Nobel Economists Gather to Discuss Direction of World Economy

A captain steers his ship using a compass. If the compass has become magnetized and no longer points north, the ship is likely to get lost. Likewise, governments use metrics and indicators to adjust policy to try and steer their economies. They depend on these metrics for reliable and meaningful guidance toward the direction that serves the greater good.

Gross domestic product (GDP), which measures the overall level of economic activity, has been the key indicator of growth which has long been considered the goal of economic policy. In recent years though, with multiple crises impinging on our world, many of which were created by ourselves, thoughtful people have suggested that maybe our course needs correction and maybe GDP growth no longer reflects what is most needed in our quest for economic progress. What kind of world are we striving for, and what measures can help us identify whether we are moving closer or further away from that goal?

What is it exactly that we are trying to grow? To what extent does GDP growth measure well-being, and what other metrics might more accurately reflect it?

The fact is, GDP makes no distinction between activities that enhance quality of life and those that diminish it. For example, expenditures related to recovery from a disaster or a crime are included as part of GDP, while all activities that take place within households, as well as actions by volunteers are excluded. It also includes the depletion of natural capital as income.

In 1972, Bhutan made Gross National Happiness its key indicator. Results are compiled by means of a nationwide survey.

Last week, a group of Nobel prize-winning economists met, for the fifth time, in the German town of Lindau near the Austrian and Swiss border. This year’s meeting featured a special guest, German chancellor Andrea Merkel. Joining the notables are young economists from 80 countries, hoping to learn, become inspired, and perhaps reflect deeply on what role their science might play in shaping the future.

Merkel, who has championed austerity, challenged the group. “Why were the economic sciences in the past several years of crisis so badly off the mark in terms of predicting or describing economic reality? Were the underlying economic theories wrong, or were we listening to the wrong people?"

She was referring, of course to the financial crisis of 2008. She also asked the group to consider new economic indicators that might be more useful in defining “the good life,” than GDP or unemployment rate. Germany has established a commission to study “growth, prosperity and the quality of life.”

Also in attendance was Joseph Stiglitz, who was also on the German commission. Stiglitz, a former head of the World Bank, has repeatedly challenged the establishment, raising issues of inequality well before it became fashionable to do so. Stiglitz reminded the group that 95 percent of the income gains in the U.S. went to the top 1 percent over the past few years, while median incomes actually went down. Inequality is strong in Europe as well, but less so than in the U.S.

Alvin Roth, another Nobelist, said that non-economists need to understand that economists don't always have solutions to economic or social problems. "Economics is a very young science,” he said. "We're still learning, the environments change, the challenges change."

The debates continues. What is the best approach? Outside, protestors lined the streets carrying placards decrying the current state of affairs: "Austerity blasts Europe," "Economic growth versus sustainability," and "Is ethical thinking foreign to economics?"

One thing that the economists seemed to agree on is that austerity, a favorite of conservatives both here and in Europe, would not work -- a position that the data seems to support.

The Organization for Economic Cooperation and Development has established a Better Life Index, an interactive tool that was launched in 2012. The index is comprised of 11 categories that include: housing, income, jobs, health, work-life balance, community, safety, governance, education, environment and life satisfaction.

What are your thoughts on economic indicators? What signposts would you like to see put in place to guide us to a better world?

Image credit: Refmo: Flickr Creative Commons

RP Siegel, PE, is an author, inventor and consultant. He has written for numerous publications ranging from Huffington Post to Mechanical Engineering. He and Roger Saillant co-wrote the successful eco-thriller Vapor Trails. RP, who is a regular contributor to Triple Pundit and Justmeans, sees it as his mission to help articulate and clarify the problems and challenges confronting our planet at this time, as well as the steadily emerging list of proposed solutions. His uniquely combined engineering and humanities background help to bring both global perspective and analytical detail to bear on the questions at hand.

Follow RP Siegel on Twitter.