Stiglitz and Sen: Measurement Of Economic Performance and Social Progress

Joe Stiglitz and Amartya Sen, along with an international group of economists, reassess measures of societal well-being. The story from the NYT:

President Nicolas Sarkozy told the French national statistics agency Monday to take greater account of factors like quality of life and the environment when measuring the country’s economic health.

Mr. Sarkozy made the request after accepting a report from a panel of top economists he had charged with reviewing the adequacy of the current standard of fiscal well-being: gross domestic product.

The panel, chaired by two Nobel economists, Joseph E. Stiglitz of Columbia University and Amartya Sen of Harvard University, concluded that G.D.P. was insufficient and that measures of sustainability and human well-being should be included.

From the executive summary to the 292-page report (pdf):

The report distinguishes between an assessment of current well-being and an assessment of sustainability, whether this can last over time. Current well-being has to do with both economic resources, such as income, and with non-economic aspects of peoples’ life (what they do and what they can do, how they feel, and the natural environment they live in). Whether these levels of well-being can be sustained over time depends on whether stocks of capital that matter for our lives (natural, physical, human, social) are passed on to future generations. ...

The assessment of sustainability is complementary to the question of current well-being or economic performance, and must be examined separately. This may sound trivial and yet it deserves emphasis, because some existing approaches fail to adopt this principle, leading to potentially confusing messages. For instance, confusion may arise when one tries to combine current well-being and sustainability into a single indicator. To take an analogy, when driving a car, a meter that added up in one single number the current speed of the vehicle and the remaining level of gasoline would not be of any help to the driver. Both pieces of information are critical and need to be displayed in distinct, clearly visible areas of the dashboard.

At a minimum, in order to measure sustainability, what we need are indicators that inform us about the change in the quantities of the different factors that matter for future well-being. Put differently, sustainability requires the simultaneous preservation or increase in several “stocks”: quantities and qualities of natural resources, and of human, social and physical capital.

There are two versions to the stock approach to sustainability. One version just looks at variations in each stock separately, assessing whether the stock is increase or decreasing, with a view particularly to doing whatever is necessary to keep each above some critical threshold. The second version converts all these assets into a monetary equivalent, thereby implicitly assuming substitutability between different types of capital, so that a decrease in, say, natural capital might be offset by a sufficient increase in physical capital (appropriately weighted). Such an approach has significant potential, but also several limitations, the most important being the absence of many markets on which valuation of assets could be based. Even when there are market values, there is no guarantee that they adequately reflect how the different assets matter for future well-being. The monetary approach requires imputations and modelling which raise informational difficulties. All this suggests starting with a more modest approach, i.e. focusing the monetary aggregation on items for which reasonable valuation techniques exist, such as physical capital, human capital and certain natural resources. In so doing, it should be possible to assess the “economic” component of sustainability, that is, whether or not countries are over-consuming their economic wealth.

[Update: Good discussion of this topic over at Mark Thoma's blog Economist's View.]