Nationalisation refers to the process in which the government takes ownership and control of privately-owned companies, industries, or assets. It involves transferring the ownership and operation of these entities from private hands to the public sector.
Argument for Nationalisation:
The argument for nationalisation is primarily based on the belief that certain industries or services are best managed and operated by the government to serve the interests of the public and the nation as a whole. Proponents of nationalisation often cite the following reasons:
Public Interest and Welfare: Nationalisation aims to ensure that essential goods and services, such as healthcare, education, and utilities, are provided to all citizens at affordable prices and without discrimination. It prioritizes public interest and welfare over profit motives.
Natural Monopolies: Some industries, like water and electricity distribution, have natural monopolies due to high fixed costs and economies of scale. Nationalisation can prevent private monopolistic practices and ensure equitable access to such services.
Strategic Importance: Nationalisation is often advocated for industries considered strategically important for the country's security, economic stability, or technological advancement. This includes sectors like defense, energy, and transportation.
Market Failure Correction: Nationalisation can address market failures, particularly when private firms fail to provide essential services adequately or when industries experience excessive volatility.
Long-term Planning: The government's involvement can facilitate long-term planning and investment in infrastructure, research, and development, which may be challenging for private firms with short-term profit goals.
Income Redistribution: Nationalisation can be seen as a mechanism to redistribute wealth and reduce income inequality by ensuring profits benefit the wider population rather than private shareholders.
Historical Examples of Nationalisation:
Post-World War II:
After World War II, the UK undertook significant nationalisation efforts, bringing key industries like coal mining, railways, and steel production under public ownership. The goal was to rebuild the nation's infrastructure and secure critical industries.
1970s Oil Crisis:
In response to the 1970s oil crisis, several countries, including Venezuela and Mexico, nationalised their oil industries to gain greater control over energy resources and protect national interests.
Current Examples of Nationalisation:
Healthcare:
Countries like the United Kingdom and Canada have nationalised their healthcare systems to provide universal healthcare to all citizens, regardless of their income or social status.
Public Utilities:
In some countries, utilities such as water and electricity supply are nationalised to ensure that these essential services are accessible and affordable to the entire population.
Evaluation of the Argument for Nationalisation:
The argument for nationalisation has both strengths and weaknesses:
Strengths:
Ensuring Essential Services: Nationalisation can guarantee essential services for all citizens and reduce the risk of profit-driven price increases or exclusions.
Strategic Control: In certain industries, nationalisation provides greater control and stability, safeguarding national interests and security.
Long-term Planning: Nationalised industries can prioritize long-term investments and research without short-term profit pressures.
Weaknesses:
Efficiency Concerns: Nationalised industries may suffer from inefficiency and bureaucratic practices, resulting in suboptimal performance and higher costs.
Budgetary Burden: Nationalisation requires significant government funding, which may lead to increased public debt or budgetary challenges.
Lack of Competition: In some cases, nationalisation may lead to a lack of competition, hindering innovation and consumer choice.
The debate over nationalisation is complex and often depends on specific circumstances and industries. Some proponents argue that nationalisation is essential for the provision of crucial services and strategic control, while opponents stress the potential inefficiencies and risks of excessive government control. A balanced approach might involve a combination of private and public ownership, with appropriate regulation to ensure the best outcomes for the economy and the welfare of citizens.
Perfectly competitive markets have both strengths and limitations, which can be evaluated based on their characteristics, including allocative and productive efficiency:
Strengths of Perfectly Competitive Markets:
a. Allocative Efficiency: Perfectly competitive markets achieve allocative efficiency, meaning resources are allocated in a way that maximizes consumer welfare. Prices are determined by the interaction of supply and demand, reflecting consumers' preferences and willingness to pay. Firms produce at the quantity where the market price equals the marginal cost, ensuring that resources are used efficiently to meet consumer demands.
b. Productive Efficiency: In the long run, perfectly competitive markets achieve productive efficiency. Firms produce at the minimum average total cost, meaning they are using resources as efficiently as possible. No firm can produce at a lower cost, and any inefficiency would lead to losses and exit from the market.
c. Consumer Welfare: Perfect competition benefits consumers by providing a wide range of products at competitive prices. The absence of market power allows firms to compete solely on price and quality, leading to affordable products for consumers.
d. Innovation and Dynamic Efficiency: The threat of competition encourages firms to innovate and adopt more efficient production methods. Dynamic efficiency is fostered as firms strive to stay ahead and adapt to changing market conditions.
Limitations of Perfectly Competitive Markets:
a. Lack of Product Diversity: In perfect competition, all firms produce identical or homogenous products. This limits the availability of diverse products in the market, as there is no differentiation between offerings.
b. Long Run Equilibrium May Not Be Attained: Perfectly competitive markets assume free entry and exit, but in reality, certain barriers may prevent firms from entering or exiting as freely. As a result, long-run equilibrium may not always be achieved.
c. Inefficient Resource Allocation: While perfect competition ensures allocative efficiency at the market level, it does not guarantee an optimal allocation of resources at the economy-wide level. Some resources may be underutilized or misallocated across industries.
d. Ignoring Externalities: Perfect competition assumes no externalities, such as pollution or social costs. In reality, certain industries may impose external costs on society, which are not reflected in the market price.
e. Real-World Imperfections: Real markets rarely conform perfectly to the assumptions of perfect competition. Information asymmetry, market power, and imperfect factor mobility are examples of real-world imperfections that can affect the functioning of markets.
In conclusion, perfectly competitive markets exhibit strengths such as allocative and productive efficiency, consumer welfare, and the promotion of innovation. However, they also face limitations related to product diversity, barriers to entry, externalities, and real-world imperfections. While perfect competition provides an ideal benchmark for market efficiency, actual markets often deviate from these assumptions, and policymakers need to address such deviations to ensure fair competition and consumer welfare.
Evaluate the view that government intervention to reduce inequality will lead to an
improvement in economic welfare.
Economic welfare refers to the overall well-being and standard of living enjoyed by individuals within an economy. It encompasses various dimensions, including income, wealth, access to basic needs, health, education, and overall quality of life. It is a broad concept that reflects the overall economic and social conditions of a society.
The view that government intervention to reduce inequality will lead to an improvement in economic welfare is a subject of debate. Here is an evaluation of this view:
Redistribution of Resources: Government intervention to reduce inequality often involves redistributive policies such as progressive taxation, social welfare programs, and minimum wage regulations. By transferring resources from the wealthy to the less fortunate, these policies aim to reduce income and wealth disparities. Advocates argue that this can enhance economic welfare by providing a safety net for the most vulnerable members of society and reducing poverty levels.
Social Cohesion and Stability: High levels of inequality can lead to social unrest and undermine social cohesion. Government intervention to reduce inequality can contribute to a more stable society by addressing social and economic disparities. This, in turn, can improve overall economic welfare by fostering a more inclusive and harmonious environment.
Human Capital Development: Government interventions targeted at reducing inequality often focus on improving access to education, healthcare, and other social services. By providing equal opportunities for human capital development, such interventions can enhance individual capabilities, increase productivity, and promote long-term economic growth. Improved education and healthcare can also have positive spillover effects on the overall well-being of society.
Incentive Effects and Efficiency: Critics argue that excessive government intervention to reduce inequality can create disincentives for productivity and innovation. High levels of taxation on the wealthy can discourage entrepreneurship and investment, potentially leading to slower economic growth. Additionally, some argue that excessive redistribution may reduce individuals' motivation to work and save, which can have negative effects on overall economic welfare.
Unintended Consequences: Government interventions aimed at reducing inequality may have unintended consequences. For example, overly generous welfare programs can create dependency and discourage individuals from seeking employment. Excessive regulation and bureaucratic inefficiencies can also hinder economic activity and negatively impact economic welfare.
In conclusion, the impact of government intervention on economic welfare depends on various factors, including the design and implementation of policies, the balance between redistribution and incentives, and the specific context of the economy. While reducing inequality can have positive effects on economic welfare by promoting social cohesion and human capital development, it is essential to consider the potential trade-offs and unintended consequences of government interventions. Striking the right balance between reducing inequality and promoting economic growth is crucial for achieving sustainable improvements in economic welfare.
Prime Minister Sunak talks about the need for “compassion” from the government this winter. But how far do social security benefits have to fall before our welfare system descends into a form of cruelty?
Take a couple with three children whose universal credit payment is, in theory, £46.11 a day. However, when their payment lands they have just £35, because around a quarter of their benefit has been deducted to pay back the loan they had to take out on joining universal credit to cover the five weeks they were denied benefit. And an extra 5% has been deducted as back payment to their utility company. According to Department of Work and Pensions (DWP) rules, money can be deducted for repayment of advance or emergency loans, and even on behalf of third parties for rent, utilities and service charge payments.
With gas and electricity likely to cost, at a minimum, £7 on cold days like today, and with a council tax contribution to be paid on top, they find that they have just £25. 80 a day left over, or £5.16 per person, to pay for food and all other essentials. Even if the Scottish child poverty payment comes their way, clothes, travel, toiletries and home furnishings remain out of reach. Parents like them are just about the best accountants I could ever meet , but you can’t budget with nothing to budget with. And that’s why so many have had to tell their children they can’t afford presents this Christmas. No wonder they need the weekly bag of food they get from the local food bank. But they also need a toiletries and hygiene bank, a clothes bank, a bedding bank, a home furnishings bank, and a baby bank.
The DWP has now become the country’s biggest debt collector, seizing money that should never have had to be paid back, from people who cannot afford to pay anyway. In fact, the majority of families on universal credit do not receive the full benefit that the DWP advertises. More than 20% is deducted at source from each benefit payment made to a million households, leaving them surviving on scraps and charity as they run out of cash in the days before their next payment. In total, 2 million children are in families suffering deductions.
Gordon Brown with workers at the Big Hoose multi-bank project, Fife, 8 November 2022. Photograph: Murdo MacLeod/The Guardian
When the money runs out, and the food bank tokens are gone, parents become desperate and ashamed that their children cannot be fed, and fall victim to loan sharks hiding in the back alleys who exploit hardship and compound it, and prey on pain and inflame it.
The case for each community having its own multi-bank – its reservoir of supplies for those without – is more urgent this winter than at any time I have known. Since the Trussell Trust’s brilliant expansion of UK food banks, creative local and national charities have pioneered community banks of all kinds offering free clothes, furnishings, bedding, electrical goods and, in the case of the national charity In Kind Direct, toiletries.
In Fife, Amazon, PepsiCo, Scotmid Fishers and other companies helped to set up a multi-bank. It’s a simple idea that could be replicated nationwide: they meet unmet needs by using unused goods. The companies have the goods people need, and the charities know the people who need them. With a coordinating charity, a warehouse to amass donations and a proper referral system, multi-banks can ensure their goods alleviate poverty.
But the charities know themselves that they can never do enough. With the state privatisations of gas, water, electricity and telecoms, the government gave up on responsibility for essential national assets. But now, with what is in effect the privatisation of welfare, our government is giving up on its responsibility to those in greatest need – passing the buck to charities, which cannot cope. Just as breadwinners cannot afford bread, food banks are running out of food.
Charities, too,are at the mercy of exceptionally high demand and the changing circumstances of donors whose help can be withdrawn as suddenly as it has been given. And so while voluntary organisations – and not the welfare state – are currently our last line of defence, the gap they have to bridge is too big for them to ever be the country’s safety net.
According to Prof Donald Hirsch and the team researching minimum income standards at Loughborough University, benefit levels for those out of work now fall 50% short of what most of us would think is a minimum living income, with their real value falling faster in 2022 than at any time for 50 years since up-ratings were introduced. And still 800,000 of the poorest children in England go without free school meals.
When it comes to helping with heating, the maximum that any family will receive, no matter its size, is £24 a week emergency help to cover what the government accepts is the £50 a week typical cost of heating a home. From April, the extra payments will be even less – just £16 to cover nearly the typical £60 a week they now expect gas and electricity to cost. And then, as Jeremy Hunt says, help with heating will become a thing of the past.
One hundred years ago, Winston Churchill was moved to talk of the unacceptable contrast between the accumulated excesses of unjustified privilege and “the gaping sorrows of the left-out millions”. Our long term priority must be to persuade a highly unequal country of the need for a decent minimum income for all, but our immediate demand must be for the government to suspend for the duration of this energy crisis the deductions that will soon cause destitution.
Ministers have been forced to change tack before. In April 2021 the government reduced the cap on the proportion of income deducted from 30% to 25%. During the first phase of Covid, ministers temporarily halted all deductions. In April, they discouraged utility firms from demanding them, but deductions as high as 30% of income are still commonplace.
There is no huge cost to the government in suspending deductions, for it will get its money back later. But this could be a lifesaver for millions now suffering under a regime that seems vindictive beyond austerity. Let this be a Christmas of compassion, instead of cruelty.
ONE can see a few instructive lessons from the painful turbulence underway in Sri Lanka. The most crucial of these for neighbours and beyond is the resounding message that there are limits to socially divisive policies any government or state can pursue, particularly to mask the distress brought about by bad economic prescriptions. In other words, sooner or later people catch on.
The jostling is already on between narratives about the crisis. The dominant narrative about an economic collapse as the trigger for mass protests is a tautology. Another perspective, inevitably, is focusing on the ousted Rajapaksa government’s refusal to vote with the US against Russia over Ukraine. The last-minute call to Vladimir Putin for help, chiefly with oil, will be interpreted in myriad ways.
There will be comments also about the need for the IMF to fix things urgently. The problem is this had happened to India when the Gulf War induced economic instability with oil prices nudging a veteran pro-Soviet India into becoming a darling of the West. The prescription the IMF gave Manmohan Singh required secrecy. It had to be kept away from parliamentary scrutiny. The Ayodhya movement of L.K. Advani was activated to occupy the nation’s attention, away from the IMF-induced pain that inevitably comes with its trickle-down economic advisory.
Be that as it may, Ranil Wickremesinghe looks the man of the moment for the US. Never mind that he lost the last election when his party couldn’t win a single seat. He came into parliament through the backdoor, the national list.
Would that work for the purpose of evicting China from its perch in Colombo? If the Western purpose falters, there could be worse awaiting the hapless country. So, here we are. The president who courted China’s economic worldview and refused to vote against Russia has fled. (Remember Kyiv in 2014?) And Wickremesinghe, nephew of Sri Lanka’s first pro-US president J.R. Jayewardene, has taken charge, and is threatening to quell the protests by force if necessary.
There’s always a backup script if things go wrong. The ousted president was a close ally of the Bodu Bala Sena. The Sinhalese chauvinist group has cast itself in the image of India’s RSS, a Muslim and Christian-hating Buddhist clone of the Hindutva order. Other similarities between India and Sri Lanka are eerier. Remember how prime minister Solomon Bandaranaike was assassinated by a Buddhist monk angered by his quest for a friendly pact with the minority Tamils? The murder bore an uncanny resemblance to Gandhi’s assassination by Hindu supremacists hostile to his alleged appeasement of Muslims.
Certain things about Sri Lanka’s heart-wrenching mess one can do little about, among them being the fact that Covid-19 waylaid the tourism industry, the island nation’s economic backbone. Small-scale entrepreneurs, critically the garment exporters, took a hit. The resultant cap on foreign imports coupled with an outlandish nationwide move to switch to organic farming, (mainly to mask the slashing of fertiliser imports) wrecked the prospects of an early recovery from pandemic-induced setbacks. The horror could strike Sri Lanka whose human development indices are far ahead of its neighbours.
Decades before Gen Musharraf sealed his military support against the Tamil Tigers, India and Sri Lanka bonded as close friends. Former president Chandrika Kumaratunga particularly treasures an old picture of Nehru hoisting her in the air. Later Indira Gandhi stopped Sirimavo Bandaranaike from quitting during a Sinhalese communist insurrection in 1971, the year Mrs Gandhi would go to war with Pakistan. “Indu called me to say under no circumstances was I to resign.” The Janatha Vimukthi Peramuna insurrection would have rattled any government. It was the first of two unsuccessful armed revolts conducted by the communist group against the socialist United Front Government of Sri Lanka. The revolt lasted two months before Indian troops helped quell it.
I met Mrs Bandarnaike when she was in the wheelchair with paralysed toes. It was a peep into the India-Sri Lanka backstage. Her son Anura Bandaranaike was a devotee of India’s healer-guru Sai Baba of Pattapurthi. On his advice, the mother flew to Puttaparthi. The Sai Baba promised quick recovery but it was a tall claim. The Buddhist press was up in arms over the leader of their country falling prey to the ‘mumbo jumbo’ of an Indian guru.
It didn’t help that India was firmly in the Soviet camp while its neighbours had cosy ties with China and the US, both allies against Moscow. Pakistan, Bangladesh, Nepal and Sri Lanka led the movement for Saarc, the South Asian club that met in Dhaka for the first summit in 1985. Gen Ershad, its host, would later tell me that it was a collective effort by India’s neighbours to deal with Delhi jointly. “We were allergic to India,” Ershad told me bluntly in a TV interview. “So we decided to deal with India jointly.”
Sri Lanka is in a serious quandary today and does not have the emotional wherewithal to deal with the IMF’s conditionality that always comes. The protesters represent Sri Lanka’s multicultural bouquet. There’s just no room for dividing them again. Nor is there stomach for more IMF pills.
Palitha Kohona, Sri Lanka’s ambassador in Beijing shared the fears with the Global Times. The patience is running thin.
“In some cases, it’s difficult because the belt is already on the last notch. Sri Lanka has a state-funded healthcare system from birth to death. Some are worried that the IMF might recommend that we tighten the healthcare system. Our education system is also free from grade one to university level. This might be another area that the IMF might recommend pruning. But these may add to the unrest, which is already hampering the recovery of the country and unsettle any government, which takes over in the next few weeks. We have to deal with these issues, and it’s not going to be easy for Sri Lanka.”
In a March 7, 2010 essay for the New York Times, the American linguist and author Ben Zimmer writes, “When politicians fret about the public perception of a decision more than the substance of the decision itself, we’re living in a world of optics.”
On the other hand, according to Deborah Johnson in the June 2017 issue of Attorney at Law, a politician may have the best interests of his constituents in mind, but he or she doesn’t come across smoothly because optics are bad, even though the substance is good. Johnson writes that things have increasingly slid from substance to optics.
Optics in this context have always played a prominent role in politics. Yet, it is also true that their usage has grown manifold with the proliferation of electronic and social media, and, especially, of ‘populism.’ Populists often travel with personal photographers so that they can be snapped and proliferate images that are positively relevant to their core audience.
Pakistan’s PM Imran Khan relies heavily on such optics. He is also considered to be a populist. But then why did he so stubbornly refuse to meet the mourning families of the 11 Hazara Shia miners who were brutally murdered in Quetta? Instead, the optics space in this case was filled by opposition leaders, Maryam Nawaz and Bilawal Bhutto.
Nevertheless, this piece is not about why an optics-obsessed PM such as Khan didn’t immediately occupy the space that was eventually filled by his opponents. It is more about exploring whether Khan really is a populist? For this we will have to first figure out what populism is.
According to the American sociologist, Bart Bonikowski, in the 2019 anthology When Democracy Trumps Populism, populism poses to be ‘anti-establishment’ and ‘anti-elite.’ It can emerge from the right as well as the left, but during its most recent rise in the last decade, it has mostly come up from the right.
According to Bonikowski, populism of the right has stark ethnic or religious nationalist tendencies. It draws and popularises a certain paradigm of ‘authentic’ racial or religious nationalism and claims that those who do not have the required features to fit in this paradigm are outsiders and, therefore, a threat to the ‘national body.’ It also lashes out against established political forces and state institutions for being ‘elitist,’ ‘corrupt’ and facilitators of pluralism that is usurping the interests of the authentic members of the national body in a bid to undermine the ‘silent majority.’ Populism aspires to represent this silent majority, claiming to empower it.
Simply put, all this, in varying degrees, is at the core of populist regimes that, in the last decade or so, began to take shape in various countries — especially in the US, UK, India, Brazil, Turkey, Philippines, Hungary, Poland, Russia, Czech Republic and Pakistan. Yet, if anti-establishmentarian action and rhetoric is a prominent feature of populism, then what about populist regimes that are not only close to certain powerful state institutions, but were or are actually propped up by them? Opposition parties in Pakistan insist that Imran Khan’s party is propped up by the country’s military establishment, which is aiding it to remain afloat despite it failing on many fronts. The same is the case with the populist regime in Brazil.
Does this mean such regimes are not really populist? No. According to the economist Pranab Bardhan (University of California, Berkeley), even though populists share many similarities, populism’s shape can shift from region to region. Bardhan writes that characteristics of populism are qualitatively different in developed countries from those in developing countries. For example, whereas globalisation is seen in a negative light by populists in Europe and the US, a November 2016 survey published in The Economist shows that the people of 18 developing countries saw it positively, believing it gave their countries’ economies the opportunity to assert themselves.
Secondly, according to Bardhan, survey evidence suggests that much of the support for populist politics in developed countries is coming from less-educated, blue-collar workers, and from the rural backwaters. Populists in developing countries, by contrast, are deriving support mainly from the rising middle classes and the aspirational youth in urban areas. To Bardhan, in India, Pakistan, Turkey, Poland and Russia, symbols of ‘illiberal religious resurgence’ have been used by populist leaders to energise the upwardly-mobile or arriviste social groups.
He also writes that, in developed countries, populism is at loggerheads with the centralising state and political institutions, because it sees them as elitist, detached and a threat to local communities. But in developing countries, the populists have tried to centralise power and weaken local communities. To populists in developing countries, the main villains are not the so-called cold and detached state institutions, but ‘corrupt’ civilian parties. Ironically, while populism in the US is against welfare programmes, such programmes remain important to populists in developing countries.
Keeping this in mind, one can conclude that PM Khan is a populist, quite like his populist contemporaries in other developing countries. Despite nationalist rhetoric and his condemnatory understanding of colonialism, globalisation that promises foreign investment in the country is welcomed. His main base of support remains aspirational and upwardly-mobile urban middle-class segments. He often uses religious symbology and exhibitions of piety to energise this segment, providing religious context to what are actually Western ideas of state, governance, economics and nationalism. For example, the Scandinavian idea of the welfare state that he admires is defined as Riyasat-i-Madina (State of Madina).
Unlike populism in Europe and the US, populism in developing countries embraces the ‘establishment’ and, instead, turns its guns towards established political parties which it describes as being ‘corrupt.’ Khan is no different. He admires the Chinese system of central planning and economy and dreams of a centralised system that would seamlessly merge the military, the bureaucracy and his government into a single ruling whole. His urban middle-class supporters often applaud this ‘vision.’
The coronavirus pandemic means that 2020 will go down in history as the year with one of the deepest plunges in national income on record. In the UK, which has one of the longest continuous logs of economic output, gross domestic product looks likely to have fallen around a tenth this year, making for the biggest recession in three centuries. Yet even these figures, however eye-watering, do not capture the true collapse in wellbeing, which must be the ultimate goal of economic policy.
In theory, gross domestic product adds up everything that a country produces in one year. The fall in national income during 2020 is easy to explain: interruptions to normal economic activity have meant that far less has been produced. In this regard the drop in gross domestic product will capture some of the missed outings and trips to the cinema, the cancelled holidays and all the meals and drinks with friends that had to be postponed.
There is, however, plenty that the figures miss. To aggregate the value of very different activities that take place in an economy statisticians use market prices — allowing them to compare the production of both apples and oranges on a common scale. But the absence of these prices for much of healthcare and education in many countries — statisticians merely impute their production from how much the government spends on them — means the disruptions to schools and delays in administering non-coronavirus medical care is missed. Spending on healthcare might have risen but on a net basis societies got far less for their money.
On the other hand, public parks and other green spaces have become much more important but their contribution to the economy will not be registered as part of GDP. Unpaid labour too, those who tried to teach their children at home, sewed personal protective equipment or baked banana bread, will not appear in the story of the year told by national income figures. Nor will the drop in air pollution or the volunteers who took care of neighbours.
Even an accurate counting of the drop in production this year would still miss the psychological damage done by prolonged isolation and loneliness; the “hidden pandemic” of mental health problems. That suggests the solution would not be to expand the definition of gross domestic product to include the production it misses but to consider focusing on wellbeing directly.
All the same, the experience of this year — when governments shut down their economies in order to protect public health — has shown that economic growth has not been prioritised above all else. Already, a wider definition of wellbeing than a pure economic one is implicitly being used to inform policy. Daily count cases and death rates have played a much bigger role in policymaking than quarterly growth figures. Suggestions that health measures represent a trade-off with economic fortunes have also been overplayed. The best way of protecting jobs this year has been keeping the virus under control: New Zealand, which managed to remain virtually virus-free thanks to an early and strict lockdown, is reaping the economic rewards.
This will remain true when the pandemic has passed. A healthy and well-educated workforce is one of the most important prerequisites to growth and secure, well-paid, high quality jobs are among the best foundations to protect mental wellbeing. Unemployment and poor-quality work can easily destroy people’s sense of self-worth while a robust private sector is essential to provide the tax revenues for health and education. The goal should be to create the kind of society where economic growth and wellbeing go hand in hand.
Since World War II, most countries around the world have come to use gross domestic product, or GDP, as the core metric for prosperity. The GDP measures market output: the monetary value of all the goods and services produced in an economy during a given period, usually a year. Governments can fail if this number falls—and so, not surprisingly, governments strive to make it climb. But striving to grow GDP is not the same as ensuring the well-being of a society.
In truth, “GDP measures everything,” as Senator Robert Kennedy famously said, “except that which makes life worthwhile.” The number does not measure health, education, equality of opportunity, the state of the environment or many other indicators of the quality of life. It does not even measure crucial aspects of the economy such as its sustainability: whether or not it is headed for a crash. What we measure matters, though, because it guides what we do. Americans got an inkling of this causal connection during the Vietnam War, with the military's emphasis on “body counts”: the weekly tabulation of the number of enemy soldiers killed. Reliance on this morbid metric led U.S. forces to undertake operations that had no purpose except to raise the body count. Like a drunk looking for his keys under the lamppost (because that is where the light is), the emphasis on body counts kept us from understanding the bigger picture: the slaughter was inducing more Vietnamese people to join the Viet Cong than U.S. forces were killing.
Now a different body count—that from COVID-19—is proving to be a horribly good measure of societal performance. It has little correlation with GDP. The U.S. is the richest country in the world, with a GDP of more than $20 trillion in 2019, a figure that suggested we had a highly efficient economic engine, a racing car that could outperform any other. But the U.S. recorded upward of 100,000 deaths by June, whereas Vietnam, with a GDP of $262 billion (and a mere 4 percent of U.S. GDP per capita) had zero. In the race to save lives, this less prosperous country has beaten us handily.
In fact, the American economy is more like an ordinary car whose owner saved on gas by removing the spare tire, which was fine until he got a flat. And what I call “GDP thinking”—seeking to boost GDP in the misplaced expectation that that alone would enhance well-being—led us to this predicament. An economy that uses its resources more efficiently in the short term has higher GDP in that quarter or year. Seeking to maximize that macroeconomic measure translates, at a microeconomic level, to each business cutting costs to achieve the highest possible short-term profits. But such a myopic focus necessarily compromises the performance of the economy and society in the long term.
The U.S. health care sector, for example, took pride in using hospital beds efficiently: no bed was left unused. In consequence, when SARS-CoV-2 reached America there were only 2.8 hospital beds per 1,000 people—far fewer than in other advanced countries—and the system could not absorb the sudden surge in patients. Doing without paid sick leave in meat-packing plants increased profits in the short run, which also increased GDP. But workers could not afford to stay home when sick; instead they came to work and spread the infection. Similarly, China made protective masks cheaper than the U.S. could, so importing them increased economic efficiency and GDP. That meant, however, that when the pandemic hit and China needed far more masks than usual, hospital staff in the U.S. could not get enough. In sum, the relentless drive to maximize short-term GDP worsened health care, caused financial and physical insecurity, and reduced economic sustainability and resilience, leaving Americans more vulnerable to shocks than the citizens of other countries.
The shallowness of GDP thinking had already become evident in the 2000s. In preceding decades, European economists, seeing the success of the U.S. in increasing GDP, had encouraged their leaders to follow American-style economic policies. But as signs of distress in the U.S. banking system mounted in 2007, France's President Nicolas Sarkozy realized that any politician who single-mindedly sought to push up GDP to the neglect of other indicators of the quality of life risked losing the confidence of the public. In January 2008 he asked me to chair an international commission on the Measurement of Economic Performance and Social Progress. A panel of experts was to answer the question: How can nations improve their metrics? Measuring that which makes life worthwhile, Sarkozy reasoned, was an essential first step toward enhancing it.
Coincidentally, our initial report in 2009, provocatively entitled Mismeasuring Our Lives: Why GDP Doesn't Add Up, was published right after the global financial crisis had demonstrated the necessity of revisiting the core tenets of economic orthodoxy. It met with such positive resonance that the Organization for Economic Co-operation and Development (OECD)—a think tank that serves 37 advanced countries—decided to follow up with an expert group. After six years of consultation and deliberation, we reinforced and amplified our earlier conclusion: GDP should be dethroned. In its place, each nation should select a “dashboard”—a limited set of metrics that would help steer it toward the future its citizens desired. In addition to GDP itself, as a measure for market activity (and no more) the dashboard would include metrics for health, sustainability and any other values that the people of a nation aspired to, as well as for inequality, insecurity and other harms that they sought to diminish.
These documents have helped crystallize a global movement toward improved measures of social and economic health. The OECD has adopted the approach in its Better Life Initiative, which recommends 11 indicators—and provides citizens with a way to weigh these for their own country, relative to others, to generate an index that measures their performance on the things they care about. The World Bank and the International Monetary Fund (IMF), traditionally strong advocates of GDP thinking, are now also paying attention to environment, inequality and sustainability of the economy.
A few countries have even incorporated this approach into their policy-making frameworks. New Zealand, for instance, embedded “well-being” indicators in the country's budgetary process in 2019. As the country's finance minister, Grant Robertson, put it: “Success is about making New Zealand both a great place to make a living and a great place to make a life.” This emphasis on well-being may partly explain the nation's triumph over COVID-19, which appears to have been eliminated after roughly 1,500 confirmed cases and 20 deaths in a total population of nearly five million.
APPLES AND ARMAMENTS
Necessity is the mother of invention. Just as the dashboard emerged from a dire need—the inadequacy of the GDP as an indicator of well-being, as revealed by the Great Recession of 2008—so did the GDP. During the Great Depression, U.S. officials could barely quantify the problem. The government did not collect statistics on either inflation or unemployment, which would have helped them steer the economy. So the Department of Commerce charged economist Simon Kuznets of the National Bureau of Economic Research with creating a set of national statistics on income. Kuznets went on to construct the GDP in the 1940s as a simple metric that could be calculated from the exceedingly limited market data then available. An aggregate of (the dollar value of) the goods and services produced in the country, it was equivalent to the sum of everyone's income—wages, profits, rents and taxes. For this and other work, he received the Nobel Memorial Prize in Economic Sciences in 1971. (Economist Richard Stone, who created similar statistical systems for the U.K., received the prize in 1984.)
Kuznets repeatedly warned, however, that the GDP only measured market activity and should not be mistaken for a metric of social or even economic well-being. The figure included many goods and services that were harmful (including, he believed, armaments) or useless (financial speculation) and excluded many essential ones that were free (such as caregiving by homemakers). A core difficulty with constructing such an aggregate is that there is no natural unit for adding the value of even apples and oranges, let alone of such disparate things as armaments, financial speculation and caregiving. Thus, economists use their prices as a proxy for value—in the belief that, in a competitive market, prices reflect how much people value apples, oranges, armaments, speculation or caregiving relative to one another.
This profoundly problematic assumption—that price measures relative value—made the GDP quite easy to calculate. As the U.S. recovered from the Depression by ramping up the production and consumption of material goods (in particular, armaments during World War II), GDP grew rapidly. The World Bank and the IMF began to fund development programs in former colonies around the world, gauging their success almost exclusively in terms of GDP growth.
Sources: World Bank (GDP data); U.S. Census Bureau (inequality data); Organization for Economic Co-operation and Development (Better Life Index data)
Over time, as economists focused on the intricacies of comparing GDP in different eras and across diverse countries and constructing complex economic models that predicted and explained changes in GDP, they lost sight of the metric's shaky foundations. Students seldom studied the assumptions that went into constructing the measure—and what these assumptions meant for the reliability of any inferences they made. Instead the objective of economic analysis became to explain the movements of this artificial entity. GDP became hegemonic across the globe: good economic policy was taken to be whatever increased GDP the most.
In 1980, following a period of seemingly poor economic performance—stagflation, marked by slow growth and rising prices—President Ronald Reagan assumed office on the promise of ramping up the economy. He deregulated the financial sector and cut taxes for the better-off, arguing that the benefits would “trickle down” to those less fortunate. Although GDP grew somewhat (albeit at a rate markedly lower than in the decades after World War II), inequality rose precipitously. Well aware that metrics matter, some members of the administration reportedly argued for stopping the collection of statistics on inequality. If Americans did not know how bad inequality was, presumably we would not worry about it.
The Reagan administration also unleashed unprecedented assaults on the environment, issuing leases for fossil-fuel extraction on millions of acres of public lands, for example. In 1995 I joined the Council of Economic Advisers for President Bill Clinton. Worrying that our metrics paid too little attention to resource depletion and environmental degradation, we worked with the Department of Commerce to develop a measure of “green” GDP, which would take such losses into account. When the congressional representatives from the coal states got wind of this, however, they threatened to cut off our funding unless we stopped our work, which we were obliged to.
The politicians knew that if Americans understood how bad coal was for our economy correctly measured, then they would seek the elimination of the hidden subsidies that the coal industry receives. And they might even seek to move more quickly to renewables. Although our efforts to broaden our metrics were stymied, the fact that these representatives were willing to spend so much political capital on stopping us convinced me that we were on to something really important. (And it also meant that when, a decade later, Sarkozy approached me about heading an international panel to examine better ways of measuring “economic performance and social progress,” I leaped at the chance.)
I left the Council of Economic Advisers in 1997, and in the ensuing years the deregulatory fervor of the Reagan era came to grip the Clinton administration. The financial sector of the U.S. economy was ballooning, driving up GDP. As it turned out, many of the profits that gave that sector such heft were, in a sense, phony. Bankers' lending practices had generated a real-estate bubble that had artificially enhanced profits—and, with their pay being linked to profits, had increased their bonuses. In the ideal free-market economy, an increase in profits is supposed to reflect an increase in societal well-being, but the bankers' takings put the lie to that notion. Much of their profits resulted from making others worse off, such as when they engaged in abusive credit-card practices or manipulated LIBOR (for London Interbank Offered Rate of interest for international banks lending to one another) to enhance their earnings.
But GDP figures took these inflated figures at face value, convincing policy makers that the best way to grow the economy was to remove any remaining regulations that constrained the finance sector. Long-standing prohibitions on usury—charging outrageous interest rates to take advantage of the unwary—were stripped away. In 2000 the so-called Commodity Modernization Act was passed. It was designed to ensure that derivatives (risky financial products that played a big role in bringing down the financial system just eight years later) would never be regulated. In 2005 a bankruptcy law made it more difficult for those having trouble paying their bills to discharge their debts—making it almost impossible for those with student loans to do so.
By the early 2000s two fifths of corporate profits came from the financial sector. That fraction should have signaled that something was wrong: an efficient financial sector should entail low costs for engaging in financial transactions and therefore should be small. Ours was huge. Untethering the market had inflated profits, driving up GDP—and, as it turned out, instability.
OPIOIDS, HURRICANES
The bubble burst in 2008. Banks had been issuing mortgages indiscriminately, on the assumption that real-estate prices would continue to rise. When the housing bubble broke, so did the economy, falling more than it had since the immediate aftermath of World War II. After the U.S. government rescued the banks (just one firm, AIG, received a government bailout of $130 billion), GDP improved, persuading President Barack Obama and the Federal Reserve to announce that we were well on the way to recovery. But with 91 percent of the gains in income in 2009 to 2012 going to the top 1 percent, the majority of Americans experienced none.
As the country slowly emerged from the financial crisis, others commanded attention: the inequality crisis, the climate crisis and an opioid crisis. Even as GDP continued to rise, life expectancy and other broader measures of health worsened. Food companies were developing and marketing, with great ingenuity, addictive sugar-rich foods, augmenting GDP but precipitating an epidemic of childhood diabetes. Addictive opioids led to an epidemic of drug deaths, but the profits of Purdue Pharma and the other villains in that drama added to GDP. Indeed, the medical expenditures resulting from these health crises also boosted GDP. Americans were spending twice as much per person on health care than the French but had lower life expectancy. So, too, coal mining seemingly boosted the economy, and although it helped to drive climate change, worsening the impact of hurricanes such as Harvey, the efforts to rebuild again added to GDP. The GDP number provided an optimistic gloss to the worst of events.
These examples illustrate the disjuncture between GDP and societal well-being and the many ways that GDP fails to be a good measure of economic performance. The growth in GDP before 2008 was not sustainable, and it was not sustained. The increase in bank profits that seemed to fuel GDP in the years before the crisis were not only at the expense of the well-being of the many people whom the financial sector exploited but also at the expense of GDP in later years. The increase in inequality was by any measure hurting our society, but GDP was celebrating the banks' successes. If there ever was an event that drove home the need for new ways of measuring economic performance and societal progress, the 2008 crisis was it.
Credit: Samantha Mash
THE DASHBOARD
The commission, led by three economists (Amartya Sen of Harvard University, Jean-Paul Fitoussi of the Paris Institute of Political Studies and me), published its first report in 2009, just after the U.S. financial system imploded. We pointed out that measuring something as simple as the fraction of Americans who might have difficulty refinancing their mortgages would have illuminated the smoke and mirrors underpinning the heady economic growth preceding the crisis and possibly enabled policy makers to fend it off. More important, building and paying attention to a broad set of metrics for present-day well-being and its sustainability—whether good times are durable—would help buffer societies against future shocks.
We need to know whether, when GDP is going up, indebtedness is increasing or natural resources are being depleted; these may indicate that the economic growth is not sustainable. If pollution is rising along with GDP, growth is not environmentally sustainable. A good indicator of the true health of an economy is the health of its citizens, and if, as in the U.S., life expectancy has been going down—as it was even before the pandemic—that should be worrying, no matter what is happening to GDP. If median income (that of the families in the middle) is stagnating even as GDP rises, that means the fruits of economic growth are not being shared.
It would have been nice, of course, if we could have come up with a single measure that would summarize how well a society or even an economy is doing—a GDP plus number, say. But as with the GDP itself, too much valuable information is lost when we form an aggregate. Say, you are driving your car. You want to know how fast you are going and glance at the speedometer. It reads 70 miles an hour. And you want to know how far you can go without refilling your tank, which turns out to be 200 miles. Both those numbers are valuable, conveying information that could affect your behavior. But now assume you form a simple aggregate by adding up the two numbers, with or without “weights.” What would a number like 270 tell you? Absolutely nothing. It would not tell you whether you are driving recklessly or how worried you should be about running out of fuel.
That was why we concluded that each nation needs a dashboard—a set of numbers that would convey essential diagnostics of its society and economy and help steer them. Policy makers and civil-society groups should pay attention not only to material wealth but also to health, education, leisure, environment, equality, governance, political voice, social connectedness, physical and economic security, and other indicators of the quality of life. Just as important, societies must ensure that these “goods” are not bought at the expense of the future. To that end, they should focus on maintaining and augmenting, to the extent possible, their stocks of natural, human, social and physical capital. We also laid out a research agenda for exploring links between the different components of well-being and sustainability and developing good ways to measure them.
Concern about climate change and rising inequality had already been fueling a global demand for better measures, and our report crystallized that trend. In 2015 a contentious political process culminated in the United Nations establishing a set of 17 Sustainable Development Goals. Progress toward them is to be measured by 232 indicators, reflecting the manifold concerns of governments and civil societies from around the world. So many numbers are unhelpful, in our view: one can lose sight of the forest for the trees. Instead another group of experts, chaired by Fitoussi, Martine Durand (chief statistician of the OECD) and me, recommended that each country institute a robust democratic dialogue to discover what issues its citizens most care about.
Such a conversation would almost certainly show that most of us who live in highly developed economies care about our material well-being, our health, the environment around us and our relations with others. We want to do well today but also in the future. We care about how the fruits of our economy are shared: we do not want a society in which a few at the top grab everything for themselves and the rest live in poverty.
A good indicator of the true health of an economy is the health of its citizens. A decline in life expectancy, even for a part of the population, should be worrying, whatever is happening to GDP. And it is important to know if, even as GDP is going up, so, too, is pollution—whether it is emissions of greenhouse gases or particulates in the air. That means growth is not environmentally sustainable.
The choice of indicators may vary across time and among countries. Countries with high unemployment will want to track what is happening to that variable; those with high inequality will want to monitor that. Still, because people generally want to know how they are doing in comparison with others, we recommended that the advanced countries, at least, share some five to 10 common indicators.
GDP would be among them. So would a measure of inequality or some pointer toward how the typical individual or household is doing. Over the years economists have formulated a rash of indicators of inequality, each reflecting a different dimension of the phenomenon. It may well be that societies where inequality has become particularly problematic may need to have metrics reflecting the depth of the poverty at the bottom and the excesses of riches at the top. To me, knowing what is happening to median income is of particular importance; in the U.S., median income has barely changed for decades, even as GDP has grown.
Employment is often used as an indicator of macroeconomic performance—an economy with a high unemployment rate clearly is not using all of its resources well. But in societies where paid work is associated with dignity, employment is a value in its own right. Other elements of the dashboard would include indicators for environmental degradation (say, air or water quality), economic sustainability (indebtedness), health (life expectancy) and insecurity.
Insecurity has both subjective and objective dimensions. We can survey how insecure people feel: how worried they are about adverse effects or how prepared they feel to cope with a shock. But we can also predict the likelihood that someone falls below the poverty line in any given year. And some elements of the dashboard are “intermediate” variables—things that we may (or may not) value in themselves but that provide an inkling of how a society will function in the future. One of these is trust. Societies in which citizens trust their governments and one another to “do the right thing” tend to perform better. In fact, societies in which people have higher levels of trust, such as Vietnam and New Zealand, have dealt far more effectively with the pandemic than the U.S., for instance, where trust levels have declined since the Reagan era.
Policy makers need to use such indicators much as physicians use their diagnostic tools. When some indicator is flashing yellow or red, it is time to look deeper. If inequality is high or increasing, it is important to know more: What aspects of inequality are getting worse?
STEERING THROUGH STORMS
Since we began our work on well-being indicators some dozen years ago, I have been amazed at the resonance that it has achieved. A focus on many of the elements of the dashboard has permeated policy making everywhere. Every three years the OECD hosts an international conference of nongovernmental organizations, national statisticians, government officials and academics furthering the “well-being” agenda, the most recent being in Korea in November 2018, with thousands of participants.
Whenever the conference next convenes, the global crisis in human societies that a microscopic virus has precipitated will surely be on the agenda. The full dimensions of it could take years or decades to become clear. Recovering from this calamity and steering complex societies through the even more devastating crises that loom—catastrophic climate change and biodiversity collapse—will require, at the very least, an excellent navigational system. To paraphrase the OECD: We have been developing the tools to help us drive better. It is time to use them.
