The measurement of economic performance and social progress revisited: Reflections and Overview Joseph Stiglitz, Amartya K. Sen, Jean-Paul Fitoussi To cite this version: Joseph Stiglitz, Amartya K. Sen, Jean-Paul Fitoussi. The measurement of economic performance and social progress revisited: Reflections and Overview. 2009. hal-01069384 HAL Id: hal-01069384 https://hal-sciencespo.archives-ouvertes.fr/hal-01069384 Preprint submitted on 29 Sep 2014 HAL is a multi-disciplinary open access L’archive ouverte pluridisciplinaire HAL, est archive for the deposit and dissemination of sci- destinée au dépôt et à la diffusion de documents entific research documents, whether they are pub- scientifiques de niveau recherche, publiés ou non, lished or not. The documents may come from émanant des établissements d’enseignement et de teaching and research institutions in France or recherche français ou étrangers, des laboratoires abroad, or from public or private research centers. publics ou privés. THE MEASUREMENT OF ECONOMIC PERFORMANCE AND SOCIAL PROGRESS REVISITED OFCE N° 2009-33 DECEMBER 2009 Professor Joseph E. Stiglitz Chair, Columbia University Professor Amartya Sen Chair Adviser, Harvard University Professor Jean-Paul Fitoussi Coordinator of the Commission, IEP OFCE - Centre de recherche en économie de Sciences Po 69, quai d’Orsay - 75340 Paris Cedex 07 - Tél/ 01 44 18 54 00 - Fax/ 01 45 56 06 15 www.ofce.sciences-po.fr The Measurement of Economic Performance and Social Progress Revisited Reflections and Overview Joseph STIGLITZ, Amartya SEN and Jean-Paul FITOUSSI www.stiglitz-sen-fitoussi.fr Prolegomena THE MULTIPLE PURPOSES OF MEASUREMENT 1. In February 2008, the President of the French Republic, Nicholas Sarkozy, unsatisfied with the present state of statistical information about the economy and the society, asked, Joseph Stiglitz (President of the Commission), Amartya Sen (Advisor) and Jean Paul Fitoussi (Coordinator) to create a Commission, subsequently called “The Commission on the Measurement of Economic Performance and Social Progress” (CMEPSP). The Commission’s aim has been to identify the limits of GDP as an indicator of economic performance and social progress, including the problems with its measurement, to consider what additional information might be required for the production of more relevant indicators of social progress, to assess the feasibility of alternative measurement tools, and to discuss how to present the statistical information in an appropriate way. 2. The Commission reviewed the purposes to be served by systems of measurement of economic performance and social progress, and the extent to which current systems serve these purposes. 3. The purposes of our statistical systems are multiple, and a metric that is adapted to one purpose may be ill suited to another. Sometimes confusion is engendered when a measure adapted to one purpose is used to highlight another. For example, GDP is neither a measure of income nor a measure of well-being. What we want to measure is the key question. We may want to measure, for instance, the levels of market activity—one of the original objectives of national income measurement. But increasingly, there is a demand to go beyond measures of market activity to measures of well-being. Whatever it is that we want to measure, we can measure the flows (for instance, the level of production and/ or income) during a given time interval, say a year. We may measure changes in those flows, say their rate of growth over time. We may want to compare levels of income across countries or we may be interested in international comparisons of countries’ growth rates. 4. It is important to distinguish between these different purposes, since they are affected differently by the various shortcomings of national accounts. For example, measuring the level of production requires a direct measure of government output. But while the adoption of direct measures of government output has been used to give a better measure of growth rates, to date there have been few attempts to adjust the measured levels of national income. To measure changes in levels through time requires distinguishing price and quantity effects, which in turn implies the capacity to measure quality changes. 5. There are long recognized problems in GDP as a measure of economic performance, but many of the changes in the structure of our society have made these deficiencies of The Measurement of Economic Performance and Social Progress Revisited REFLECTIONS AND OVERVIEW greater consequence. At the same time, advances both in our conceptual understanding of the issues and data availability mean that it is now possible to construct better indicators. Better indicators might be able to address one of the concerns that motivated this report: a marked distance between standard measures of important socio economic variables like economic growth, inflation, unemployment, etc. and widespread perceptions 6. International comparisons of levels and more importantly of rates of growth play a very important role in the design of policy. Comparisons are indeed possible if the procedures and definitions used to compute the accounts are comparable. Yet there are still “large differences in the ways National Accounts calculations are carried out even among European countries, let alone between Europe and the U.S1”. This may have far- reaching consequences. It makes no sense, for instance, to structural reforms intended to import the “best practice” of the country performing the best in terms of growth rate, if the growth rates of the two countries differ mainly because of differences in the ways National Accounts are computed. 7. Policies have also been affected by widespread statistical analyses of the determinants of growth and economic performance; but inferences made from those statistical studies may be flawed if the measures themselves are flawed. Those conducting this research and relying on these results must be well informed concerning the limitations of our statistics on which they are based. 8. But what is of particular concern is when narrow measures of market performance are confused with broader measures of welfare. What we measure affects what we do; and if our measurements are flawed, decisions may be distorted. Policies should be aimed at increasing societal welfare, not GDP. Choices between promoting GDP and protecting the environment may be false choices, once environmental degradation is appropriately included in our measurement of economic performance. This report, building on extensive earlier work, describes the additions and subtractions that can and should be made to provide a better measure of welfare. 9. Advances in research across a number of disciplines enables, however, the development of broader, more encompassing measures of well being. Some of these dimensions are reflected in traditional statistics, but are given more prominence: unemployment has an effect on well-being that goes well beyond the loss of income to which it gives rise. Other dimensions to which we call attention are health, education, security, and social- connectedness. These dimensions affect the capabilities of people which depend on the extent of their opportunity set and of their freedom to choose among this set, the live they value2. Some economic reforms in recent years may have increased GDP, but their adverse effects on these other dimensions on Quality of Life are unmistable. 10. We care about the future—that the living standards that we enjoy today should be enjoyed by future generations. Our statistical systems should tell us whether or not what we are doing is sustainable, economically, environmentally, politically, or socially. There is 1. Joachen Hartwig (2005): “On Misusing National Account Data for Governance Purposes », Working paper 05-101, KOF Swiss Economic Institute, ETH, Zurich. 2. Amartya Sen: “Well Being, Agency and Freedom: the Dewey Lectures, 1984”, The Journal of Philosophy, 82, 169-221, 1985. 4 The Measurement of Economic Performance and Social Progress Revisited reason to believe that, at least in certain dimensions, what we are doing is not sustainable, but current statistics do not reflect this—just as they gave little indication of the unsustainability of the U.S. economic growth in the years preceding the crisis. 11. There is no single indicator that can capture something as complex as our society. But because what we choose to measure and how we construct our measures can have such an important role in the decisions that are made, it is important that there be an open and public discussion of our system of metrics. Hopefully, this Report will play a role in this Public Dialogue. I - Uses and Misuses of GDP 1. Between the time we began working on this Report and the time we completed it, the economic context has radically changed. We are now living through one of the worst financial, economic and social crises in history. Part of the reason why the crisis took many with such surprise is that the “measurement” systems we use to assess and monitor economic performance failed. They suggested that in the years prior to the crisis the economy was doing far better than it was. The crisis has raised questions of how to value assets – if we value the houses produced back then at current market prices, output at that time would be much lower. So too for the profits recorded by one of the seemingly most dynamic sectors of the economy, the financial sector, which were not just ephemeral, but, in many cases, based on suspect valuations.