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Mismeasuring Our Lives – Why GDP Doesn’t Add Up

“‘The [financial] crisis is teaching us a very important lesson: those attempting to guide the economy and our societies are like pilots trying to steer a course without a reliable compass’ —from Mismeasuring Our Lives

In February 2008, amid the looming global financial crisis, President Nicolas Sarkozy of France asked Nobel Prize–winning economists Joseph Stiglitz and Amartya Sen, along with the distinguished French economist Jean Paul Fitoussi, to establish a commission of leading economists to study whether Gross Domestic Product (GDP)—the most widely used measure of economic activity—is a reliable indicator of economic and social progress. The Commission was given the further task of laying out an agenda for developing better measures.

Mismeasuring Our Lives is the result of this major intellectual effort, one with pressing relevance for anyone engaged in assessing how and whether our economy is serving the needs of our society. The authors offer a sweeping assessment of the limits of GDP as a measurement of the well-being of societies—considering, for example, how GDP overlooks economic inequality (with the result that most people can be worse off even though average income is increasing); and does not factor environmental impacts into economic decisions.”

Megacities, not nations, are the world’s dominant, enduring social structures

“Cities are mankind’s most enduring and stable mode of social organization, outlasting all empires and nations over which they have presided. Today cities have become the world’s dominant demographic and economic clusters.

As the sociologist Christopher Chase-Dunn has pointed out, it is not population or territorial size that drives world-city status, but economic weight, proximity to zones of growth, political stability, and attractiveness for foreign capital. In other words, connectivity matters more than size. Cities thus deserve more nuanced treatment on our maps than simply as homogeneous black dots.

This map from my new book, Connectography, shows the distribution of the entire world’s population, with yellow representing the most dense areas. These zones are, not surprisingly, where you find the dashed ovals that represent the world’s burgeoning megacities, each of which represents a large percentage of national GDP (indicated by the larger circles) in addition to its role as a global hub.”

 Genuine Progress Indicator

“We believe that if policymakers measure what really matters to people—health care, safety, a clean environment, and other indicators of well-being—economic policy would naturally shift towards sustainability.

Redefining Progress created the Genuine Progress Indicator (GPI) in 1995 as an alternative to the gross domestic product (GDP). The GPI enables policymakers at the national, state, regional, or local level to measure how well their citizens are doing both economically and socially.

Economists, policymakers, reporters, and the public rely on the GDP as a shorthand indicator of progress; but the GDP is merely a sum of national spending with no distinctions between transactions that add to well-being and those that diminish it.

The GPI is one of the first alternatives to the GDP to be vetted by the scientific community and used regularly by governmental and non-governmental organizations worldwide. Redefining Progress advocates for the adoption of the GPI as a tool for sustainable development and planning.

On a yearly basis, Redefining Progress updates the U.S. Genuine Progress Indicator to document a more truthful picture of economic and social progress. Our latest update, which plots GPI accounts from 1950 to 2004, shows that economic growth has been stagnant since the 1970s.”

Beyond GDP – is it time to rethink the way we measure growth?

“Is our love affair with GDP coming to an end? If you were following this year’s Annual Meeting in Davos, you’d be forgiven for thinking that this is indeed the case.

In three separate sessions, two giants of the financial world and one leading academic were all in agreement: gross domestic product – the estimate of the total value of goods and services a country produces – is up for review.

Nobel Prize winning economist Joseph Stiglitz, IMF head Christine Lagarde and MIT professor Erik Brynjolfsson all said GDP is a poor indicator of progress, and argued for a change to the way we measure economic and social development.

“We have to go back to GDP, the calculation of productivity, the value of things – in order to assess, and probably change, the way we look at the economy,” said Lagarde.”

Happiness is the new GDP

“Global policymakers are starting to take happiness seriously.

In March, the United Nations released its fourth World Happiness Report, ranking 156 nations on how close residents say they are to living the best life possible. The UN report features endless interesting tidbits: Scandinavians are consistently the happiest people on earth. India’s happiness has declined significantly since around 2006. Citizens of wealthy Qatar are much less happy than people in relatively impoverished Costa Rica.

To a growing number of economists and policymakers, statistics like these are much more than fun facts. They’re a source of guidance that, in some respects, can be more useful than our standard measure of economic success—GDP.”

GDP Sucks. Here Are Some Better Alternatives

“Gross Domestic Product is the scourge of the modern world. Well, maybe that’s a bit strong. But an economic obsession with GDP, as it’s more commonly known, is at the root of almost every problem facing mankind today.

It’s pretty simple as a concept — GDP is merely a tally of the monetary value of all products and services produced and sold inside a country over a specific time period (usually a year).

So simple, in fact, that it dates back farther than you probably imagine. English economist William Petty came up with the concept in the 17th century as a method for defending landlords against disproportionately high taxation during a war with the Dutch.

As a landowner himself, Petty asserted that the government’s income should equal its spending. Breaking apart the figures necessary to calculate GDP, he argued that since a far higher share of Britain’s spending came from paying wages, the tax burden should be shifted accordingly—that is to say, tax the workers instead of the assets of rich landowners. Back then, such thinking was used to fight the government. Today, it couldn’t be more politically mainstream.

Later that century, Charles Davenant further refined Petty’s work. Still, the modern concept of GDP didn’t emerge until 1934 — when Nobel Prize-winning economist Simon Kuznets prepared a report for the U.S. Congress. Kuznets’s goal was to measure the nation’s productivity in the hope of developing a solution to the Great Depression. His work was so precise and comprehensive that it set the standard for such calculations. Today, Kuznets’s version of GDP is by far the most popular method for judging a country’s success.”

Why we need to rethink how we measure inequality – please welcome the Absolute Palma index

“The world is abuzz about inequality

  • Pope Francis famously tweeted that inequality is the root of evil.
  • As we witnessed in Davos in January, the media can’t get enough of Oxfam’s statistic that the richest 85, 80, 62 people have the same wealth as the poorest half of the planet.
  • In 2014, a 700-page book on inequality by a French academic was a worldwide best seller.

But what exactly is this inequality everyone is talking about? It turns out that we might be measuring it all wrong. The Gini coefficient and (increasingly) the Palma Index are the most popular tools for measuring inequality within a country. These indicators calculate the ratio of the incomes of the rich over the poor. For instance, the Palma is a score calculated by dividing the share of income of the richest 10% by that of the poorest 40%.”

Towards a sustainable prosperity

“Prosperity matters. A prosperous society is concerned not only with income and financial wealth, but also with the health and wellbeing of its citizens, with their access to good quality education, and with their prospects for decent and rewarding work. Prosperity enables basic individual rights and freedoms. But it must also deliver the ability for people to participate meaningfully in common projects. Ultimately, prosperity must offer society a credible and inclusive vision of social progress.

Prosperity has not always been interpreted so broadly. For the last half a century at least, it has been cashed out (almost literally) in terms of per capita income. Increasing the Gross Domestic Product (GDP) has been seen as synonymous with achieving a rising prosperity. Since the second world war, growth in the GDP has become the single most important indicator of economic success across the world. It has also been seen as the principal goal of government policy.

There are some persuasive reasons for this formula, as recent years have shown. When GDP falters, calamity beckons. Investment stalls, consumer spending declines, tax revenues plummet. Firms find themselves out of business. People find themselves out of jobs. Lives and livelihoods suffer. And a government which fails to respond appropriately may rather quickly find itself out of office.”

Why Global Inequality Matters

“Let me start by enquiring about the importance assumed by inequality in the public debate during these last years. As we know, inequality has been marginalised both in academia and in politics – also and especially on the left, which should have been the most sensitive to social issues. Then, all at once, with the outbreak of the crisis, inequality has assumed a central role that was, until very recently, unpredictable. Newspapers talk about it, and it is even a topic of discussion among the Democratic candidates to the White House. What do you think has changed?

Given the nature of the question, I will have to split the answer in two. Let me start from why all of a sudden inequality has become a much discussed subject. It seems clear to me that the origin of this change has been the economic crisis. It is the material factors that affect people’s lives, and their way of thinking: inequality, to be sure, is not a new phenomenon, but for 25 years the middle class has been able to mask the absence of income growth through access to credit, that is, borrowing. With the crisis, however, this bubble burst, and all of a sudden millions of ordinary people were hit very hard, started to lose out because the economy was in recession and wages went down; and they could not repay the loans they had contracted, especially those in the real estate market. Do not forget that American private debt was higher than the (country’s) GDP.

And soon they realized what their material conditions really were and that they had not really seen any economic growth for over 25 years. And, at the same time, that there was instead a class of people, the famous 1%, or if you want the 5%, who had done extremely well. So, the reason that sparked this interest in inequality has been the absence of income growth and the realization that this very absence of growth did not apply to everybody – in the past someone had become very rich while the economy stagnated for so many others. And this “discovery” had a big impact, hit the public consciousness, raised awareness and that’s why inequality has become so popular a theme. I think the importance played by Occupy here in the US, the Indignados in Spain and, of course, by Syriza in Greece is the result of this shock.”

Related Posts:

“The Limits to Growth” Revisited

Utopias / 1. Social Justice

Utopias / 2. Solarpunks

Utopias / 3. PostCapitalism

Utopias / 4.Rewilding

 

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