We use market prices to value goods and services. But now, even those with the most faith in markets question reliance on market prices, as they argue against mark-to-market valuations. The pre-crisis profits of banks — one-third of all corporate profits — appear to have been a mirage.
This realization casts a new light not only on our measures of performance, but also on the inferences we make. Before the crisis, when US growth (using standard GDP measures) seemed so much stronger than that of Europe, many Europeans argued that Europe should adopt US-style capitalism. Of course, anyone who wanted to could have seen the growing indebtedness of households in the US, which would have gone a long way toward correcting the false impression of success given by the GDP statistic.
Recent methodological advances have enabled us to assess better what contributes to a citizen’s sense of well-being, and to gather the data needed to make such assessments on a regular basis. These studies, for instance, verify and quantify what should be obvious: The loss of a job has a greater impact than can be accounted for just by the loss of income. They also demonstrate the importance of social connectedness.
Any good measure of how well we are doing must also take account of sustainability. Just as a firm needs to measure the depreciation of its capital, so, too, our national accounts need to reflect the depletion of natural resources and the degradation of the environment.
Statistical frameworks are intended to summarize what is going on in our complex society in a few easily interpretable numbers. It should have been obvious that one couldn’t reduce everything to a single number, GDP. The report by the Commission on the Measurement of Economic Performance and Social Progress will, one hopes, lead to a better understanding of the uses, and abuses, of that statistic.
The report should also provide guidance for creating a broader set of indicators that more accurately capture both well-being and sustainability, and it should provide an impetus for improving the ability of GDP and related statistics to assess the performance of the economy and society. Such reforms will help us direct our efforts — and resources — in ways that lead to improvement in both.
Joseph E. Stiglitz, a professor at Columbia University and winner of the 2001 Nobel Memorial Prize, served as chairman of the Commission on the Measurement of Economic Performance and Social Progress.
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