Beyond GDP Measuring Welfare and Assessing Sustainability

In spite of recurrent criticism and an impressive production of alternative indicators by scholars and NGOs, GDP remains the central indicator of countries' success. This book revisits the foundations of indicators of social welfare, and critically examines the four main alternatives to GDP that have been proposed: composite indicators, subjective well-being indexes, capabilities (the underlying philosophy of the Human Development Index), and equivalent incomes. Its provocative thesis is that the problem with GDP is not that it uses a monetary metric but that it focuses on a narrow set of aspects of individual lives. It is actually possible to build an alternative, more comprehensive, monetary indicator that takes income as its first benchmark and adds or subtracts corrections that represent the benefit or cost of non-market aspects of individual lives. Such a measure can respect the values and preferences of the people and give as much weight as they do to the non-market dimensions. A further provocative idea is that, in contrast, most of the currently available alternative indicators, including subjective well-being indexes, are not as respectful of people's values because, like GDP, they are too narrow and give specific weights to the various dimensions of life in a more uniform way, without taking account of the diversity of views on life in the population. The popular attraction that such alternative indicators derive from being non-monetary is therefore based on equivocation. Moreover, it is argued in this book that "greening" GDP and relative indicators is not the proper way to incorporate sustainability concerns. Sustainability involves predicting possible future paths, therefore different indicators than those assessing the current situation. While various indicators have been popular (adjusted net savings, ecological footprint), none of them involves the necessary forecasting effort that a proper evaluation of possible futures requires.

Contents; vii; Preface ix; Introduction: The four musketeers xi; 1 A wealth of indicators 1; 1.1 Introduction; 1.2 A bird's eye view; 1.3 Aggregating the non-aggregatable?; 1.4 Correcting GDP; 1.5 Sustainability assessment: weak or strong?; 1.6 Coping with multidimensionality: dashboards; 1.7 An overhanging question: how far can aggregation go?; 2 Measuring sustainability; 2.1 Introduction; 2.2 Wealth and sustainable well-being; 2.2.1 Discounting future streams of well-being?; 2.2.2 From intertemporal well-being to sustainable consumption; 2.3 The savings approach: a reference framework; 2.3.1 Shifting the focus to sustainability : why?; 2.3.2 Assessing sustainability in imperfect but predictable economies.; 2.3.3 An example; 2.4 The savings approach: several pending problems; 2.4.1 Monetization in practice; 2.4.2 Behavioral indeterminacy or when 'weak' indicators can; turn out too strong; 2.4.3 Technological and normative uncertainties; 2.4.4 An additional problem: the cross-national dimension of; unsustainability; 2.5 Conclusion: where to go from there?; iii; iv CONTENTS; 3 A price for everything?; 3.1 A revealed preference argument; 3.1.1 The argument for an individual consumer; 3.1.2 Extending the argument to social welfare through a representative agent; 3.1.3 Extending the argument to social welfare with an opti-; mality assumption; 3.2 A variant of the revealed preference argument; 3.3 The theory of index numbers; 3.3.1 An axiomatic approach; 3.3.2 Approximating welfare changes; 3.4 Decomposing welfare; 3.4.1 A first decomposition, with the social expenditure function; 3.4.2 A second decomposition, in terms of effeciency and equity; 3.4.3 A new decomposition, based on Bergson curves; 3.4.4 Another decomposition, for small variations; 3.5 Specific problems with imputed prices and full income; 3.6 Conclusion; 4 Equivalent income, or how to value what has no price; 4.1 Money-metric utility and equivalent income; 4.2 Knock-out criticism?; 4.2.1 Not welfarist enough; 4.2.2 Too welfarist; 4.2.3 Potentially regressive; 4.2.4 Reference dependent; 4.2.5 Arrow's coup de gr?ce; 4.3 Fairness to the rescue; 4.3.1 The equivalence approach in fair allocation theory; 4.3.2 Arrow Independence is not compelling; 4.3.3 References need not be arbitrary; 4.3.4 The right dose of welfarism; 4.3.5 Bundle dominance is unacceptable; 4.3.6 Egalitarianism is demanding; 4.4 Social welfare decomposition; 4.5 Conclusion; 5 Is happiness all that matters?; 5.1 The Easterlin paradox: Have we been wrong for 70,000 years?; 5.1.1 Bentham is back; 5.1.2 The debate about subjective welfarism; 5.1.3 Is happiness the ultimate goal?; 5.1.4 The key objection to subjective scores; 5.2 A theory of subjective well-being; 5.2.1 A?ects and judgments; 5.2.2 The three problems of the respondent; CONTENTS v; 5.2.3 Heterogeneous and shifting standards; 5.2.4 What do people care about?; 5.2.5 Comparisons across preferences; 5.3 Making use of happiness data; 5.3.1 Proposed indicators; 5.3.2 Putting a?ects in their place; 5.3.3 Identi?cation problems; 5.3.4 Can happiness data be improved?; 5.4 Conclusion; 6 Empowering capabilities; 6.1 The capability approach; 6.1.1 From basic needs to capabilities; 6.1.2 Functionings, between 'opulence' and 'utility'; 6.1.3 From functionings to capabilities; 6.2 Capabilities as opportunities; 6.2.1 Valuing sets; 6.2.2 The relevant aspects of opportunities; 6.2.3 Shaping opportunity sets; 6.2.4 Equality against set valuation; 6.2.5 Why capabilities?; 6.3 The valuation issue; 6.3.1 The intersection approach; 6.3.2 Disagreement and respect for diversity; 6.3.3 Implications of respect for personal preferences; 6.4 Is the CA a separate approach?; Conclusion: How to converge on a multiplicity; Why synthetic indicators?; Shortcuts and pitfalls; Vices and virtues of monetary indicators; A multiplicity of synthetic indicators; Sustainability warnings; A A theory of the reference for equivalent incomes; A.1 The model; A.2 Reference operators; A.3 Non-market goods; A.4 Market prices; A.5 The household problem; B Proofs 233; B.1 A Paretian rank-dependent criterion; B.2 Reference-price independence; B.3 A simple proof of Arrow's theorem in an economic framework; vi CONTENTS; Bibliography

Marc Fleurbaey is the Robert E. Kuenne Professor of Economics and Humanistic Studies, Professor of Public Affairs and the University Center for Human Values