Should We Tweak GDP to Measure Happiness?

10 leaders who have managed to win respect Illustrations by Newsweek; Source Material: Polaris

For most of the last seven decades, which is to say about as long as economists have been calculating what's now called "gross domestic product," it's been criticized for being, well, too gross. "Economic resources are not all that matter in people's lives," warns Angel Gurría, secretary--general of the 32-country Organization for Economic Cooperation and Development. Yet as a convenient marker of national economic health, GDP tends to dominate discussions of how nations rank against one another. Is the answer to change the way you count up GDP? Do you try to play it down as an indicator? Or do you throw it out? That debate is in full swing among economists now, and how it's decided will have a profound effect on the way we perceive our ability to survive or thrive in the years to come.

As a very general picture of production and consumption, GDP is, after all, a huge improvement on the scattershot numbers that came before the Great Depression of the 1930s. The problem, pointed out by one of the statistic's original architects, Nobel laureate Simon Kuznets, is that so much social and political importance is read into a single figure that focuses exclusively on market activities. What isn't bought or sold—housework or caring for your own children, for instance—doesn't figure. The numbers are also infamously and literally disaster-prone: hurricanes and floods push up GDP because the reconstruction gets factored in as new spending. Countries with more prisons look better than those with fewer (building and running them counts as good economic activity). And if corporations and the very rich are doing well, that can skew the averages to make it look as if everyone is prospering when, in fact, the majority is not.

Depletion of finite resources and environmental depredation don't get counted either. In the 1980s the French undersea explorer and environmentalist Jacques-Yves Cousteau preached obsessively against the global fixation on GDP growth that implied all consumption was good even if it meant dooming future generations to a declining quality of life—or no life at all. The true measure of prosperity, he used to say, should be based on a broader understanding of "happiness," even if this sounded like "a crazy idea."

A growing awareness of climate change and looming social inequities has sparked a serious reappraisal of GDP among many of the world's top economists. The debate gained urgency with the Great Recession, which has prompted a broad rethink about what kind of growth is both desirable and sustainable. In early 2008 French President Nicolas Sarkozy brought together Nobel laureates Joseph Stiglitz and Amartya Sen with French economist Jean-Paul Fitoussi and more than 20 other experts for a Commission on the Measurement of Economic Performance and Social Progress. Its report issued last year concluded "the time is ripe for our measurement system to shift emphasis from measuring economic production to measuring people's well-being."

Since then, such influential bodies as the OECD have embraced the commission's work. Even skeptics who fear the huge costs of developing new global statistics and question how the public will react to what may look like a basket of apples and oranges are willing to nod to the commission's findings. The only real remaining divide is among those who want to improve the inputs into GDP and related statistics as they exist now, and those who think GDP as a whole should be given less importance.

Steven Landefeld, who oversees the compilation of America's GDP numbers as director of the Bureau of Economic Analysis, thinks much more can be done with the data already in hand. He wrote last year that there may well be a place in government statistics for a new analytical approach to the way people spend their time, in effect "a measure of happiness." The risk is that the inclusion of softer data in GDP would make the figure more nebulous and would diminish its usefulness as a tool for policymakers trying to manage the market economy.

Stiglitz and his colleagues, well aware of this problem, recommend what they call "a dashboard," on which some dials would measure quality of life, environmental impact, depletion of resources, and the like. Obviously policymakers need temperature and fuel gauges if they want to know how far they're able to go, not just how fast, but a new and improved GDP probably will remain front and center and still recognizable as the speedometer.