Author: Arun Subramanian.
Does the economy exist for people, or do people exist for the economy?
The COVID-19 pandemic has been a global economic event and game changer, comparable to some of the most challenging milestones of this century. We have seen the level of panic manifest in the public when people hoarded toilet paper, sanitizers, food, and health relevant articles including medical devices. The period from February has been the beginning of exclusive focus on essentials to the point where virtually nothing else was consumed.
Almost half a year after staying indoors, managing work and family, producing and consuming only what is needed, as a society, we are faced with an important question—
Have we built an economy that is grossly unessential?
Constitution of an economy
An economy is groomed into robust health when a balance is maintained between production and consumption on the one hand, and a nourishing ecosystem with healthy people on the other. The central question we explore in this article is:
Does the current measure of economy include production, consumption of goods and services coupled with the fundamental aspects of the world around us (nature and people) ?
Unfortunately, the answer is that it doesn’t; production and consumption of goods alone form the focus.
Capital in this world can be considered under three major categories, with each being equally important and a balance between them being the basis for a healthy economy.
Since the existing measure of the economy is based on the unreliable indicator of the behavior of consumers and organizations, an alternative measure is proposed, one that is wholesome, considering factors beyond just the obvious indices of production and consumption of goods and services.
Consumption pattern so far
Annie Leonard₁, the sustainability champion discovered that among the materials flowing through the consumer economy, less than 1% remain in use 6 months after purchase. The impact is very profound – raw materials are being consumed faster than they can be replenished, labor and energy expended to produce and transport to the consumer who will use the articles at most for a couple of times, before it is dispatched to its final destination—the landfill.
Obsolescence of a product is predominantly triggered not based on shelf life alone but on account of boredom – the product is no longer exciting – and one seeks a change and replacement with a newer product. In certain cases, it is because products go out of fashion and are hence discarded. On very rare occasions, products are replaced on account of wear and tear. This pattern of consumption is also a part of the consumer’s awareness, but, immediate gratification of wants takes precedence, resulting in impulsive buys. It could also be a perceived feeling of self-in-adequateness since we don’t possess those goods yet, thus driving us to consume beyond needs. As a society, we have been nudged very cleverly by product companies and their advertising agencies to demonstrate mindless consumerism as a dominant behavior, even though excessive consumption is not at all a true sign of prosperity and happiness.
Role of Organizations
Organizations play a central role in the economy as the producers of goods and services, supported by humans in the production chain. They have existed with two mottos guiding their activities—maximization of profits, and maximization of shareholder value.
As a human is mortal on this earth, so are organizations. It has been observed that the average life expectancy of a Fortune 500 company is 50 years (Corporate Foresight by Rohrbeck Rene₂). A McKinsey₃ study has revealed that this has come down to 18 years. Recent mortality rates are even higher. They possibly fail in the test of endurance, do not live up to their potential, and are therefore put to death much earlier. Evidence for premature deaths in a study by HBR₄, point to organizations’ failure to focus on humans within. Forgetting they are a community of humans in business, organizations go wrong fundamentally by placing their focus solely on goods and services. Humans are a capital, not a resource. But humans are commoditised by organizations, and this leads to unjust actions such as workforce reduction when challenged with stagnation in growth or when the economy is passing a through recessionary phase.
Even for organizations with longer lifespans, a state of maturity, reflected by plateaued growth, sets in as a part of natural order. Most organizations see this maturity as stagnation, which brings negative connotation and is hence undesirable. Organizations which have existed for the long haul harmoniously adapt to these changes, including changing their businesses. Unfortunately, most organizations do not adapt this way, and are expected to operate in a perpetual growth phase, without any form of innovation. This does not succeed, obviously, and when faced with failure, the axe falls on the people who made the organization successful in the first place i.e. the employees—they become resources or a commodity, and are no longer considered capital. This distinction in how they are considered by the economy is central.
Measurement of performance of an economy
Success or failure is determined by a measuring index that passes judgement. Economies of countries are measured and assessed primarily by Gross Domestic Product. Traditionally GDP is measured in terms of the value of goods and services produced in a country in a given period. Assuming all that is produced is also consumed, GDP states the spend in terms of consumption. It literally gives you the nation’s annual bill.
GDP, for instance, includes consumption (sales) of automobiles in a country. But it does not account for the degeneration of the environment as a side-effect of production, or for the pollution caused when these automobiles are driven.
As a second example, consider the manufacture and sale of cigarettes. The revenue generated is enormous, and contributes handsomely to the GDP of the producing nation. But the environmental hazards of production and health hazards of consumption are completely ignored in this measure. If, citizens affected by smoking get treated by a doctor or in a hospital, the hospital bill or doctor’s bills and pharmacy bills add to the GDP.
In India, a drive along the rivers Ganga or Yamuna in the industrial belt of Uttar Pradesh, shows the tonnes of waste and effluent by-products from several industrial units being emptied into the flowing rivers, or dumped onto barren lands. The air around is heavy and smoggy every winter. GDP does not indicate this adverse impact.
The services offered these days include an assortment of digital contributions which are virtually presented, including online news channels, e-papers, online consulting and online education; but, their value is not included in the computation of GDP.
GDP as a measure does not reveal the inequalities of consumption. A country can have a good GDP, and yet vast majority of its citizens could be struggling to make ends meet. The GDP as an index in this case, does not articulate the complete market size and becomes an incomplete measure, if not an incorrect one.
In abnormal times such as wars or pandemics, deducing economic health of a nation based on GDP gives a wrong index of performance. The choice between life and livelihood gets biased in favour of the latter, because of an obsession for the index’s value and the narration thereof to stakeholders (lenders, organizations, business analysts, media). The asymmetry between produced capital, human capital and natural capital, that builds up, goes completely unrepresented in the GDP index.
Alternative measurement indices
We must seek to understand and measure how a country as an economy is faring socially & economically. This includes taking cognizance of
- How well are basic/essential needs of the public managed ?
- How are industries faring with impact on environment, ecology and people ?
- How is the government serving its people ?
A single index will not convey these parameters for a country/economy.
A proposal is presented. The first point (from above) will be measured by the Essential Consumption Index, while points 2 and 3 will be measured by the Inclusive Wealth Index₅. Both indices are considered in detail in the forthcoming part of the article.
Part 2 available here
- Corporate Foresight – Roehrbeck Rene
- We Are Like That Only – Rama Bijapurkar
Arun Subramanian is an independent advisor working with multiple start-ups and angel investors, providing them with strategic consulting for product development and business process efficiency since August 2017. Arun has 20 years of global experience building enterprise-grade solutions with BaaN and with SAP. (View More)
4 thoughts on “Measuring Purush(ARTHA) – a Purvapaksha of Economic metrics – Part 1”
Very good question.
There is no doubt that GDP is absolutely a wrong measurement for the progress of a country not even as a parameter of economic progress since it takes into account all those products and services where money transactions take place.
I would like to suggest that the only purpose of a measurement is to drive the constituents for corrective action.
On a slightly different note I tried to develop an alternative measure of development of a country or region.
Assume that all the current negatives currently prevailing in the society are eliminated- no drug abuse, no junk food, no alcohol or cigarettes, no crime, no corruption, no accidents, no pollution no malnutrition etc. What will be the inevitable result- higher longevity!
To my mind every country should strive to take all those actions that help increase longevity
Wonderful dahrmics view. Here the main question is of international standards. We also have lots of distance and area measuring units but no one has today in use. So how to get international standards fame???
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You brought out the issues very well in a thought provoking way. Why should there be a measure of GDP at all? What if we as a country say we dont measure our GDP?