ssue Brief November 2012

W
henever you read a report or hear on the news that the economy is growing, what
you are hearing is that the Gross Domestic Product (GDP) is growing. But while GDP
measures economic activity, it does not measure the distribution of the wealth created by that
activity, or the quality of our air and water, or the quality of our schools. Yet, when we hear
GDP is growing many of us believe that the country is doing beter than it was. Given that
economists, politicians and the media treat GDP this way, it is no surprise that we think this way.
In the wake of the 2007 economic crisis, state governments and
some economists are pursuing a renewed push for alternative
measurements of our national well-being. Recognizing that
persistent unemployment coupled with economic growth reveals
the divorce between the GDP and our general welfare (a point
already recognized by the developer of GDP), alternatives to
GDP are becoming more fashionable. For instance, United Na-
tions Secretary-General Ban Ki-Moon called for an alternative to
GDP to be produced at the Rio+20 conference held in June 2012.
1
Unfortunately, these alternatives are being pursued at a time
when financial actors are pushing an aggressive efort to finan-
cialize nature. From water markets to pollution markets, Wall
Street has its ambitions set on expanding into new and newly
profitable areas. By extending the paradigm of market valua-
tion beyond the market, these alternatives to GDP will facilitate
the financialization of nature, placing our essential, common
resources under the power of Wall Street bankers.
The financialization of nature is the process of replacing environ-
mental regulation with markets. In order to bring nature under
the control of markets, new commodities need to be created by
the commodification, marketization and ofen privatization of
our common resources. It is a means of transferring the steward-
ship of our common resources to private business interests.
Relying on market-based schemes to protect the environment
and fight climate change is misguided. In 2007, former World
Bank chief economist Nicholas Stern described climate change
as the greatest and widest-ranging market failure.
2
In the
wake of the largest financial crisis in 75 years, one both created
and spread by the use of innovative financial instruments, the
push to advance market-based schemes and reliance on financial
instruments to fight climate change or distribute water must
be seen for what it is: an opportunity for polluters to buy the
right to pollute and for speculators to gamble on our essential
resources. Such schemes transfer control from local communities
to external shareholders, further concentrate pollution in poor
communities and exacerbate inequality.
AIternatives to Gross Domestic Product
and the FinanciaIization of Nature
www.foodandwatereurope.org
2
A Brief History of Gross Domestic Product
The GDP of a country is the measurement of the total monetary
value of all production of goods and services within a given
country and within a given time. Rises and falls in GDP show
whether or not the total value of production within a country
is growing or shrinking. In other words, GDP is a measurement
of economic activity and is a guide to whether an economy is
expanding or contracting.
In the United States, the Bureau of Economic Analysis at the
Department of Commerce releases quarterly estimates of GDP
as well as final annual GDP measurements. These figures are
widely reported in the press and are taken as a guide to the
economic health of the country. When news reports claim that
the economy has grown or shrunk by a given percent, they are
reporting the estimated percentage increase or decrease in GDP.
Although countries have long tried to maintain records of eco-
nomic production and of national wealth, GDP is a fairly recent
development. In the 1930s, economists working for the U.S. gov-
ernment developed the National Income and Product Accounts
(NIPA), which track both the total production in the country
and the total of incomes earned.
3
Simon Kuznets, an economist
working at the National Bureau of Economic Research, was
tasked with developing the national accounts in order to provide
a comprehensive account of the state of the economy and of
eforts to recover from the Great Depression. The original set of
accounts was presented to Congress in 1937.
4

Since that time, the accounts, and GDP in particular, have gone
through many transformations and adjustments. At the same
time, GDP has grown in prominence. Today, GDP and GDP per
capita are taken not only as measures of the growth of econom-
ic output, but also as signs of the well-being of the nation.
Criticism of Gross Domestic Product
Criticisms of the limitations of GDP are longstanding relative to
its history. Simon Kuznets himself cautioned that these mea-
surements had limitations for what they could tell us about the
economic well-being of the country.
As an aggregate of the total market value of production and
services, GDP counts as positive contributions many expenditures
that are not beneficial for well-being. Some critics note that GDP
does not distinguish between the quantity of a given expenditure
and the quality of that expenditure. Money spent on alcohol and
gambling is just as good by GDP standards as money spent on
books and exercise, as Lew Daly and Stephen Posner note.
5
A further criticism of GDP is that it does not distinguish
between expenditures that contribute to social well-being and
what are called defensive expenditures. Spending on education
is an example of an expenditure that benefits social well-being.
Defensive expenditures merely try to protect the current status
without making improvements. Examples include expenditures
to clean up from industrial accidents, health care costs to treat
avoidable illnesses and health issues, and military spending.
6
One of the principle criticisms of GDP as inadequate for measur-
ing the well-being of the country is that it fails to account for the
distribution of the wealth and income generated by the produc-
tion it measures.
7
Although this can be mitigated to some extent
by reporting GDP per capita, it is still the case that even this mea-
surement obscures the true distribution of wealth and income.
Some people will receive a vastly larger share of the economic
output of the country than the per capita average, and some will
receive much less. At best, GDP per capita is a crude measure of
living standards.
8
GDP simply cannot track inequality.
9
Despite these flaws in GDP, the real issue that proponents of
alternatives fix upon is that GDP is no longer used solely for the
purpose intended. As one report states, GDP is being misused
as an indicator of something it doesnt measure and was never
intended to measure.
10
As indicated above, even Simon Kuznets
himself cautioned that GDP should not be used to chart any-
thing other than economic growth. As early as 1934, he told
Congress that [g]oals for growth should specify more growth
of what and for what.
11
In 1972, William Nordhaus and James
Tobin argued, in an essay that pioneered the alternative GDP
movement: GNP is not a measure of economic welfare. Econo-
mists all know that.
12
Indeed, even Alan Greenspan has recog-
nized this fact, stating that GDP is not necessarily a measure of
welfare or even a significant measure of standards of living.
13

While technical fixes for the way GDP is calculated could correct
some of the problems with it, the broader problem of the misap-
propriation of GDP as a sign of social well-being and progress
defies a technical fix. From economists to policymakers, news
reporters to the general public, growing GDP has become syn-
onymous with our social and economic welfare.
Lew Daly and Stephen Posner contend, [d]epending on GDP
promotes an economic model devoted to growth at all costs,
where more is equated with beter and an expanding economy
equals social progress even as average households do not benefit
3
and the critical non-market dimensions of our lives and nation
are depleted for lack of adequate investments and protec-
tions.
14
They further contend that the problem lies in how GDP
has come to play such a defining role in public debates about
economic performance and social progress.
15

The authors of a Boston University report on alternatives to
GDP agree. The real issue, beyond the technical problems of
GDP, is that GDP has been widely adopted as a measure of
something it was never intended to measure.
16
But would replac-
ing GDP with an alternative really solve this problem, or would
it contribute to the further degradation of our environment by
facilitating the financialization of nature?
Brief History of AIternatives
to Gross Domestic Product
In 1968, U.S. Senator Robert Kennedy made a speech at the
University of Kansas in which he highlighted the deficiencies of
using Gross Domestic Product (or GNP, since this was prior to
1991).
17
Four years later, William Nordhaus and James Tobin pub-
lished their paper that initiated the movement for alternatives
to GDP. Nordhaus and Tobin developed a measure of economic
welfare that was meant to begin to move beyond GDP and
incorporate broader measures of social welfare.
18
The atempt to
find an alternative grew from there. By 2000, one researcher was
able to claim that there were literally hundreds of alternative
indicator programs in use.
19
The basic purpose of alternatives to GDP is to provide an indica-
tor of social well-being or general welfare. They are specifically
meant to address the fact that GDP has been misappropri-
ated to this role. The basic components of the most prominent
alternatives, including the GPI (Genuine Progress Indicator),
follow a similar patern. They involve estimating expenditures
and weighing these estimates with inequality indices. They add
non-market benefits including various unpaid social functions
such as parenting and housework, but also public infrastruc-
ture. Deductions are then made for the defensive costs, such
as cleaning up from pollution. Degradation of the environment,
now considered natural capital, is also deducted.
20
What is
calculated is an aggregate that reflects a particular understand-
ing of the general welfare of the nation.
Perhaps the two most prominent of these atempts to provide an
alternative, at least in terms of adoption by state governments,
are the Index of Sustainable Economic Welfare (ISEW) and its
successor, the Genuine Progress Indicator (GPI).
21
The ISEW was
developed in the 1980s by Herman Daly and John B. Cobb.
22
In
1995, Redefining Progress developed the ISEW into the GPI, hav-
ing altered the methodology, but not the purpose, of the ISEW.
23
The atempts to develop alternatives to GDP have not been lim-
ited to the United States. Various world leaders including U.N.
Secretary-General Ban Ki-Moon and Connie Hedegaard, EU
commissioner for climate action, urged the Rio+20 conference
to pursue alternatives to GDP.
24
In 2008, then-French President
Nicolas Sarkozy created a Commission on the Measurement of
Economic Performance and Social Progress to investigate devel-
oping alternatives to GDP for use in France.
25
And the Organisa-
tion for Economic Co-operation and Development (OECD) has
been pursuing alternatives to GDP since 2004, working with the
World Bank, European Parliament, European Commission, and
World Wildlife Fund, among others.
26
What is important is that these alternatives seek to go further
than GDP, which is limited to calculating only those activities
that are expressed in market values. This is their major in-
novation. Non-market values such as parenting, in-home food
preparation and volunteer activities are all subsumed under GPI.
Nature itself is subsumed under the GPI as it seeks to value
water and air purification and other ecosystem services.
27
The
concern driving this subsumption of non-market values under
GPI is that these non-market values are un-quantified and
un-valued, and thereby inaccessible for policy development.
28
In
fact, for their proponents, it is this characteristic of alternatives
to GDP such as GPI that makes them capable of replacing GDP
as a measure of well-being.
4
Criticism of AIternatives
to Gross Domestic Product
As with GDP, there are many technical criticisms of alternatives
to GDP. Eric Neumayer, for example, has criticized the ISEW/
GPI model because it seeks to mesh together two incompat-
ible measurements, that of current welfare and sustainability.
29

Another criticism argues that the social factors taken as adding
to social well-being are in many instances subjective. The persons
who develop the particular index that is being used determine
what counts as having social benefit.
30
One can easily imagine
that an alternative to GDP could be developed that would reflect
fundamentally diferent values than those expressed in the GPI,
for instance. In fact, this subjective aspect of determining what
does and does not count as contributing to social well-being
means that there will likely be variations in GPI from one state to
another.
31

A newer criticism of alternatives to GDP centers on whether or
not they contribute to the financialization of nature. As argued
above, the need for an alternative is made using the point that
GDP is not and was never meant to be an indicator of social
progress or the general welfare of the nation. Thus, by focusing on
GDP in both reporting on the state of the economy and in policy
decisions, we are pursuing a narrow indicator that leaves out all
the important non-market values that make up a healthy, well-
functioning society.
Basically, GPI seeks to go beyond GDP to account for the non-
market values that GDP leaves out. To do this, it has to assign
market values to the non-market values. In a sense, it is not so
much a replacement of GDP as it is an expansion of it.
While the purpose of the alternatives to GDP is to capture the full
socio-economic efects of economic activity, the means of doing
so is to extend market values over non-market values. In other
words, the most prevalent alternatives, such as GPI, extend the
domain of the market and seek to create market values where
none exist. In order to achieve this, GPI must calculate market
values for a variety of non-market activities. These values will
then be presented as costs or prices of the non-market activities.
Only now, they will no longer be non-market, they will be part of
a renewed and expanded market.
So, for proponents of GPI, the answer to the depletion of non-
market values (destruction of forests, pollution of water, etc.)
caused by the overweening power of the market is to expand the
market to include those values. As such, the market will allocate
the newly marketized commodities based on market eficiency,
e.g., the ability to pay. An example from the water markets proves
the point: in 2012, natural gas companies seeking water for hy-
draulic fracturing outbid Colorado farmers, freezing out farms.
32

To achieve this goal of expanding market values to include non-mar-
ket values, a new universal economic measure must be developed
that subsumes those previously non-market values. GPI is still a
form of economic/market reductionism that seeks a new single
quantitative measure of a broadened understanding of the market.
John Talberth, who helped develop the GPI at Redefining Prog-
ress, admits that GPI requires natural capital accounting, or the
establishment of monetary values for a countrys environment:
Proper valuation of natural capital and ecosystem services is es-
sential to a rigorous metric.
33

It seems, therefore, that GPI will be a major part of spreading
financialization, justifying natural capital accounting, and per-
petuating payments for environmental services. Blayne Haggart
noted of GDP, Although it is an objective, positive measure of
economic growth, its use as a proxy for social welfare represents
a judgement [sic] as to the importance of market activity and
economic growth.
34
It is hard to see how this criticism does not
also apply to GPI. If use of GDP a measure of economic activ-
ity renders a judgment as to the importance of the market,
extending the market paradigm to subsume the natural environ-
ment must surely extend that judgment, even as it claims to
displace economic growth from its place of prominence.
A rigorous GPI, founded on proper valuation of natural capital
and ecosystem services, would certainly contribute to the finan-
cialization of nature. The financialization of nature follows upon
the commodification, marketization and ofen privatization of
our common resources. Strictly speaking, commodification is the
commercialization of something not generally seen as a product.
Whereas a widget is a commercial product, nitrogen pollution
has not traditionally been viewed as a commodity.
Commodification turns an inherent value into a market value,
enabling it to be bought and sold on a market. The commodities
can then be priced and a market can be created for them. Priva-
tization transfers control and management of these commod-
itized resources from public ownership to private ownership. At
this point, financialization acts upon the commodity as an asset
and applies various financial instruments to it, such as through a
water futures contract or a nitrogen credit option.
35
5
The valuations necessary for an alternative to GDP such as GPI
are the same valuations necessary for the commodification and
marketization of our common resources. In fact, the point of the
valuations made for GPI is the extension of market values over and
incorporating non-market values. GPI is not merely supportive of
financialization of nature; it is itself the financialization of nature.
AIternatives to the AIternatives
While GPI explicitly facilitates the financialization of nature,
there are other alternatives to GDP that avoid the trap of trying
to provide market values for non-market values. These non-
monetary, non-market alternatives can still help to guide public
policy and can still help us to beter understand the true extent
of social well-being in our society.
The Footprint model has grown in popularity in recent years,
so that it is now possible to calculate ones carbon footprint or
water footprint. For example, a households water footprint is
calculated from national averages of water use associated with
such fixtures and devices as shower heads, dishwashers, wash-
ing machines, etc.
36
In addition, the water used in the produc-
tion of the food you eat and the clothes you wear, as well as
the gasoline that powers your car, can be part of calculating the
footprint.
Broader calculations of an Ecological Footprint can also be
made. Ecological Footprint accounts reveal how much land and
water area a human population requires to produce the resources
it consumes and to absorb its waste. They also track how much
productive area or biocapacity is available.
37
Without at-
tempting to price the natural environment on which a countrys
economy relies, the footprint model calculates whether or not a
given country is overextending its environmental resources.
What the various footprint models demonstrate is that it is
possible to address concerns about the limits of GDP without
resorting to extending the market valuation paradigm embedded
in the GDP.
Further evidence of this is the Gross National Happiness Index
of Bhutan. Unlike GPI or other indices generated by economists,
the GNH seeks to measure happiness without reducing it to an
aggregate of market values. Assessment of GNH is done through
a survey format meant to be understandable to the general public.
It does not create market values for non-market values, it asks
the Bhutanese people themselves to assess their happiness.
38
ConcIusion
While it is true that use of Gross Domestic Product as an indica-
tor of social well-being extends GDP beyond what it measures,
adopting the Genuine Progress Indicator or related alternatives
will facilitate the financialization of nature.
Policymakers should seek an alternative to GDP not by replac-
ing it with another aggregator, but by replacing it with a pool of
measurements that, taken together, can inform policy decisions
and beter reflect our social values. In this pool, GDP can still play
an important role, especially if recalibrated so that it no longer
counts as positive contributions any economic activity for nega-
tive and defensive measures. Other potential measures in the pool
would be GDP per capita and Gini coeficients for measuring in-
equality. Added to these economic measurements, the pool should
include a non-monetary, footprint model as an alternative to GDP
that captures the environmental resources being used for the
economic output of the country or state and measures whether or
not that usage is sustainable over the long term.
By using a pool of measurements, with each member of the
pool taken as giving only that information it actually provides,
it is possible to have a clearer understanding of the social well-
being of the country or state without facilitating the financial-
ization of nature.
Endnotes
1 Rio+20 United Nations Conference on Sustainable Develop-
ment, http://www.uncsd2012.org.
2 Stern, Nicholas. Stern Review on The Economics of Climate
Change (pre-publication edition). Executive Summary. HM
Treasury, London, U.K. 2006 at i.
3 GDP: One the Great Inventions of the 20th Century. Survey of
Current Business. January 2000 at 6.
4 Ibid. at 7.
5 Daly, Lew and Stephen Posner. Beyond GDP: New Measures for a
New Economy. Dmos, 2011 at 5.
6 Daly and Posner, 2011 at 5.
7 Costanza, Robert et al. Beyond GDP: The Need for New Measures
of Progress. The Pardee Papers. No. 4. January 2009 at 10.
8 Holden, Michael. Per Capita Gross Domestic Product: An Appropri-
ate Measure of Living Standards? The Case of Newfoundland and
Labrador. (PRB 03-14E). Parliamentary Research Branch. Library
of Parliament. Ottawa. September 2003 at 11.
9 Haggart, Blayne. The Gross Domestic Product and Alternative
Economic and Social Indicators. (PRB 00-22E). Parliamentary Re-
search Branch. Library of Parliament. Ottawa. December 2000.
10 Costanza et al., 2009 at 4.
11 Kuznets, Simon. How to Judge Quality. New Republic. October
20, 1962 at 29.
12 Nordhaus, William and James Tobin. Is Growth Obsolete?
Economic Research: Retrospect and Prospect. National Bureau of
Economic Research General Series No. 96E. Columbia Universi-
ty Press. 1972 at 4. Gross National Product (GNP) measures the
total income of U.S. citizens whether that income is generated
domestically or abroad. GDP measures only domestic produc-
tion. The Bureau of Economic Analysis stopped using GNP and
started using GDP in 1991.
13 GDP: One the Great Inventions of the 20th Century. 2000 at
12.
14 Daly and Posner, 2011 at 6.
15 Ibid. at 4.
16 Costanza et al., 2009 at 7 to 10.
17 Remarks of Robert F. Kennedy at the University of Kansas,
March 18, 1968. Available at http://www.jfklibrary.org/Re-
search/Ready-Reference/RFK-Speeches/Remarks-of-Robert-
F-Kennedy-at-the-University-of-Kansas-March-18-1968.aspx.
Accessed October 11, 2012.
18 Nordhaus and Tobin, 1972 at 4.
19 Haggart, 2000.
20 Talberth, |ohn, Cliord Cobb and Noah Slattery. The Genuine
Progress Indicator 2006. Redening Progress. 2006 at 3.
21 Both the Maryland and Vermont state governments have
adopted a form of GPI to inform state policy. See http://www.
green.maryland.gov/mdgpi/index.asp and http://www.uvm.
edu/giee/.
22 Kuik, Onno. The Index of Sustainable Economic Welfare. VU Uni-
versity, Institute for Environmental Studies. Amsterdam.
23 Costanza et al., 2009 at 12.
24 Rio+20, Use Rio+20 to overhaul idea of growth, urges EU cli-
mate chief. Available at http://www.uncsd2012.org/index.php?
page=view&nr=810&type=230&menu=39. Accessed November
15, 2012.
25 Commission on the Measurement of Economic Performance
and Social Progress, http:llwww.stiglitz-sen-toussi.frlenlin-
dex.htm. In January 2010, the Sarkozy government introduced
a National Sustainable Development Strategy.
26 Costanza et al., 2009 at 32.
27 Daly and Posner, 2011 at 5.
28 Ibid. at 12.
29 Neumayer, Eric. The ISEW: Not an indicator of sustainable eco-
nomic welfare. Social Indicators Research, vol. 48. 1999 at 78.
30 Haggart, 2000.
31 See the GPI developed for Maryland and that developed for
Vermont, http://www.green.maryland.gov/mdgpi/index.asp
and http://www.uvm.edu/giee/.
32 Finley, Bruce. Colorado farms planning for dry spell losing auc-
tion bids for water to fracking projects. The Denver Post. April 1,
2012.
33 John Talberth. Measuring What Matters: GDP, Ecosystems
and the Environment. Available at http://www.wri.org/sto-
ries/2010/04/measuring-what-matters-gdp-ecosystems-and-
environment. Accessed October 4, 2012.
34 Haggart, 2000.
35 See: Food & Water Watch. Don t Bet on Wall Street: The Financial-
ization of Nature and the Risk to Our Common Resources. 2012.
36 See, for instance, H2OConserve. About the Water Footprint
Calculator. Available at http://www.h2oconserve.org/?page_
id=503.
37 Global Footprint Network. :KDW+DSSHQV:KHQDQQQLWH
Growth Economy Runs Into a Finite Planet? Annual Report 2011.
2011 at 35.
38 The Centre for Bhutan Studies. A Short Guide to Gross National
Happiness Index. Thimpu, Bhutan. 2012.
Food & Water Europe is a program of Food & Water Watch, nc., a non-prot con-
sumer NGO based in Washington, D.C., working to ensure clean water and safe food
in Europe and around the world. We challenge the corporate control and abuse of our
food and water resources by empowering people to take action and transforming the
public consciousness about what we eat and drink.
Copyright November 2012 by Food & Water Europe. AII rights reserved.
This issue brief can be viewed or downloaded at www.foodandwaterwatch.org.