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Narrative
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The fact that the GNP does not really measure economic welfare is not news. Back in the
early 1970's William Nordhaus and James Tobin proposed a new measure. They called it the
Measure of Economic Welfare (MEW). They said that economic welfare is related to
consumption, not to production.
They started with GNP but took out amounts related to
production and investment, such as depreciation. They took out costs of education and
health expenses because they said those are defensive expenses. They deducted the costs
associated with commuting to work. How many people have a commute that is 30 minutes or
less? If you had to drive an hour instead it would cost more but would you be better off
economically? No. They also excluded costs for items such as police services, sanitation
services, road maintenance, and national defense. A lot more money is going into
the personal equivalent of national
security: car alarms, house alarms. None of these improve the quality of our lives. So
Nordhaus and Tobin said they shouldn't be included when measuring economic welfare.
In the early 1980's Xenophen Zolotas proposed another measure, the Economic Aspects of
Welfare (EAW). It was similar to MEW. For example, he deducted the cost of commuting
and treated education expense as investment. He also deducted:
- Half of advertising costs, because he estimated that only half of all
advertising is a valuable information delivery service
- Pollution control costs
- An estimate of damages from air pollution
- Half of health costs, based on the assumption that half these costs are the
result of environmental stress
- A factor to account for national resource depletion
In the late 1980's Herman Daly and John Cobb proposed a measure that they called the Index
of Sustainable Economic Welfare (ISEW). They also started with the GNP as a basis. What
they included in their measure were expenditures on public education and health. They
took out expenditures for advertising and commuting. They decided that increasing
dependence on foreign capital was a negative influence, as was the loss of wetlands and
farmlands. They said that an increase in income disparity was also a negative influence.
They reasoned that the stock of land available was fixed and increases in real estate
value due to inflation do not really increase overall economic welfare, so they designed their
measure to reflect that. Then they calculated it all the way back to 1950 and compared it
to the GNP.
Then, in 1995, Clifford Cobb, Ted Halstead and Jonathan Rowe proposed
a measure they called the Genuine Progress Indicator. They went
farther than Daly and Cobb did and factored in the value of volunteer
work, cost of crime and family breakdown, the cost of underemployment,
ozone depletion and the loss of old growth forests. They calculated
the GPI from 1950 onward and compared it to the GDP. As you can see,
according to the GPI we are not even breaking even.
(Sources: Daly, 1983; Cobb, Halstead, Rowe, 1995)
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