Economics of the Genuine Progress Indicator

Abstract

The Genuine Progress Indicator (GPI) is an interesting alternative to Gross Domestic Product (GDP) as an indicator of society’s development. Historically, GDP has been used by policymakers, media analysts, and economists as the main indicator of development, even though economics textbooks often state that it is not a measure of social welfare. Strictly speaking, GDP is only an indicator of the production of economic goods and services, not an index of well-being or development. It does not include the environmental, social, or economic costs of producing goods and services. The theoretical basis of GDP is conventional macroeconomics, which adopts an isolated economic system as the object of analysis. In this approach, there is no flow of matter and energy to produce economic goods and services. The economy is considered a perpetual motion machine that does not need material and energy to produce and which consequently does not generate waste. However, the economy is a subsystem open to the flow of matter and energy, supported by a closed, natural subsystem—the global environmental system. In practice, the production of economic goods and services is dependent on the continuous flow of matter and energy from the environment, and inherently, the result of GDP is also the generation of waste. The GPI adopts this perspective. In the 1990s, Daly and Cobb created the Index of Sustainable Economic Welfare (ISEW), hereafter termed GPI. The objective was to incorporate environmental, social, and economic costs associated with GDP growth, and to generate an indicator that reflected a genuine development of society. The GPI has been estimated for several countries, including the United States, Australia, China, and Brazil. This indicator is neither perfect nor complete for assessing development or human well-being, but it is superior to GDP. Despite technological development, there has been an unequivocal increase in environmental degradation, contrary to the environmental Kuznets curve (EKC) hypothesis. The result of environmental degradation has been an increase in the environmental, social, and economic costs of GDP growth. However, these costs have been ignored by policymakers, companies, and society in their production and consumption decisions. Improving the GPI and its estimates can provide better information for decision making by economic and political agents.