Socially Responsible Business Archive


GDP Scorecards Still Misleading Government, Banks and Investors as New Survey Shows Disconnect

Tuesday, February 8th, 2011

The GDP results for the final quarter of 2010 remain unreliable in charting recovery and progress in Europe, the USA, China, Brazil and most other countries. A new survey, BEYOND GDP, by GlobeScan and Ethical Markets (USA and Brazil) in Australia, Brazil, Canada, China, France, Germany, India, Italy, Kenya, Russia, the UK and the USA, reaffirms the large majorities favoring reform of money-based GDP with many available indicators of health, education, infrastructure, poverty gaps and environmental quality found in their 2007 survey for the European Commission (www.beyond-gdp.eu).

Statistical agencies are still on automatic pilot, grinding out GDP, an inaccurate "rearview mirror," omitting vital indicators of future trends. The chorus of critics of "GDP fetishism" now point to many more accurate indicators forecasting national wellbeing, sustainability and quality of life. Britain's David Cameron has ordered his Office of National Statistics to develop new measures by 2012, similar to Canada's Index of Wellbeing.

Both surveys use the familiar debate format, asking respondents which of the following statement they agreed with:

“The government should measure national progress using money-based, economic statistics because economic growth is the most important thing for a country to focus on.”

or

“Health, social and environmental statistics are as important as economic ones and the government should also use these for measuring national progress.”

The new 2010 survey results still show high levels of public agreement with the "Beyond GDP" statement. Support in seven of these countries eroded somewhat since 2007 while support increased in others, notably Canada, Germany and Brazil where 83% favor reforming GDP. Support for including broader indicators in GDP remained above 70% in Britain, France and Italy despite the financial crises in 2007-2008 and governments bailing out banks, transferring liabilities to taxpayers through austerity and job cuts. In the USA, 59% approve of reforming GDP in spite of foreclosures and the loss of retirement security in pensions and savings – even as conservatives become predominant in politics and media.

The  Beyond GDP Survey's implications mirror those of the 2009 Stiglitz-Sen Commission to French President Nicholas Sarkozy, that GDP had become a "fetish" and it was time to move on.[1] Other reasons this "GDP fetishism" has been perpetuated include deregulation and the growing influence of money and finance in politics, including developing countries (re-named as "emerging markets").  In OECD countries, special interests and their allies in politics and in ministries of finance, economic development, trade, central banks and stock markets grew to dominate governments' policies.   Money measures and 24-7 global stock and bond markets are primary in mainstream media.  All benefit from GDP measures of growth which ignore future trends, infrastructure, social and environmental costs.

[1] "Stiglitz-Sen Moving in the Right Direction, but Slowly," IPS, Sept. 18, 2009, http://www.ipsnews.net/news.asp?idnews=48492

Many companies, investors and the public in this Survey can see the big picture: well trained work forces, efficient public infrastructure and productive ecosystems in EU and other countries – all counted at zero in GDP! GDP's macro-economic, money-denominated, over-aggregated methods are unnecessary in our internet age, which enables multi-disciplinary indicators and metrics, using systems approaches. GDP is superseded by these new scorecards – with web-based dashboards displaying all the vital areas of quality of life and true progress.

Yet obsolete models persist in finance along with lags in macro-economic statistics. As deregulation and privatization became widespread, infrastructure (ignored in GDP) was short-changed, while ministries of education, health, social welfare, consumer and environmental protection lost influence. Their support and that of NGOs for overhauling GDP accounts was insufficient to breach the bastions of macroeconomics. Statisticians claimed it was too difficult. Market enthusiasm, buttressed by financial forces and powerful interests were all justified by these traditional economic theories.

As far back as 1992, Agenda 21 Article 40, signed by 170 countries at the UN Earth Summit in Rio de Janeiro, committed them to overhaul GDP to account for infrastructure, social capital, unpaid work and environmental assets. Indicators proliferated on infrastructure assets, environmental quality, resource depletion, loss of biodiversity, public health, access to clean water, education, poverty gaps, social welfare and quality of life.

Yet, all these well-researched indicators produced since 1992 stayed sidelined from GDP accounting and designated as "satellite accounts." Not surprisingly, this devalued their importance and relegated them to academia, NGOs and the margins of societies. Mass media, financed by advertising, still focuses on driving mass consumption, GDP and other macro-economic indicators. Stressing the need for "faster growth," most fail to clarify that they and politicians use GDP-growth as the tacit definition of overall progress. Other indexes of national progress (www.beyond-gdp.eu) include the UN's Human Development Index (HDI) since 1990, the Living Planet Index of WWF and the Ecological Footprint to measure global conditions.

Meanwhile, the rise of socially responsible business and investment has led to new corporate accounting standards — beyond earlier "efficient market" models — to measure performance by environmental, social and governance standards (ESG), the "triple bottom line." Financial firms using enhanced accounting and risk analysis include: Global Reporting Initiative, Amsterdam, NL; Calvert Group, USA; Swiss Reinsurance, Zurich; ASRIA, Hong Kong; Friends Provident, London; Triodos Bank, NL and UK; and Rabobank, International, NL; Ethical Markets Media, USA and Brazil.

It is time to require all companies to internalize the "externalities," i.e., to fully account for their social and environmental costs of production on their balance sheets. Many companies have succeeded in overhauling accounting practice toward this "triple bottom line." Better practices and companies still must operate in financial markets driven by simplistic GDP-measured growth. So security analysts miss these "externalities" and valuable public assets: infrastructure, airports, transport, etc., are masked in GDP which still omits an asset account to balance public debts!

The new breed of micro-economists corrected company balance sheets and incorporated the new indicators. But macro-economists and fossilized incumbent industries they serve and their allies in politics and government agencies; still seek to preserve their freedom to "externalize" social and environmental costs. They benefit from the view of "progress" in GDP-measured growth.

Thus, our economies continue to pump out carbon and other pollutants while ignoring social and environmental assets, hiding poverty gaps, as well as infrastructure assets – all missing in GDP. Financial markets wager on the future of the euro and bet on member countries' sovereign bonds, while demanding "austerity," forcing taxpayers to pay again for bankers' follies. Calls by European leaders for bondholders' "haircuts" are fiercely opposed.

We can now steer our societies away from dangerous inequalities, pollutants and climate change toward the cleaner, greener economies we are all building and track progress with the Green Transition Scoreboard®, totaling all private investments since 2007 in growing green sectors worldwide at $1.6 trillion in 2010.

As distrust, anger, resentment at the unfairness of the bailouts emerged in political backlashes in the USA and in Europe, indicators on public infrastructure, environment, health, education and quality of life are even more important for our future. Nations can find new paths out of austerity and recession as casino finance is curbed, downsized and returned to its former, proper role in serving the world's real economies. (see "Transforming Finance" at www.ethicalmarkets.com). The Beyond GDP Survey shows that the public is ahead of politicians (www.globescan.com).

Read the original article at HazelHenderson.com.

ethicalmarkets Hazel Henderson is the author of Ethical Markets.

Real Economies and the Illusions of Abstraction

Thursday, November 4th, 2010

The yawning gap between the real world and the discipline and profession of economics has never been wider. The ever-increasing abstractions in finance and its models based on "efficient markets" and "rational actors": capital asset pricing, Value-at-Risk, Black-Scholes Options Pricing, have been awarded most of the Bank of Sweden prizes since they were founded in the 1960s and foisted onto the Nobel Prize Committee. Most of these abstract models, based on misuse of mathematics, contributed to the financial crises of 2007-2008. Now, the family of Alfred Nobel, led by lawyer Peter Nobel, has disassociated itself from the Bank of Sweden Prize in Economics In Memory of Alfred Nobel.[1] They point out that Nobel never would have approved of a prize in economics since it is not a science – and would have disapproved even more that most of the prizes were given to Western, neoclassical economists using mathematized, abstract models – far from Nobel's wider concerns.

Nowhere is this abstraction more devastating than in the mathematical compounding of interest rates on borrowed money, now sinking individuals, companies and nations in unrepayable debt as explored in lawyer Ellen Brown's Web of Debt (2007).

In The Politics of the Solar Age (1981, 1988), I warned that compound interest violated the Second Law of Thermodynamics:

"Much confusion arises because economics inappropriately analogizes from some of these models from the physical, social, and biological realms. For example, the best example of a "runaway" can be found in the hypothetical model that economists have imposed on the real world: compounded interest. Here, they have set up an a priori, positive feedback system (based on the value system of private property and its accumulation), in which the interest earned on a fixed quantity of money (capital) will be compounded and the next calculation of interest added on cumulatively. But this "runaway" accumulation process bears no relationship to the real world – only to the value system. However, it has profound real-world effects if enough people believe it is legitimate and employ lawyers, courts, etc., to enforce it!" (p. 228)

I also pointed out that Frederick Soddy, Nobel laureate in chemistry, decided that economists' dangerous drift into pseudo-scientific abstraction must be halted before they destroyed industrial societies, because their uninformed ideas contravened the first and second laws of thermodynamics. (p. 225)

The mathematical fantasy that money is wealth and can reproduce itself is revealed again in the US housing and foreclosure crisis. Money is a useful information system for tracking our use of nature's resources and scoring the games we humans play, but it gradually became mistakenly equated with the real wealth of nations. Similarly, too often economists and politicians describe money flows in economies as analogous to the human body's circulatory system. Yet human blood's hemoglobin cells do not charge money or interest for the life-giving oxygen they deliver to every other cell in our bodies.

Charging interest for lending money was frowned on by our ancestors and considered a sin in Christian, Judaic as well as Islamic and other religious traditions. This view survives today in Sharia finance where lending at interest is shunned in favor of requiring the investor or creditor to share risks of any enterprise with the entrepreneur.

Generations of scholars since Aristotle's treatises on "just prices" have examined the myths and human experiments in creating money and systems of exchange, from mutual fund manager Stephen Zarlenga's The Lost Science of Money (2002) and Prof. Margrit Kennedy's Interest and Inflation Free Money (1995) to lawyer Ellen Brown's Web of Debt (2007). In my Creating Alternative Futures (1978), I posed the question: Is there any such thing as profit without some equal, unrecorded debt entry in some social or environmental ledger or passed on to future generations? My answer was "yes," provided all costs of production were internalized and thermodynamic, not economic, measures of efficiency were calculated.

The mismatch is between the real-world economies, where real people grow food, make shoes, clothes, shelter and tools in real factories, versus the human mind's tendencies toward abstraction. Understanding the real world in which we live requires us to recognize patterns and to abstract reality into mental models. The map is not the territory, as we have been reminded by many epistemologists. The danger is that we routinize our perception through these models, forgetting the need for constant updating and course-correcting as conditions change around us. Thus our mental models are memes that crystallize into habits, dogmas and outdated theories such as those in conventional economics and finance. These led to collective illusions: about "efficient markets," "humans as rational actors" and the lure of "compound interest" that still guide the decisions of too many asset managers. New models of triple bottom line accounting for environmental, social and governance (ESG) have been adopted by responsible investors and institutional investors, including those engaged with the UN Principles of Responsible Investment, managing $22 trillion in assets. The current US mortgage and foreclosure mess provides a new teachable moment where we can re-examine the obsolete beliefs still at the core of economics and now refuted by physicists, thermodynamics, endocrinologists, brain and behavioral scientists.[2]

Read the full, original post at Seeking Alpha.

Hazel Henderson is the author of Ethical Markets, available now.