History
Economists have long recognised the fact that the GDP is misleading as an indicator or even as a proxy of the welfare of a nation, let alone as a measure of people’s well-being, although the makers of economic policy commonly think to the contrary. This problem already became apparent in practical economic policies in most industrialised countries in the early 1970s. The most famous examples of this development is the MEW index developed by William Nordhaus and James Tobin in their Measure of Economic Welfare (MEW) in 1972, the Japanese Net National Welfare (NNW) indicator in 1973, the Economic Aspects of Welfare index (EAW) index of Zolatas in 1981, the ISEW indicator of Daly and Cobb in 1989 and the UN’s human development index, or HDI, in 1990. They are all based on neoclassical welfare economics and use as the starting point the System of National Accounts (SNA). The basic idea behind all these approaches is the inclusion of nonmarket commodities, positive and negative, to yield an aggregated macroindicator in monetary terms.
The EAW index, applied to the United States for the period from 1950 to 1977, showed that the economic aspects of social welfare are a diminishing function of economic growth in industrially mature, affluent societies. The percentage increases in social welfare over time are smaller than the corresponding increases in the GDP, and are diminishing. When the elasticity of the EAW/GDP ratio reaches zero, economic welfare will have attained its maximum value. Beyond that point any further increase in the GDP would lead to an absolute decline in economic welfare.
The ISEW was originally developed in 1989 by Herman Daly and John B. Cobb, but later they went on to add several other "costs" to the definition of ISEW. This later work resulted yet an other macroeconomic indicator Genuine Progress Indicator (GPI): see sustainability measurement. The GPI is an extension of ISEW, that stresses genuine and real progress of the society and seeks especially to monitor welfare and the ecological sustainability of the economy. The ISEW and GPI summarise economic welfare by means of a single figure according to same logic as GDP summarises economic output into a single figure. Beside economic issues, social and environmental issues in monetary terms are included.
Read more about this topic: Index Of Sustainable Economic Welfare
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