Gross Domestic Product has long been criticized as a flawed measure of the strength of an economy. But as technology topples the core economic assumptions of our society, GDP is rapidly becoming a completely broken metric.
So what should replace GDP as an easily expressed yardstick for our economy and society? How should we measure the economy and its progress on the back of the Internet, on-demand services and the social reputation economy?
Economists and sociologists have floated countless alternative metrics like Gross Output, or the Genuine Progress Indicator. The most creative answer, to my mind, remains Bhutan’s Gross National Happiness concept. That said, I have a different, and somewhat counterintuitive, proposal. I think we should measure energy consumption per capita.
First, some quick history. GDP, which measures the value of finished goods and services produced within a country, was born in the late 1930s out of the Great Depression and, to a lesser extent, World War II. After the Depression, there was understandably a huge interest in being able to measure the economic health of a country, and during World War II, GDP also served as a useful propaganda message for the U.S. to express its economic might relative to other countries.
GDP was useful for quite some time. But there have long been many well discussed flaws with GDP as a single measure of the economy. It doesn’t account for all sorts of variables that materially impact standards of living, like health, wellness, wealth distribution or environmental impact. Because it treats spending similarly, GDP sees things like dollars spent on prisons as a positive for society when it is arguably something society should aim to reduce.
Even more crucial to our era, as technology makes it easier for humans to interact, share and trade with each other in non-cash goods, the relative value of the cash economy, which is what GDP measures, should decline as a percentage of all goods and services traded.
As cash becomes less valuable, consumers will choose to spend less of their time in the traditional workforce earning it. (You can read my previous column on the topic here.) Labor force participation will also drop as technology replaces some types of jobs.
The value of human participation in the measured cash economy and the impetus to participate in the cash economy are weakening. But that doesn’t necessarily mean that trade, interaction and standards of living are on the decline.
Technology may decrease overall consumption dollars while still making people more satisfied and better off.
Uber and Lyft could lower how much people spend on transportation by driving down prices and cutting into demand for cars. But that could be a positive for society if humans do more and are similarly satisfied.
Snapchat, Facebook and Netflix may be having a similar large, unmeasured effect. These services offer a less expensive form of entertainment per hour than Hollywood films, plays or TV. But if people are more satisfied using them, they are better off because of them and that should factor into some reflection of progress.
So, assuming that there is value to being able to benchmark some sense of the macro economy, what should we use? I think energy consumption per capita is a good metric.
If we had magically solved a host of other issues constraining human progress, such as poverty, hunger and war, energy would be the one thing holding us back. For that reason, it seems like the unit most worth optimizing.
The more energy we had at our disposal, the faster we could conduct massive experiments, harness computing power and build propulsion systems for every man, woman and child in the world.
It’s also one of the few metrics that is timeproof.
It is extremely hard to compare our standard of living to that of people who lived one hundred years ago, let alone five hundred years ago. But energy consumption is generally measurable and fits our sense of progress in the West, where the Industrial Revolution shot forward energy consumption per capita in the early developing nations like England, and standards of living rose quickly in historically energy rich countries like the U.S.
Between 1820 and 1920, energy consumption per capita rose fastest worldwide in the few decades following World War II, and there has been relative stagnation since the 1970s according to the US Energy Information Administration.
Increasing Efficiency
There are two obvious issues with talking about energy consumption as the yardstick for our society and something we should celebrate driving up. The first is the environment.
I am an environmentalist, and I absolutely believe that global warming is a real and imminent threat to our world. If we want to strive to drive up energy access and consumption per capita globally going forward, we need to get global warming under control immediately. If we don’t get it under control, we will be massively hampering our ability to drive up energy consumption in the future.
So it is pretty clear that in certain countries, more clean energy is critical for growth. We need to be able to consistently produce energy without the externalities that will destroy our economy.
We shouldn’t aim to curb carbon emissions by curbing energy use, however. Limiting or rationing energy per capita is not a long-term reasonable answer for us as a planet. We need to get the immediate global warming situation under control by investing in technologies like nuclear and solar and developing new ones to harness the infinite energy embedded in the universe around us.
The second problem with using energy consumption as a yardstick is efficiency and the difference between producing and consuming energy.
Generating more or less energy doesn’t mean that we are using it well, and that’s why it is important that we focus on energy consumption per capita—namely, energy that people are using efficiently.
In 2013, the U.S. used about 39 percent of the energy we generated (38.4 Quads out of the 97.4 Quads), according to a Lawrence Livermore National Laboratory Energy report.
The gap is largely attributable to the fact it is hard to match energy supply and demand in time and space. We need to move energy from where it is produced to where it needs to be consumed, and you can’t shut off a power plant when demand is low. Both of these facts drive a great deal of structural inefficiency. It’s also the case that the percentage of produced energy we are harnessing isn’t improving. Clearly, this is a challenge we will need to overcome and a big opportunity for greater efficiency and growth.
There are other unresolved issues with this approach, in particular, how we measure per capita energy consumption and how we get people access to more power.
But at a high level, as technology dramatically changes how we interact and trade, energy is the best indicator to describe change over long periods of time. Our great great great grandchildren won’t have a sense of what a dollar was, but they will know what a joule is, and I hope they have access to as many joules as their hearts desire.