The following article was written for the
February 2006 issue of Vermont Commons
The Real Economy
by Dr. Robert Costanza
Stories about
the economy typically focus on Gross Domestic Product (GDP),
jobs, stock prices, interest rates, retail sales, consumer confidence,
housing starts, taxes, and assorted other indicators. We
hear things like “GDP grew at a 3% rate in the fourth quarter,
indicating a recovering, healthy economy, but with room for further
improvement.” Or, “The Fed raised short-term
interest rates again to head off inflation.”
But do these reports, and the indicators they cite, really tell
us how the economy is doing? What is the economy anyway? And
what is this economy for?
Conventional
reports on these questions are rather narrow. The “economy” we
usually hear about refers only to the market economy – the
value of those goods and services that are exchanged for money.
Its purpose is usually taken to be to maximize the value of these
goods and services– with the assumption that the more activity,
the better off we are. Thus, the more GDP (which measures
aggregate activity in the market economy), the better. Likewise
the more contributors to GDP (such as retail sales and salaries
paid to employees), the better. Predictors of more GDP
in the future (such as housing starts and consumer confidence)
are also important pieces of information from this perspective. Declining
or even stable GDP is seen as a disaster. Growth in GDP is assumed
to be government’s primary policy goal and also something
that is sustainable indefinitely.
But is this
what the economy is all about? Or more accurately, is this all that
the economy is about? Or, is this what the economy shouldbe about? The
answer to all of these is an emphatic no. Here’s why.
Let’s start with purpose. The purpose of the economy should
be to provide for the sustainable well-being of people. That
goal encompasses material well-being, certainly -- but also
anything else that affects well being and its sustainability.
This seems obvious and non-controversial. The problem
comes in determining what things actually affect well-being
and in what ways.
There is substantial new research on this “science of
happiness” that shows the limits of conventional economic
income and consumption in contributing to well-being. Psychologist
Tim Kasser in his 2003 book “The High Price of Materalism” points
out, for instance, that people who focus on material consumption
as a path to happiness are actually less happy and even suffer
higher rates of both physical and mental illnesses than those
who do not. Material consumption beyond real need is a
form of psychological “junk food” that only satisfies
for the moment and ultimately leads to depression, Kasser says.
Economist Richard Easterlin, a noted researcher on the determinants
of happiness, has shown that well-being tends to correlate well
with health, level of education, and marital status, and not
very well with income. He concludes in a recent paper in the Proceedings
of the National Academy of Sciences that, “People
make decisions assuming that more income, comfort, and positional
goods will make them happier, failing to recognize that hedonic
adaptation and social comparison will come into play, raise their
aspirations to about the same extent as their actual gains, and
leave them feeling no happier than before. As a result, most
individuals spend a disproportionate amount of their lives working
to make money, and sacrifice family life and health, domains
in which aspirations remain fairly constant as actual circumstances
change, and where the attainment of one’s goals has a more
lasting impact on happiness. Hence, a reallocation of time
in favor of family life and health would, on average, increase
individual happiness.” British economist Richard
Layard’s 2005 book: “Happiness: lessons from a new
science,” echos many of these ideas and concludes that
current economic policies are not improving happiness and that “happiness
should become the goal of policy, and the progress of national
happiness should be measured and analysed as closely as the growth
of GNP.”
Economist Robert Frank, in his 2000 book “Luxury Fever,” also
concludes that the nation would be better off – overall
national well-being would be higher, that is – if we actually
consumed less and spent more time with family and friends, working
for our communities, maintaining our physical and mental health,
and enjoying nature.
On this last point, there is substantial and growing evidence
that natural systems contribute heavily to human well-being. In
a paper published in 1997 in the journal Nature, my
co-authors and I estimated the annual, non-market value of the
earth’s ecosystem services is $33 trillion globally, substantially
larger than global GDP. The just released UN Millennium
Ecosystem Assessment is a global update and compendium of ecosystem
services and their contributions to human well-being.
So, if we want to assess the “real” economy – all
the things which contribute to real, sustainable, human welfare – as
opposed to only the “market” economy, we have to
measure the non-marketed contributions to human well-being from
nature, from family, friends and other social relationships at
many scales, and from health and education. One convenient
way to summarize these contributions is to group them into four
basic types of capital that are necessary to support the real,
human-welfare-producing economy: built capital, human capital,
social capital, and natural capital.
The market economy covers mainly built capital (factories, offices,
and other built infrastructure and their products) and part of
human capital (spending on labor), with some limited spillover
into the other two. Human capital includes the health, knowledge,
and all the other attributes of individual humans that allow
them to function in a complex society. Social capital includes
all the formal and informal networks among people: family, friends,
and neighbors, as well as social institutions at all levels,
like churches, social clubs, local, state, and national governments,
NGO’s, and international organizations. Natural capital
includes the world’s ecosystems and all the services they
provide. Ecosystem services occur at many scales, from climate
regulation at the global scale, to flood protection, soil formation,
nutrient cycling, recreation, and aesthetic services at the local
and regional scales.
So, how has the real economy been doing recently, compared to
the market economy? The short answer is, not so good. How
do we know? One way is through surveys of people’s life
satisfaction, which have been decreasing slightly since about
1975. A second approach is an aggregate measure of the
real economy that has been developed as an alternative to GDP
called the Genuine Progress Indicator, or GPI.
Let’s first take a quick look at the problems with GDP
as a measure of true human well-being. GDP is not only limited – measuring
only marketed economic activity or gross income -- it also counts
all of this activity as positive. It does not separate desirable,
well-being-enhancing activity from undesirable well-being-reducing
activity. For example, an oil spill increases GDP because someone
has to clean it up, but it obviously detracts from society’s
well-being. From the perspective of GDP, more crime, more sickness,
more war, more pollution, more fires, storms, and pestilence
are all potentially good things, because they can increase marketed
activity in the economy.
GDP also leaves out many things that do enhance well-being
but are outside the market. For example, the unpaid work of parents
caring for their own children at home doesn't show up, but if
these same parents decide to work outside the home to pay for
child care, GDP suddenly increases. The non-marketed work
of natural capital in providing clean air and water, food, natural
resources, and other ecosystem services doesn’t adequately
show up in GDP, either, but if those services are damaged and
we have to pay to fix or replace them, then GDP suddenly increases.
Finally, GDP takes no account of the distribution of income among
individuals. But it is well-known that an additional $1 worth
of income produces more well-being if one is poor rather than
rich. It is also clear that a highly skewed income
distribution has negative effects on a society’s social
capital.
The GPI addresses these problems by separating the positive
from the negative components of marketed economic activity, adding
in estimates of the value of non-marketed goods and services
provided by natural, human, and social capital, and adjusting
for income-distribution effects. While it is by no means
a perfect representation of the real well-being of the nation,
GPI is a much better approximation than GDP. As Amarta
Sen and others have noted, it is much better to be approximately
right in these measures than precisely wrong.
Comparing GDP and GPI for the US shows that, while GDP has steadily
increased since 1950, with the occasional dip or recession, GPI
peaked in about 1975 and has been gradually decreasing ever since.
From the perspective of the real economy, as opposed to just
the market economy, the U.S. has been in recession since 1975. As
already mentioned, this picture is also consistent with survey-based
research on people's stated life-satisfaction. We are now in
a period of what Herman Daly has called "un-economic growth," where
further growth in marketed economic activity (GDP) is actually
reducing well-being on balance rather than enhancing it. In terms
of the four capitals, while built capital has grown, human, social
and natural capital have declined or remained constant and more
than canceled out the gains in built capital.
In the last four years, the decline in domestic GPI has picked
up speed. While U.S. GPI was beginning to trend upward
again at the end of the Clinton years, the policies of the Bush
administration have lead to a significant worsening of income
distribution (thereby further decreasing social capital), an
increasing depletion of natural capital, and worsening human
capital through decreased spending on education and health and
loss of jobs. And the Bush team has certainly not compensated
for these negatives with a stellar performance in the built capital
component (GDP). While the dollar incomes of some wealthy individuals
may have improved over this period, the overall well-being of
the nation has significantly declined. Further, the psychological
evidence is that even the well-being (as opposed to income) of
the wealthy individuals has probably not improved very much and
may even have declined. From the perspective of the real
economy, the country is in rapidly worsening shape.
Is the news all bad? No. We recently estimated the GPI
of the State of Vermont and of Burlington, the state’s
largest city, and found that Vermont’s and Burlington’s
GPI per capita had increased over the entire 1950-2000 period
and is now more than double the national average. This
was due to Vermont’s attention to protecting and enhancing
natural, human, and social capital in balance with gains in built
capital -- accomplished through the application of strong, local
democratic principles and processes still actively at work in
Vermont.
The lesson from Vermont, and from similar analyses done at the
regional level in other locales, is that there is significant
variation across the country in trends in well-being and quality
of life, and plenty of good examples we can learn from to improve
the overall well-being of the country.
How can we apply these lessons to get out of the real recession
in human well-being at the national scale that we have been in
since 1975? Several policies have been suggested that would help
to turn things around:
- Shifting our primary national policy goal from increasing
marketed economic activity (GDP) to maximizing national well-being
(GPI or something similar). This would allow us to see
the interconnections between built, human, social, and natural
capital and build well-being in a balanced and sustainable
way.
- Reforming the tax system to send the right incentives by
taxing negatives (pollution, depletion of natural capital,
overconsumption) rather than positives (labor, savings, investment).
Recent tax reforms have decreased well-being by promoting a
greater income gap, natural resource depletion, and increased
pollution.
- Reforming international trade to promote well-being over
mere GDP growth. This implies protecting natural capital, labor
rights, and democratic self-determination first and then allowing
trade, rather than promoting the current trade rules that ride
roughshod over all other societal values and ignore all non-market
contributions to well-being.
- Implementing local complementary currency systems to encourage
more local economic activity and help build social capital. There
are more than 4000 local currency systems in operation today,
including “Ithaca hours” in Ithaca, NY and “Burlington
Bread” in Burlington, VT. While these systems have
so far not played a major role in local economies, the potential
for their expanded use is huge.
- Further reforming campaign finance laws so that the needs
and welfare of individuals are more fully and accurately expressed
in the national democratic process, rather than the needs and
welfare of those who currently fund political campaigns. As
Tom Prugh, myself, and Herman Daly have argued in our book “The
Local Politics of Global Sustainability,” implementing
strong democracy (as opposed to the weak and ineffective sham
of democracy we currently see at the national scale) is an
essential prerequisite to building a sustainable and desirable
future.
Ultimately, getting out of the 25-year recession in well-being
we are currently in will require us to look beyond the limited
definition of the “economy” we read about in the
newspapers, and recognize what the real economy is and what it
is for. We must not allow deceptive accounting practices – analogous
to those that caused the Enron and WorldCom debacles – to
paint an inaccurate and ultimately destructive picture of how “well” we
are doing. Alternatives are available, but they need significant
further discussion and research.
With nothing less than our current and future well-being at
stake, we can certainly afford to devote greater effort to learning
how to adequately understand and measure it. If we want the things
that really matter to our well-being to count, we must learn
how to recognize and count them, and use that information to
inform policy in a real democracy.
Robert Costanza
Gund Professor of Ecological Economics
and Director, Gund Institute of Ecological Economics
Rubenstein School of Environment and Natural Resources
The University of Vermont
590 Main Street. Burlington, VT 05405-1708
Telephone: 802.656.2974
Fax: 802.656.2995
email: Robert.Costanza@uvm.edu
http://www.uvm.edu/giee
