Economics
Measuring What Makes Life Worthwhile

Economists try to quantify economic activity using a variety of metrics and indicators, but the most widely used tool in their arsenal is gross domestic product (GDP) and its spin-offs, including GDP growth and GDP per capita. GDP is the value of all the finished goods and services produced within a country's borders in a specific time period. Notice the word ‘finished’. This means that GDP is a measure of value added rather than just sales: it counts the value added by each firm in the process of manufacturing a product or delivering a service. So, GDP is an accretive measure. It assumes that, long ago, there was such a thing as zero GDP, and over time, economic activity has added to its value. 

GDP is often calculated by summing up three types of consumption, namely, consumption by individuals, consumption by firms (investment), and consumption by governments (government expenditure). As long as these parties continue to consume, GDP continues to grow. The more we spend, irrespective of the usefulness of our spending, or the collateral consequences of our spending, the better off we are, at least according to GDP.

So GDP is not a measure of welfare. It measures economic activity in isolation, without measuring its effect on other spheres of life. This is easy enough to demonstrate with a banal example. Let’s say that all our kidneys suddenly stopped working, due to an epidemic of renal disease. We would then need millions of new dialysis machines, so the manufacture of such machines would have to be ramped up immediately. This, coupled with dialysis performed at hospitals three times a week for a large portion of the population, would make GDP skyrocket. (Note that the value of properly functioning kidneys—i.e., of healthy people—does not enter into the calculation.) But, surely, we cannot argue that a nation afflicted by renal disease on a massive scale is now better off as a result of a higher GDP!

GDP may be a useful measure of economic activity, but clearly it is a terrible measure of the the welfare of a society, or the happiness of its citizens. In 1968, US presidential candidate Robert Kennedy remarked that GDP, while including cigarette advertising and new jails and the logging of redwoods, failed to celebrate the health of the nation’s children, the quality of education, the beauty of poetry, or the integrity of public officials. He famously concluded that GDP measures everything “except that which makes life worthwhile.”

Dissatisfaction with GDP as a measure of wellbeing has spawned various attempts at devising more intelligent estimates of national wellbeing. A few of these alternative indicators are described in the following infographic:

GDP Alternatives

 

A New Indicator: The Gross National Reserve

What we need is a method to measure economic progress that, unlike GDP, includes the many facets of life that are not immediately quantifiable when economic activity is tallied, but are nevertheless fundamental to human welfare. We propose to create a new measure: the Gross National Reserve, or GNR. To discover how the GNR would be calculated, click on the following link:

How the GNR Works

GDP-based accounting methodology makes an unfair assumption that all accounts begin at zero. In the GNR model, we attempt to fix this shortcoming. We start with something called Global Accounting of Assets—a mammoth, one-time undertaking to compute the value of all the natural resources on earth. This quantity is the Gross Global Reserve (GGR), which can be broken down into separate values for each country (GNRs).

Once computed, the Gross Global Reserve (GGR) should never diminish. From year to year, it would either remain stable or increase slightly. This may seem odd at first. After all, natural resources like petroleum and natural gas are consumed and not replenished; and despite our efforts to conserve the natural environment, the sheer pressure of population growth is depleting natural landscapes and habitats continuously, and releasing vast amounts of carbon into the atmosphere. But economic activity itself can increase the GGR, just as it does the GDP in the First Dimension. Moreover, private enterprises as well as governments will be able to increase the GGR by undertaking activities like reforestation of denuded hillsides, cleaning up polluted waterways, restoring natural habitats and seeding them with endemic flora and fauna, and so forth. If enough such projects are done on a regular basis, it is possible to maintain each GNR (and thus the overall GGR) in balance, so that depletive and accretive activities offset each other. The  aim is to make such balancing efforts mandatory for all organisations (private businesses as well as government departments), not by fiat but rather by enabling certain mechanisms that would naturally nudge enterprises in the right direction.

Enabling Mechanisms for GNR Economics

The first such enabling mechanism is the Utility Index, a scorecard-like tool that would allow for the evaluation of every enterprise (private or public) according to the impact it has on society. If GNR and GGR are just macroeconomic indicators, private enterprises may not feel especially incentivised to change their ways. They might see in GNR a useful tool, but aside from making adjustments to their CSR programmes, they would not be affected. As we shall see, however, each firm's contribution to GNR will affect their Utility Index, which will be the basis of a new system of taxation and economic incentives.

Another enabling mechanism is the novel method for participation in Global and Continental assemblies that was described in the page on sovereignty. Each country’s right to vote on important resolutions at such assemblies would hinge on their score in the national scorecard (effectively the score achieved by each country’s Head of State in his or her scorecard). Countries that allow their GNR to diminish would achieve low scores, and thus suffer a reduction in their voting rights.

The third enabling mechanism is the creation of a new financial instrument dedicated exclusively to accretive and depletive transactions in the GNR/GGR. To illustrate how such a meta-currency would work, and why it is necessary, let’s look at the following example: the development of an industrial zone in a natural wetland area.

 

Activity

Accretive impact
(30-year horizon)

Depletive impact
(indefinite annuity)

Overall annual change to GNR

Building an industrial development zone
in a wetland

Added value of goods made annually
in the industrial area:
$100 million

Annual loss of biodiversity services
due to wetland destruction:
$55 million

$100 - $55
= $45 million

 

As the numbers suggest, the government has decided to go ahead with the project because it generates a net accretion to GNR even though it has some environmental side effects. Every year, the manufacturing companies operating in the new industrial park would have to collectively pay $55 million to reimburse the depletive impact of the industrial park. For the sake of simplicity, let’s call this payout a “debit”. This debit would flow into a collective account held by the interested level of government (in this case, the Regional government). Though levied in the cash currency (here, dollars), this sum, once deposited to the collective account, would be denominated as a different meta-currency that may be used only for GNR-accretive projects or transactions. What was a debit for the companies that had to pay the equivalent dollar sum now becomes a credit to the authority in charge of maintaining the account and distributing the funds deposited there.

The Regional government can now employ these credits to fund accretive activities in its jurisdiction, such as designation of new wildlife preserves, improvements to recycling and waste reduction programmes, retrofitting government buildings with energy-saving design and equipment, development of solar-powered public transportation, landscaping of new public parks, etc. The most important aspect of this scheme is that once converted into the new debit/credit meta-currency, these funds could be used only for activities that are designed specifically to increase the GNR. By dedicating a special financial tool to GNR accounting, the Second Dimension economic system ensures that the funds are used responsibly and transparently. As we will see later, debits/credits are just one of several new financial tools that will be needed in the Second Dimension and beyond.

GNR and the Spectrum of Demand

In the foregoing discussion we’ve seen how a balance-sheet approach like GNR could lead to a fairer accounting of our use of natural resources. It is sensible and intuitive; the only complex task would be the accurate computation of the intangible benefits of many of the natural resources that capitalist activity either consumes or degrades. 

Now we can also connect the GNR principle with the ideas introduced in previous pages, especially the Spectrum of Demand model. Like the capitalist system, GDP metrics describe only one portion of the Spectrum of Demand. Like capitalism, GDP only values goods and services that are provided by a market economy in response to individual needs and desires. It ignores the wellbeing of communities and of nature. 

The GNR model, on the other hand, covers much more of the Spectrum. Until now, we’ve discussed how it could lead to better valuation of natural resources. The concept of a national reserve, however, is not limited to natural resources. It is far more ambitious and comprehensive. In order to accurately reflect the health of an economy, it must include social goods and services as well—a vastly more challenging collection of previously un-calculated benefits. The inclusion of social benefits would propel GNR economics into the Third Dimension.

As Robert Kennedy siad, GDP fails to calculate the value of good education, of good health, and good governance, to name a few social benefits that we take for granted. The GNR approach would address this by assigning a value to each social benefit, each public and common good, and adding it to the GNR.

In the realm of education, for example, each school could be rated according to comprehensive criteria. For each student who graduates and either enters university or a vocational institute within one year, the school would be able to claim a certain credit to GNR. In public administration, each government department would be set annual goals, financial as well as operational. If those goals are met and measured according to transparent, measurable standards, the department would have added value to the GNR, whereas if they are not met, leading to unnecessary expenditure, delay, and inefficiency, then it would have depleted GNR. All government agencies and companies could also add to the GNR by ensuring employee satisfaction, measured through end-of-year surveys. Cities could add to GNR by creating public parks, or adorning their pedestrian zones with artwork, or improving public transportation. They could also generate GNR accretions for reductions in crime, and depletions for increases in crime.

There are, in short, many different ways in which accretions and depletions to GNR arising from intangible benefits could be calculated. The methods by which the value of these additions are computed may well turn out to be complex and require much initial work and debate. They may also be subject to frequent change as social and economic conditions evolve. But the need and purpose of such a system of accounting are clear. Ultimately, even the development of consciousness, at the very right-hand extreme of the Spectrum, could be brought into a GNR calculation, so that the-familiar Spectrum diagram would look like this:

 

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