Thank You, Messrs. Sen and Stiglitz...

... for articulating one of my long-standing complaints about economics and economic measures of performance.

According to Peter Goodman's article in today's New York Times, economists Joseph Stiglitz and Amartya Sen, both Nobel Prize winners, have just released a report arguing against the use of Gross Domestic Product (GDP) as the sine qua non measure of economic health.

By focusing purely on GDP (the quantity of goods and services an economy produces), Sen and Stiglitz aver, "many societies ... [have] failed to factor in the social costs of joblessness and the public health impacts of environmental degradation."

The late, great H. L. Mencken once wrote, "There is always an easy solution to every human problem—neat, plausible, and wrong." And an "easy solution" is exactly what GDP is. If you're trying to determine how well your society is doing, there are all kinds of measures you could use. Start by defining your terms: What exactly do you mean by "doing well"?

Particularly in a society as complex as the United States, it's hard to know where to start. Our Declaration of Independence holds it to be "self-evident" that we have the right to "life, liberty, and the pursuit of happiness", so ... does economic "wellness" really matter more than physical "wellness"? And what about "happiness" -- how does one measure that?

Goodman quotes Stiglitz as saying, "What you measure affects what you do. If you don't measure the right thing, you don't do the right thing." Sometimes we measure the wrong thing because measuring the right one is too hard. But then the "wrong" thing takes on a life of its own as the "important" thing.

What's wrong with GDP? Where to start, where to start...

GDP measures economic activity, the production of goods and services that are traded in the marketplace. Which means that anything that can't be priced isn't measured. So what's the value of, say, the person who stays home to raise a family? Obviously -- by the GDP model -- nothing, because that person isn't compensated (monetarily) for his or her work. That's not good economic thinking, that's cynicism (as Oscar Wilde put it in Lady Windermere's Fan, a cynic is a "man who knows the price of everything and the value of nothing.").

Not only does GDP not provide a properly-nuanced picture of a society's economic wellness (let alone any other aspects of its wellness), it doesn't consider the question of sustainability. Can anything, even an economy as large as that of the United States, grow indefinitely without any negative side effects? Name anything that could grow indefinitely without negative side effects.

Stiglitz said, "Your measure of output is grossly distorted by the failure of our accounting system. What began as a measure of market performance has increasingly become a measure of social performance, and that's wrong."

Focusing on maximizing GDP alone is as foolish as focusing only on "maximizing shareholder value" by looking for new and ever more creative ways to boost share prices. Wall Street loves it when I cut costs, so why don't I lay off another 1,000 employees? Sure enough, Wall Street will reward me, because the societal costs of 1,000 new members of the unemployed isn't part of the share-price calculation.