Indicators of Economic Progress: The Power of Measurement and Human Welfare

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Table of Contents

  1. Introduction
  2. Tools and Measures
  3. Measures of National Income
  4. Need for New Theory
  5. Measures and Indicators
  6. Characteristics of a Successful Indicator
  7. The Problem of Value
  8. What are we trying to measure?
  9. Alternative indices
  10. Components of Economic Welfare
  11. Human Economic Welfare Index (HEWI)
  12. Composite HEWI
  13. Conclusions
  14. Endnotes

1. Introduction

Right measurement is a powerful instrument for social progress; wrong or imprecise  measurement a source of hazard and even havoc. The essential purpose of economic activity is the promotion of human development, welfare and well-being in a sustainable manner, and not growth for growth’s sake, yet we lack effective measures to monitor progress toward these objectives. Advances in understanding, theory and measurement must necessarily proceed hand in hand. A companion article in this publication sets forth the urgent need for new theory in economics. This article sets forth the complementary need for new measures. The stakes are high and the choice is ours. On one side, rising social  tensions, recurring financial crises and ecological disaster; on the other, the progressive unfolding and development of human capacity in harmony with Nature. The deficiencies of GDP as a measure are welldocumented by leading economists Kuznets,  Tobin, Tinbergen and many others; but, unfortunately, decision-making still remains  largely based on GDP, valid during 1930-70 perhaps, but certainly inappropriate today. The challenge is to derive more appropriate indicators to reflect real, sustainable economic welfare, social development and human wellbeing. The attributes that have made GDP so successful are often overlooked — it provides clear objectives for policy and decision-making. We propose new composite indicator, HEWI, which can be used to guide decision-making, which retains the strengths associated with GDP, while substantially enhancing its value as a  measure of human economic development. HEWI monitors progress on factors that contribute prominently to present economic welfare — household consumption,  government welfare-related expenditure, income inequality and unemployment — as well as factors that have the potential to significantly enhance long term sustainability —  education, fossil fuel energy efficiency and net household savings. The index is applied to assess the economic performance of select countries from 1985-2005.

2. Tools and Measures

Human beings are distinguished from other life forms by their unique ability to fashion tools which extend our powers of consciousness beyond the reach of our senses and our powers of execution beyond the limits of strength, endurance, space and time imposed by our physical bodies. Tools are an instrument for social evolution. Language is a tool which enables us to formulate original ideas, communicate our inmost thoughts and feelings, record events for posterity, transmit knowledge down through the ages, and exchange ideas over vast expanses of time