In your ‘Redefining Growth’ paper you said perhaps GDP isn’t the most adequate way of measuring growth, and growth shouldn’t be just about monetary gain.
Yes, well, first I should say there’s nothing actually wrong with GDP, per se: it does what it says on the tin. GDP is a perfectly fine measure of economic output in market prices. The problem is that we tend to use GDP to equate with things like, “Are living standards going up or down?”, “Is life getting better or worse?” – then it’s a very limited measure for it. GDP also has difficulties in dealing with technology where the quality of things may be changing quickly or the price may be coming down. One example is: the day Skype was invented, the economy shrank. GDP went down. We all got poorer. But it seems absurd because Skype’s a great invention. Life got easier and cheaper – you can make phone calls anywhere in the world for free, and better still, video phone
calls, which you couldn’t have before. So it’s a wonderful invention, but from a GDP standpoint it doesn’t look good. So we need to think of better ways to measure what we think of as prosperity in the economy, and Nick [Hanauer – the paper’s co-author] and I propose that what’s creating true prosperity is solving new problems, or problems in new ways. GDP also has a limitation: it can’t separate what we would common-sensically think of as ‘good activity’ from ‘bad activity’. So when Hurricane Sandy hits New York, GDP goes up because there’s suddenly a lot of construction work to rebuild, or it can’t separate something that causes cancer or cures cancer. Yet we would view those as two very different things. So the idea of solving problems represents increases in true prosperity, so solving a problem like curing cancer or addressing climate change or more trivial things like making a crunchier crisp.
So these are effectively softer measurements, but they’re nonetheless important?
Yes. At the moment they’re softer measurements, but it may be possible to start adding some more quantitative ways of looking at them. I was looking at a nice chart of a guy who’s collected data on, “How many hours a day does one have to work for a lumen of light?” This was going back from before the Industrial Revolution where candles used to be very expensive and the average
person had to work a very long time to even get a couple of candles, to now it’s probably not hours, but minutes that most people have to work to get a lumen of light. That’s clearly a measure of progress, of life getting better, of a problem being solved in a way that takes less and less of our time. Our time is kind of our ultimate budget constraint.
Is this something that companies should be getting involved in?
I think the relevance to companies, and also to investors, is that we can ask some basic questions about, “What is the role of business in society?” and the answer that we would put forward is, “Businesses play a critical role. They’re the institutions that solve huge numbers of problems for people and for society”, and through the capitalist system, business is where innovation
happens to find new and better solutions that make people’s lives better. In some ways this goes back to an older school vision of what business was for. If you asked a CEO back in the 1950s what the goal of their company was, they probably would have said, to make their customers happy; to sell products and services that their customers want, and to make a profit doing that. In order to give customers what they want and make a profit, they have to have employees who are able to do that and suppliers and partners who can help them do that. They also need capital to do that,
whether it’s from the bank or shareholders, but they would have seen that capital as a means to that end rather than the end itself. So we think, similarly, the purpose of businesses is to solve problems for society and capital provides a means to do that, versus the vision that started coming to the fore really in the 1980s, that the purpose of the corporation was to maximise shareholder
value. We would argue that’s confusing means and ends.
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