Thursday, November 29, 2007

Robert Costanza, The Real Economy

The Real Economy by Dr. Robert Costanza

Stories about the economy typically focus on Gross Domestic Product (GDP), jobs, stock prices, interest rates, retail sales, consumer confidence, housing starts, taxes, and assorted other indicators. We hear things like “GDP grew at a 3% rate in the fourth quarter, indicating a recovering, healthy economy, but with room for further improvement.” Or, “The Fed raised short-term interest rates again to head off inflation.”

But do these reports, and the indicators they cite, really tell us how the economy is doing? What is the economy anyway? And what is this economy for?

Conventional reports on these questions are rather narrow. The “economy” we usually hear about refers only to the market economy – the value of those goods and services that are exchanged for money. Its purpose is usually taken to be to maximize the value of these goods and services– with the assumption that the more activity, the better off we are. Thus, the more GDP (which measures aggregate activity in the market economy), the better. Likewise the more contributors to GDP (such as retail sales and salaries paid to employees), the better. Predictors of more GDP in the future (such as housing starts and consumer confidence) are also important pieces of information from this perspective. Declining or even stable GDP is seen as a disaster. Growth in GDP is assumed to be government’s primary policy goal and also something that is sustainable indefinitely.

But is this what the economy is all about? Or more accurately, is this all that the economy is about? Or, is this what the economy shouldbe about? The answer to all of these is an emphatic no. Here’s why.

Let’s start with purpose. The purpose of the economy should be to provide for the sustainable well-being of people. That goal encompasses material well-being, certainly -- but also anything else that affects well being and its sustainability. This seems obvious and non-controversial. The problem comes in determining what things actually affect well-being and in what ways.


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