After four months of hard slog I handed my diploma thesis in economics in today, and breathed a mighty sigh of relief. 80 pages, 20,000 words, 38 charts & graphs –I think I can be happy with the result.
The topic was "An international comparison of alternatives to GDP as a measure of welfare." If that's still a little broad, here's a brief synopsis (if you'd prefer a polemic speech, go listen to this 2min Bobby Kennedy speech on the topic):
After the Great Depression in 1929 the Yanks decided they could do with a system of national accounts to deliver comprehensive information about how the economy was faring. Out of this process sprung the Gross Domestic Product, or GDP, which measures the value of all goods and services produced by an economy over a period of time; basically, it tell you how big an economy is.
Now, what the GDP doesn't do is tell you how well off people are, for the simple reason that it doesn't measure everything that affects how well off we are. What kind of things does it leave out? Income distribution, for starters: GDP doesn't tell you if the rich folk are earning more, or the poor folk, or both. Levels of health, education, crime, environmental pollution, unemployment, over-employment (working too much), unpaid work; these all affect our welfare, too, but aren't part of GDP. Unpaid work is one of my favourites. An example: I cook myself dinner every night, and so does my neighbour. That doesn't count towards GDP. If my neighbour pays me to cook her dinner and I pay her to cook mine, suddenly GDP increases. Are we any better off? Not really. But if we use GDP to measure how well off we are, then we would have to say yes.
Another problem with GDP is that some things are part of it, but probably shouldn't be. If, for example, I run a factory and pump black smoke into the air so that no one gets to see the sun, lots of people are unhappy and circle my house with torches and pitchforks during their lunch break (they need the torches to see because it's so dark). So I spend a lot of money installing filters to get rid of the smoke. All of that increases GDP, but are the people better off than they were before I started polluting? Not really. They can see the sun again, but they could beforehand, too. They're not accidentally stabbing each other with pitchforks in the dark any more, but that was also my fault. So GDP has gone up, even though our welfare hasn't increased.
Finally, our welfare doesn't just depend on how we're doing today, but also how we'll be doing tomorrow, in a few years and decades, and how our descendants will be doing. Going out and fishing the oceans empty would result in really, really cheap fish for a while (yay! more GDP! everyone's better off!), but after that it wouldn't be so swell. So our welfare also depends on how sustainably we're living.
So these are some of the reasons why GDP isn't a great measure of welfare. People have known this for yonks – the chap who invented GDP, in fact, told the American Congress that that wasn't how it was supposed to be used while he was inventing it. But they didn't listen.
Anyway, about 40 years ago some economists got together and decided they'd create an alternative, which they called the "Index of Sustainable Economic Welfare" – ISEW. A few other economists thought, "bonzer!", and took up this concept for their own countries. Over the years it was extended, and refined, and given prettier names like "Genuine Progress Indicator" (GPI). There's ISEWs and GPIs and indexes by a bunch of other names for all sorts of countries now, sometimes several for the same country. Some of them define welfare a little differently than the others, but most of them come back to the same principles.(1) A lot of the differences are in the way they go about measuring welfare – does emitting a ton of CO2 cause $30 of damage, or $60, $160 or perhaps even more?(2)
Now, what I did – after explaining all that stuff up there for 15 pages because, well, that's what you do when you're an academic – is take three of these ISEW studies, look at them very sternly, and ask, "Are you a valid and reliable measure of welfare?"(3)
I then wrote down all the bits where I thought they were and weren't very good measure of welfare, considered all the technical stuff they did, made some suggestions of how I thought they could be improved, and tried some of my own suggestions out to see what the results were. That one sentence covers 70% of my thesis and 100% of the attractive and very time consuming graphs and tables.
Attentive readers will have noticed that 15 + 70% does not equal 80, and they're right: on the remaining pages I drew dirty pictures, then deleted those and I wrote, "I did not plagiarise" one-thousand times.
So that's my thesis. Those who find the topic interesting should check out Beyond GDP (www.beyond-gdp.eu) and perhaps the Commission on the Measurement of Economic Performance and Social Progress (www.stiglitz-sen-fitoussi.fr), both of which have loads of material on the subject. Particularly hardcore is the 292-page report by the CMEPSP, written by half-a-dozen Nobel-prize winning economists, whom I nevertheless harbour a grudge against because I waited almost half a year for their report and when it came out it was just "We need better data" written three-hundred-thousand times and no index for me to study.
But they're Nobel laureates, so I guess they're allowed to do that.
(1) Some of them just go around and ask people how happy they are. Which is great but, y'know, a little useless.
(2) If you ask Penny Wong she'll answer, "Whatever the coal lobby says", but that's because she hates kittens and only has her position because it looks incredibly good having a female, Asian, homosexual Minister for Climate Change. (Sorry Philipp Rösler, lesbianism beats adoption. And she was only 3 years older that you when she took office, so nerr.)
(3) If I'm honest I only whispered the question under my breath, but this a joke only Seb will understand.
The topic was "An international comparison of alternatives to GDP as a measure of welfare." If that's still a little broad, here's a brief synopsis (if you'd prefer a polemic speech, go listen to this 2min Bobby Kennedy speech on the topic):
After the Great Depression in 1929 the Yanks decided they could do with a system of national accounts to deliver comprehensive information about how the economy was faring. Out of this process sprung the Gross Domestic Product, or GDP, which measures the value of all goods and services produced by an economy over a period of time; basically, it tell you how big an economy is.
Now, what the GDP doesn't do is tell you how well off people are, for the simple reason that it doesn't measure everything that affects how well off we are. What kind of things does it leave out? Income distribution, for starters: GDP doesn't tell you if the rich folk are earning more, or the poor folk, or both. Levels of health, education, crime, environmental pollution, unemployment, over-employment (working too much), unpaid work; these all affect our welfare, too, but aren't part of GDP. Unpaid work is one of my favourites. An example: I cook myself dinner every night, and so does my neighbour. That doesn't count towards GDP. If my neighbour pays me to cook her dinner and I pay her to cook mine, suddenly GDP increases. Are we any better off? Not really. But if we use GDP to measure how well off we are, then we would have to say yes.
Another problem with GDP is that some things are part of it, but probably shouldn't be. If, for example, I run a factory and pump black smoke into the air so that no one gets to see the sun, lots of people are unhappy and circle my house with torches and pitchforks during their lunch break (they need the torches to see because it's so dark). So I spend a lot of money installing filters to get rid of the smoke. All of that increases GDP, but are the people better off than they were before I started polluting? Not really. They can see the sun again, but they could beforehand, too. They're not accidentally stabbing each other with pitchforks in the dark any more, but that was also my fault. So GDP has gone up, even though our welfare hasn't increased.
Finally, our welfare doesn't just depend on how we're doing today, but also how we'll be doing tomorrow, in a few years and decades, and how our descendants will be doing. Going out and fishing the oceans empty would result in really, really cheap fish for a while (yay! more GDP! everyone's better off!), but after that it wouldn't be so swell. So our welfare also depends on how sustainably we're living.
So these are some of the reasons why GDP isn't a great measure of welfare. People have known this for yonks – the chap who invented GDP, in fact, told the American Congress that that wasn't how it was supposed to be used while he was inventing it. But they didn't listen.
Anyway, about 40 years ago some economists got together and decided they'd create an alternative, which they called the "Index of Sustainable Economic Welfare" – ISEW. A few other economists thought, "bonzer!", and took up this concept for their own countries. Over the years it was extended, and refined, and given prettier names like "Genuine Progress Indicator" (GPI). There's ISEWs and GPIs and indexes by a bunch of other names for all sorts of countries now, sometimes several for the same country. Some of them define welfare a little differently than the others, but most of them come back to the same principles.(1) A lot of the differences are in the way they go about measuring welfare – does emitting a ton of CO2 cause $30 of damage, or $60, $160 or perhaps even more?(2)
Now, what I did – after explaining all that stuff up there for 15 pages because, well, that's what you do when you're an academic – is take three of these ISEW studies, look at them very sternly, and ask, "Are you a valid and reliable measure of welfare?"(3)
I then wrote down all the bits where I thought they were and weren't very good measure of welfare, considered all the technical stuff they did, made some suggestions of how I thought they could be improved, and tried some of my own suggestions out to see what the results were. That one sentence covers 70% of my thesis and 100% of the attractive and very time consuming graphs and tables.
Attentive readers will have noticed that 15 + 70% does not equal 80, and they're right: on the remaining pages I drew dirty pictures, then deleted those and I wrote, "I did not plagiarise" one-thousand times.
So that's my thesis. Those who find the topic interesting should check out Beyond GDP (www.beyond-gdp.eu) and perhaps the Commission on the Measurement of Economic Performance and Social Progress (www.stiglitz-sen-fitoussi.fr), both of which have loads of material on the subject. Particularly hardcore is the 292-page report by the CMEPSP, written by half-a-dozen Nobel-prize winning economists, whom I nevertheless harbour a grudge against because I waited almost half a year for their report and when it came out it was just "We need better data" written three-hundred-thousand times and no index for me to study.
But they're Nobel laureates, so I guess they're allowed to do that.
(1) Some of them just go around and ask people how happy they are. Which is great but, y'know, a little useless.
(2) If you ask Penny Wong she'll answer, "Whatever the coal lobby says", but that's because she hates kittens and only has her position because it looks incredibly good having a female, Asian, homosexual Minister for Climate Change. (Sorry Philipp Rösler, lesbianism beats adoption. And she was only 3 years older that you when she took office, so nerr.)
(3) If I'm honest I only whispered the question under my breath, but this a joke only Seb will understand.
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