternatives to GDP. The practical importance of a measure of social welfare can hardly be overstated. Ppolicy decisions, cost–benefit analyses, international comparisons, measures of growth, and inequality studies constantly refer to evaluations of individual and collective wellbeing. The fact that monetary measures still predominate in all such contexts is usually interpreted as imposed by the lack of a better index rather than reflecting a positive consensus.

The purpose of this paper is, in the light of state-of-the-art welfare economics, to examine the pros and cons of the main alternative approaches to the measurement of social welfare from the perspective of ppolicy evaluation as well as international and intertemporal comparisons. Four approaches are discussed here. First, there is the idea of a “corrected GDP ” that would take account, in particular, of nonmarket aspects of well-being and of sustainability concerns. As will be explained here, a basic problem for this approach is that its starting point, national income, as a candidate for a measure of social welfare,

Fleurbaey: Beyond GDP: The Quest for a Measure of Social Welfare GDP. Section 2 revisits the classical results involving the value of total consumption and usually invoked in justification of GDP-like measures. This appears important because some of these results are often exaggerated, while others are little known or even susceptible of developments in future research. Section 3 is devoted to the intertemporal extension of this approach, as featured in the Net National Product (NNP) and “green” accounting.

Section 4 turns to measures based on willingness-to-pay and moneymetric utilities, highlighting the connection with recent developments in the theory of social choice and fairness. This section also briefly discusses cost–benefit analysis, which is an important tool for ppolicy evaluation. Sections 5–7 are devoted to the nonmonetary approaches, namely, synthetic indicators such as the HDI (section 5), happiness studies and the various possible indexes of subjective well-being (section 6), and the capability approach (section 7).

Section 8 makes concluding remarks about the relative strengths and weaknesses of the various approaches analyzed in the paper and the prospects for future developments and applications. 2. Monetary Aggregates Revisited The project of correcting GDP has been often understood, after William D. Nordhaus and James Tobin’s (1973) seminal work, as adding or subtracting terms that have the same structure as GDP, i. e. , monetary aggregates computed as quantities valued at market prices or at imputed prices in case market prices are not available. As we will see in this section, economic theory is much less supportive of this approach than usually 2 Nordhaus and Tobin (1973) set out to compute “a comprehensive measure of the annual real consumption of households. Consumption is intended to include all goods and services, marketed or not, valued at market prices or at their equivalent in oopportunity costs to consumers” (p. 24). 1031 thought by most users of national accounts. Many official reports swiftly gloss over the fact that economic theory has established total income as a good index of social welfare under some assumptions (which are usually left unspecified).

To be sure, there is a venerable tradition of economic theory that seeks to relate social welfare to the value of total income or total consumption. 3 Most of that theory, however, deals with the limited issue of determining the sign of the welfare change rather than its magnitude, not to mention the level of welfare itself. In this perspective, the widespread use of GDP per capita, corrected or uncorrected, as a cardinal measure allowing ppercentage scaling of differences and variations appears problematic. 4 In this section, I review the old and recent arguments for and against monetary aggregates as social welfare indicators. . 1 A Revealed Preference Argument Start from the revealed preference argument that, assuming local nonsatiation, if a consumer chooses a commodity bundle x (with ? different commodities) in a budget set defined by the price vector p, then x is revealed preferred to all bundles y such that py < px. If x is interior and assuming differentiability, for an infinitesimal change dx, x + dx is strictly preferred to x by the consumer if and only if pdx > 0. Note the importance of the interiority assumption here.