What is the best way to measure economic welfare?

Pratham Dave

What is the best way to measure economic welfare?

Economic welfare refers to the standard of living and level of prosperity of an individual. Measuring economic welfare is imperative since it is the end goal of most economic and social policies. However, an increasing body of exports believe that the means of economic welfare measurement in the status quo are meretricious and unrepresentative. Therefore, they ought to be replaced by more efficacious methods that encapsulate all the determinants of economic welfare, so that they can inform evidence based policymaking by providing policymakers with a veracious picture of the quality of life.

Approximately 10 years ago, the French government formed Stiglitz-Sen-Fitoussi Commission issued its landmark report, Mismeasuring Our Lives: Why GDP does not add up, which vehemently opposed the consensus Gentium by critiquing the venerated indicator. It argued that the indicator’s emphasis on material wellbeing and nescience of welfare determinants like healthcare, education, environment, and inequity, render it unrepresentative of true economic welfare. This report should be considered in the backdrop of an overwhelming amount of research that suggests GDP fails to account for paramount unpaid volunteer and household work carried out, which does indeed contribute to a nation’s economic welfare (Miranda, 2011). Therefore, we must adhere to GDP’s constructor Simon Kuznets’s thought and treat it as a measure of economic activity, not welfare, since as Senator Robert F. Kennedy explains, “GDP measures everything, in short, except that which makes life worthwhile.” (Kapoor and Debroy, 2019).

While economists largely agree that GDP is an inadequate measure of economic welfare, the “best way to measure economic welfare” is indubitably a topic of contention. Although the UN created HDI assess education and healthcare in addition to GNI, it is still far from ideal, owing to the equal weightage of factors, which enable nations to achieve the same HDI values by compensating for their poor performance in, for example, healthcare, with a stellar performance in income and education. Moreover, HDI does not inculcate critical determinants of the standard of living such as inequality, liberty, and freedom. Furthermore, a majority of existing indicators, such as GDP and HDI, are significantly determined by economic output. Thus, empirical research suggests that to maximize economic welfare measured by the aforementioned indicators, nations would be forced to unsustainably exploit their resources. This, as seen in China, is likely to lead to environmental degradation, which worsens living standards. Therefore, they are unfit to measure economic welfare in a world outstripping its biocapacity (Hickel, 2018). Since economic welfare is a function of a profusion of variables, ranging from work-life balance and civic engagement to the environment and healthcare, measuring it requires a

comprehensive analysis of a myriad of determinants, which is why I argue that a dashboard approach to measuring economic welfare, such as the OECD’s Better Life Index, ought to be adopted. Such composite indicators approach this multifarious subject with the multifarity it deserves; for example, the Better Life Index is composed of over 11 different variables, which enables a holistic evaluation. Additionally, it is imperative to heed that economic welfare is immensely subjective. For instance, individuals may assign different weights to work-life balance when evaluating their levels of economic welfare. Ergo, to truly gauge economic welfare, indexes like the Better Life Index permit individuals to assign their weights to each of the 11 criteria. This customizability results in a measurement that accounts for divergent priorities, resulting in a measurement that parallels the true levels of economic welfare for individuals (Stiglitz, 2018). New Zealand’s decision to embed such holistic measures of well-being into their budgetary processes in 2019, for example, has been accredited with their remarkable triumph over COVID-19 (Stiglitz, 2020).

Economic welfare is a salient subject because it is typically the end goal of all policies. To measure economic welfare in the “best way, ” we need to dethrone the misrepresentative mannerisms of yesteryear, and transition towards dashboards composed of a multitude of variables. This is because they are the only means of measurement that is able to encapsulate all the determinants of economic welfare and give treat it with the multidimensionality it deserves. References Miranda, V. (2011), “Cooking, Caring and Volunteering: Unpaid Work Around the World”, OECD Social, Employment and Migration Working Papers, No. 116, OECD Publishing. Kapoor and Debroy, “GDP Is Not A Measure Of Human Well-Being”, Harvard Business Review (2019) Hickel, J, “THE PROBLEM WITH THE HUMAN DEVELOPMENT INDEX IN AN AREA OF ECOLOGICAL BREAKDOWN” (2018) OECD, “What is the Better Life Index”, OECD Better Life Index Stiglitz, J. “Beyond GDP”, Project Syndicate (2018) Stiglitz, J. “GDP IS The Wrong Tool For Measuring What Matters”, Scientific American (2020)