The CSR Newsletters are a freely-available resource generated as a dynamic complement to the textbook, Strategic Corporate Social Responsibility: Sustainable Value Creation.

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Monday, March 19, 2018

Strategic CSR - GDP

The article in the url below is a great example of why there needs to be more economists engaged in the CSR debate. On the surface, the article is a review of a recent book by David Pilling of the FT, Growth Delusion, that argues against GDP as a measure of national economic wellbeing:
 
"Like most other offerings in this genre, David Pilling's 'The Growth Delusion' celebrates the predicted demise of our headline measure of how well the economy is doing—and along with it the end of Western capitalism's obsession with 'endless' production and consumption."
 
The reviewer rebuts the charge that such weaknesses have been ignored by economists, instead suggesting they are well known:
 
"From the start, prominent critics underlined the failure of GDP to account for the environmental costs of economic growth, a theme struck most forcefully in the 1972 Club of Rome report 'The Limits to Growth.' Less prominently, although no less accurately, feminist scholars highlighted GDP's failure to account for economic value created in the home—which meant that post-1950s GDP and productivity growth statistics were flattered by the new tendency of women to take paid work and purchase items such as microwaves and ready meals. … The people who work with GDP data know, far better than most, how much uncertainty arises from compiling the statistics, seasonally adjusting them and comparing them over time or across countries."
 
The environmental harm of our current economic model is, of course, well documented. There are other interesting questions raised in the review, such as whether there is any measurable improvement in the economy by "merely shifting the economic value of production in the home into the marketplace." The reviewer's point, however, is that it is easy to criticize. The challenge, of course, is coming up with a better measure that serves our economic needs more effectively. And this, according to the reviewer, depends on how you respond to this central question:
 
"Is economic welfare better served by a high level of output and consumption or is it necessary for it to grow?"
 
The reviewer builds the compelling case that, in order to consider dethroning GDP as our primary measure of economic activity, it is important that critics understand what it actually does and why we focus on change in GDP, rather than overall GDP. To this point, the reviewer raises what she thinks is the crux of the debate:
 
"In other words: Why does momentum matter? Portugal and Greece have similar levels of GDP per capita now, but after 2007 Greece had a massive boom and then a bust. Greeks have had the extra interim output, but it is not obvious they have had the better experience. The point about Japan is similar: At its level of prosperity, does it need more growth? Is it terrible to be a rich, contented, safe country, where people have long life expectancy, a magnificent culture and high quality services, simply because the chosen measure of total economic output is static?"
 
The answer to this question is central to understanding what GDP does and is, therefore, a direct critique of the title of the book under review:
 
"The answer lies in the fact that GDP—or any alternative aggregate measure—aims to encapsulate the constant innovation and betterment of life driven by competition in market economies. No single number will do it perfectly. Indeed, a new critique of GDP recently has joined the old ones—namely that it fails to capture the role of new technology in our increasingly digital economies. The concept of GDP, an aggregate measure of output at market prices, does not account for all the value of innovations. Yet over time an increase in GDP is the result of innovation, and so to argue against growth is to argue for an end to innovation. Those who think growth is 'delusional' need to explain what they think should be taken away from people when a new product or service they want comes along, to prevent GDP from growing."
 
In other words, it is not that GDP implies growth when there really is none (i.e., a "Growth Delusion"), but that it captures innovation and creativity in a society. In other words, it captures progress in its widest sense. If progress equals 'value-added,' then an increase in GDP is an imperfect measure of the growth in overall value created. This review acknowledges that GDP is imperfect, but also that it has so far turned out to be the best measure we have of value creation, society-wide. As such, proposed changes should be incremental, based on this core understanding of what GDP is and what it does, rather than the radical reform that is suggested by the book being reviewed, or other high-profile projects, such as the move to measure Gross National Happiness (http://www.grossnationalhappiness.com/).
 
Take care
David
 
 
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Dismal Statistics
By Diane Coyle
February 5, 2018
The Wall Street Journal
Late Edition – Final
A15