Tuesday, May 24, 2011

OECD Better Life Index Versus GDP

So, the Organization for Economic Cooperation and Development ("OECD") has come up with a new "Better Life" index upon which to compare countries. Certainly, it is an improvement over GDP. However, I think we must judge this effort as a partial failure to the extent that what is trying to be produced is an alternative to GDP that will actually be reported by the media.

First, it simply is too complicated. When I go to the OECD Better Life Initiative web page, it asks me to rank 11 areas in terms of relative importance to me. I am simply not sure I am fully up to the task. As in, if I were to do a ranking, I am not fully confident in my own answers in terms of my own preferences. What sort of concrete tradeoffs are entailed by a given set of answers? How comfortable would I be with a given ranking if it actually had some sort of impact on my life?

Second, and worst of all, at the end of the day, this measure has no chance of replacing or supplementing GDP as an item that is reported by the media. You can see what the OECD has done here. They have bought into the idea that it is improper to make any sort of value judgments, and therefore have decided that it is up to each and every individual to make his or her own ratings so as to produce individualized country rankings. But this idea fails on two levels. For one, OECD already has made value judgments by deciding that there are 11 categories that matter and that these are the categories that must be weighted and implicitly traded off against each other. For another, GDP is at least a shared social measure, so it is likely to be reported in the media. So, the people behind this OECD category have decided to sacrifice the idea of a shared social measure of well-being to the god of false objectivity. Worse, they haven't really gotten anything in return. They have failed to really eliminate important value judgements, their total focus on individual rankings notwithstanding. The people behind this simply have failed to bite the bullet here and recognize that it is necessary to exercise some institutional judgment and actually produce a single number that rises and falls in a manner analogous to GDP.

It didn't have to be this way. The OECD could have come up with a single number that could be reported by the media and still provided the capability of people to make their own indexes. What they have produced instead is a complicated tool that is practically guaranteed to have minimum impact.

The problem with GDP is that it is at core a subjective measurement that is masquerading as an objective measurement. What is subjective about GDP? What is subjective is that someone decided that the component things that make up GDP were worth measuring and aggregating together into a single measure in the first place. What is subjective is the judgment that the resulting number itself has some sort of meaning. So, it is not as though GDP is objective. One might say that the data that goes into GDP is objective. But the idea that aggregating this objective data and reporting on results is something that is meaningful and important is subjective.

The OECD did not have to sacrifice this project at the altar of objectivity. The main competitor, GDP, is not itself objective.

You simply cannot avoid subjective measurement here. What is important is to acknowledge it and deal with it explicitly, not try to avoid it. So, what the OECD should have done is use their best judgment to come up with a single number that can expand and contract, just like GDP does. They should then allow individuals to alter the various weights of individual criteria to produce their own numbers if they like, but there should have been one number for each country that is released periodically and that can easily be reported by the media.

I appreciate this effort as a first stab at this very challenging problem. But it must ultimately be judged as a failure in terms of producing a viable alternative to GDP that will be reported by the media and thus have much of an impact in improving how we think. I do not imagine that any but the most curious individuals will come to use the Better Life Initiative tool to calculate their own individualized rankings.

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