The case to broaden GDP to GPECS

Gross Domestic Product (GDP) is the leading  (defacto) measure used within macroeconomics as a proxy for performance outcomes of an economy. It is used by economists and politicians of all persuasions to purport economic success. 

For most countries it’s the major measure used to determine social health or wellbeing. If it’s going up, then the general assumption is everything else is improving too. However, it has long been known that GDP is simply a measure of transactions and has severe limitations and in some cases its use is more damaging than not.

Many key goods, including peacefulness, environmental protection , social cohesion, general wellness and family bonding, are not measured in GDP because they do not involve transactions. In fact, GDP includes pollution, crime, the health costs of cigarettes and environmental disasters as ‘growth’ because they generate spending.

GDP only counts human activities that involve the exchange of money, without any consideration of the social value of those exchanges, or even the concept of a national wealth. Worse it does not even take into account population growth , so under certain circumstances GDP can be growing while everyone's "slice of the pie" is actually going backward.

For this reason I have come up with my own measure to guide macroeconomic outcomes for an economy, this is something I branded as GPECS.

• sustainable Growth
• Productive gains
• Employment
• social Calm
• Self Sustainability

The reason I use this measure is because it fits my overall ideology of how the economy should support a nation. It is not a "new" idea, more an expansion of drivers of functional finance.

It provides a multi-disciplinary view of macroeconomic policy, which in my opinion gives a far better measure of economic success than any single metric can.

For example, the misrepresented Keynesian idea that digging holes and filling them back in or building bridges to nowhere fails the GPECS test. It may create employment and social calm, but unless those holes and bridges are needed to increase productivity then it fails the productive gains and sustainable growth tests. This is why, although I consider myself a chartalist , I am very much against scatter-gun stimulus programs.

So what are the key markers of an economy with a high GPECS rating? Well you would hope to see the following:

• Low growing real household incomes;
• Low levels of inflation;
• Improving productivity;
• Relatively low levels of private sector debt with business investment making up a large proportion of credit.
• Low unemployment;
• Low crime rate and high well-being metrics;
• Fiscal policy that provides equity to the citizenry and captures sovereign wealth.
• Long term investment that removes external national dependencies (see below).

GPECS will be talked about more in future posts, but just to clarify a few definitions above. 

Productivity

Productivity is the key to greater wealth, as an individual, a nation, and a world. Productivity is doing more with less. It is that simple. Unfortunately people often equate productivity with economies of scale and population growth, which leads to a poor understanding how economic growth really occurs.

If a farmer selectively breeds his crop so that the next generation of plants yield 5% more grain, with no further inputs required (no more water, fertiliser, harvesting time etc), then he has made a 5% productivity improvement. The output in terms of grain is 5% higher for the same inputs.

Productivity gains flow through the economy, allowing us to produce more goods over time. When other farmers follow this lead, we find that marginal land can now be used productively. We find that fewer people need to work in agriculture, because each farmer is producing more food. This frees up labour to be employed elsewhere in the economy, producing other goods to satisfy our desires.

Productivity gains normally come from two sources. The first is in the form of new inventions and innovations in the methods of production – a new engine design, a new breed of plant, a new manufacturing technique or a new material. Innovation in the methods of production is THE key driver of our prosperity.

A second way that productivity improves is through economies of scale. Even in the absence of new technology or innovation, we can produce more output with less input by specialisation of labour, and larger and more efficient capital equipment, to achieve economies of scale

So in an economy aiming for higher production you would expect to see a number of key things:

• Incentivisation in the tax system to support business investment in research and development, and therefore a proportion of business profits being re-invested to support greater production.
• A high proportion of private sector debt being used for business investment in non-financial assets.
• Key economic metrics targeting output per unit worked.

External national dependencies

A national dependency is a key input into the economy, the clearest example being energy. A country that is dependent on another nation, or a group of other nations, to provide key economic inputs is always at risk of external shock. A fundamental driver of long term economic success is the removal of these externalities either via developing their own internal capacity to deliver them, or developing alternatives via research and business investment.