Getting What You Measure

As discussed earlier, the economic studies in this field often seek to identify the optimum path to maximize the utility of consumption. Consumption is often estimated by subtracting investment (in the economy or in avoiding climate change) from the Gross Domestic Product (GDP), the sum of the goods and services in the economy.

But, total consumption as estimated through GDP is a very imperfect measure of the good, or enjoyment, we get from the economy. Consider an odd example. If family A has children and raises them, and family B has children and raises them, then no economic activity has occurred. But if family A pays family B to raise the A kids, and family B pays family A to raise the B kids, then raising kids is part of the GDP. Many economic studies would find that people are better off in the second case because GDP has risen, but few people would agree, especially if taxes were extracted from the payments in the second case.

Perhaps more relevant, after a hurricane destroys a city, economic activity is lost because people are not working their usual jobs for a while, but economic activity is gained because people must clean up and rebuild. Very few people would agree that money spent fixing hurricane damage is good, but such money appears in the GDP. On the other side, if technological progress means you get a better computer for the same cost, GDP misses the improvement.

Video: Hurricane GDP (1:38)

Click for a video transcript of "Hurricane GDP".

PRESENTER: Many economic analyses say that sort of the gross domestic product-- the GDP-- is good. And a bigger GDP, spending more money in the economy is a good thing. Well, there's a lot of useful information to this, but it's not completely accurate.

These pictures from the United States Geological Survey are showing the affect of Hurricane Katrina on the coast of Mississippi near Biloxi in the USA. What you see here is a picture on top from September 19, 1998, which is well before the hurricane-- and one on the bottom from August 31, 2005 after the hurricane.

You will notice things such as there was a pier house and then it was gone. And there was a pier and then it was gone. And there was this beautiful pre-civil war mansion, and well, try to find it down below and you know it's not there anymore. Now, if they spend money to fix these things that money spent fixing these will show up in the GDP. And people will say, oh, look the economy grew, but that might not be a good thing.

If we see more disasters in the future, those disasters break things that we have to fix. Those will show up as a growing economy, but that doesn't mean that people are better off. And in that case, we probably need better measures of what we're seeing.

Here are before-and-after pictures of destruction by Hurricane Katrina, from 2005, near Biloxi, Mississippi, USA. The original caption from the United States Geological Survey is: “In the top image, taken in 1998, notice the pier, pier house, and the antebellum house. The bottom image shows the same location on August 31, 2005, two days after Hurricane Katrina made landfall. This photo shows the complete destruction of these landmarks.” Note that repairing such damage is generally counted in the Gross Domestic Product, and a larger Gross Domestic Product is often taken to be a good thing. The owners of the buildings indicated by the red arrows might disagree

Source: Coastal Change Hazards: Hurricanes and Extreme Storms, St. Petersburg Coastal and Marine Science Center, Coastal Change Hazards: Hurricanes and Extreme Storms, Hurricane Katrina, United States Geological Survey.

Various alternatives to the GDP have been developed by economists, such as the Measure of Economic Welfare (MEW; Nordhaus, W. and J. Tobin, 1972, Is growth obsolete? Columbia University Press, New York), or the Genuine Progress Indicator (e.g., Lawn, P. and M. Clarke, 2010, The end of economic growth? A contracting threshold hypothesis, Ecological Economics 69, 2213-2223). These alternatives seek to more accurately characterize real growth, or sustainable growth, in some fashion. There is much interesting and important scholarship, and much more than we can cover here.

But, if a general conclusion can be drawn from this work, it is that the recent growth of well-being probably has been slower than indicated by the recent growth of GDP. And, if this general summary is correct, then economically optimal behavior now involves greater actions to reduce climate change than indicated, because our descendants will not gain wealth and thus the ability to solve the problems from global warming as rapidly as indicated above.

One also might ask whether it is really accurate that wealth allows the solution of all problems. What if global warming generates crises that wealthy future generations cannot solve? The optimizations now generally assume that this will not happen, but if problems that resist money can arise, more action now to head off climate change may be economically justified.

Even bigger questions of whether economic growth is even desirable, or whether our future goals should be very different from our past, are beyond the scope of the instructional materials of this class. However, such questions are not beyond the scope of interest of the class participants—you might wish to think about it.