Adding costs and savings to reflect hidden reality

Create a GDP+ measure that modifies the detail of how GDP is calculated by adding in otherwise-obscured costs and savings so it better reflects hidden reality


The metaphor of a ‘slow-motion train crash’ caused by the worst Industrialization side-effects – in particular peaking oil combined with pollution and global warming – is, more accurately, a train deliberately accelerating toward an avalanche of boulders that it set off earlier. The way out is to take two actions in parallel: decelerate the train and remove the largest of the boulders before the train reaches them.

The international community already fully-realizes that – in theory at least – that means all countries must in concert slowly wean themselves off oil, at the same time as reducing the damage they cause with greenhouse-gas pollution. Yet with today’s absence of global governance, and without the most influential oil, energy and mining companies taking leadership, these sorts of problems are, in practice, impossible to solve. It is bad enough that each country is, in effect, forced to compete with each other to get the greatest one-time economic boost from fossil-fuels while they still can. But that is only part of the difficultly. The other part relates to hidden interconnections. Potential solutions to oil-dependency and climate change are so enmeshed but complex that, once again, we cannot see the forest for the trees. Joined-up thinking is very difficult.

For instance, some alternatives to oil – such as coal – risk polluting even worse. Saving rain-forests or growing biofuel impacts available agricultural land, which impacts long-term food-security. Officially admitting that economic-oil is peaking, risks damaging the share-price of multinationals that dominate the global economy and pension funds – risking panic buying, wild financial swings and (potentially) extreme hardship.

In order to help themselves at least compare like with like, key players in the potential Oil Tragedy need to be able to resort to a form of True Costing in which evaluations of different alternatives take into account not just those immediate costs and savings that are obvious, but also hidden costs and savings that may only occur very much later – for example, costs of cleaning-up pollution, or eventual savings in reduced healthcare. Such an approach is attractive not just at the level of individual technological options but also when a government considers its country’s performance as well as when the international community evaluates the whole global economy.

At the moment, governments typically measure the health of national economies, and by implication the overall global economy, in terms of Gross Domestic Product. But GDP is in fact quite a recent invention. It was devised in the 1930s to try to get a handle on how effective interventions were for tackling the Great Depression. The trouble is that these days GDP is universally used to gauge how successful an economy is. Unfortunately, that is not what it was designed for, and it is not what it actually measures.

The almost-exclusive use of GDP as the indicator of national performance has become increasingly risky. For a start, it is very short-term. A country (or the global economy generally) can look good even though it is doing things that are destroying its long-term prospects – depleting unsustainable resources without planning sufficient alternatives for example. Likewise, GDP does not reflect waste or efficiency. High-Tech, for instance, generally produces greater and greater benefits over time for the same cost. Yet as far as GDP is concerned, the benefits of a web-enabled laptop are no greater than those of an equivalently-priced mechanical adding-machine. And a gas-guzzling leviathan of a car is just as attractive as its highly-efficient hybrid rival.

Similarly, profits made by banks gambling on market fluctuations (but not in any direct way contributing to the success of a country) are viewed as just as valuable as the profits of an entrepreneurial inventor. But possibly most risky of all, GDP completely ignores hidden costs such as damage to the environment (technically referred to as macroeconomic ‘externalities’). Often, something like air-pollution even shows up as extra benefit – because it results in more money being spent on healthcare.

All this needs to be enhanced. However, although at various times economists and others have proposed alternatives to GDP, it seems highly unlikely that within the timescales available any substitutes can be adopted broadly enough to be sufficiently useful over the next few decades. Far more pragmatic therefore is, when useful, to modify the detail of how GDP itself is measured by adding in otherwise-obscured costs and savings – so that it more accurately reflects hidden reality.

This approach has the advantage of being flexible enough to tie in large amounts of existing work (such as from climate-change advocates calculating the ‘cost of carbon’), but not to exclude other efforts that come from very different disciplines (such as from economists trying to reflect the sustainability of economic growth, or from social scientists factoring-in education levels, wealth disparity, life expectancy and quality of life). Importantly, such an approach to True Costing also allows governments to keep nearly all the extraordinary number of processes that have grown up around GDP, but to maintain additional parallel sub-processes that make them far safer with regard how they impact government strategy.