Alternative Ways To Measure Prosperity


After coming to the conclusion that our current way of measuring the health of an economy using GDP is insufficient at best, it is natural to have a look at the alternatives.

There is consensus that in order to create a framework that more accurately values the things that are thought to increase quality of life, one needs to include natural, social, and human capital along with economic capital. This means adjusting traditional accounting systems for things such as opportunity for entrepreneurship, safety and security, education, degradation of natural resources, health, and personal freedom, all of which obviously are essential for a decent quality of life.

Here are some alternative ways to measure prosperity.

Alternative Ways to Measure Prosperity

Adjusted Net Savings

The World Bank has calculated the costs to natural capital for 20 years already, and have made a measurement called Adjusted Net Savings (ANS), which ”measure the true rate of savings in an economy after taking into account investments in human capital, depletion of natural resources and damage caused by pollution”. While the ANS is one of the better measurements, as mentioned in a previous article on this topic, it still falls short of including social capital.

Genuine Progress Indicator

The Genuine Progress Indicator (GPI) is another alternative, developed by the think-tank, Redefining Progress. GPI differs from adjusted net savings in two main ways: (1) it focuses on an adjusted measure of consumption, rather than on savings and (2) it includes many more categories of adjustments. The most unique, and controversial adjustment is to personal consumption expenditures for income distribution; more equal income distributions increase the GPI, while less equal distribution reduces it. Further, the GPI adds or subtracts categories of spending based on whether they enhance or detract from national well-being. In 2004, for example, $1,4 trillion is subtracted for cumulative CO2 emissions. Per capita GDP in the US was $36,595 while the per capita GPI was estimated to be $15,036.

According to this indicator, not only do traditional accounting measures such as GDP considerably overstate the health of the economy; in several years since the 1970s, per capita well-being has actually declined. In those years, declines in income equality and leisure time, coupled with increases in cost of crime, pollution, and other social ills, have more than offset the increases due to larger levels of economic activity and increases in socially productive activities such as volunteerism.

Legatum Prosperity Index

The Legatum Institute’s work on including and balancing various adjustments to traditional ways of measuring welfare is probably the most interesting current alternative to GDP. Extensive research has been done to develop a comprehensive evaluation of the various forms of capital, resulting in a score that aims to measure true prosperity. The Legatum Institute also points to the interesting aspect of using this model to unveil possible socio-economic reasons for countries’ varying performances and conflicts. For instance, African and ex-Soviet countries have remarkable resources in social capital, but suffer from poor governance and corruption, therefore failing to allocate the riches equally, which hinders prosperity.

Further, Asian countries such as China, Saudi-Arabia, Vietnam, Thailand, and Malaysia might have strong economic growth, but are among the worst in the world at safeguarding personal freedom.

The continued pursuit of economic growth without challenging what it comes at the expense of is indeed worrying. While it may be argued that measuring social and human capital is never going to be an exact science, there is clearly a need to value the things that make life worth living, not just the cash in your pocket.

What are your thoughts?

About the Author Carl Frederik Kontny

Carl Frederik Kontny holds a BSc. in environmental science, policy, and management from the University of Bergen and a BSc. in economics from the University of Oslo. While originally from Oslo, he has lived both in Minnesota and in London before returning closer to home to attend a MSc. in energy economics at NMBU, just outside of his hometown. Carl Frederik has a special interest in energy policy and ways to effectively integrate the value of natural, social, and human capital when measuring economic growth and prosperity.

Leave a Comment:

Nathan Shaw says January 21, 2013

If the drive and desire that people show for attaining money could switched to either generating social, human or natural capital then a switch to a sustainable way of life, not dominated by the constant want for more, is entirely possible. The problem lies in the time it will take for this shift to evolve.

    Carl Frederik Kontny says January 24, 2013

    Thanks for you comment! I think people will always want money in varying degrees, mainly because of what the money represents or the things that can be obtained by spending that extra cash. Now, while some want money just for the money and the status that entails to some, most people desire money because it allows them to live in a place with beautiful surroundings, go to school where they want, not having to worry about health insurance, provide for their families. This is why policy mechanisms that change what governments and businesses strive for is essential; it gives security, personal freedom, health&education etc. a value that is taken into consideration when looking at how well an economy is doing. Changing this doesn’t necessarily mean convincing people that they shouldn’t strive for more money, but it requires political will to recognize the value in functioning ecosystems and people’s well-being.

Judy says January 28, 2013

Carl, thanks for posting the comparative overview of these three different “prosperity” measures. I would like to know more about the specific criteria of the Legatum Prosperity Index–what are the specific forms of capital that correlate with which specific socioeconomic effects? Clearly, “safeguarding personal freedom” is a Western democratic value. The values that underpin a particular index should be explicit; transparent. From what you posted, I would be partial to the GPI, which implicates social justice criteria. Are there other indices that have credibility and are being used, and who uses them? There is an obvious problem with multiple, competing standards in effect—but still better than no alternative to the GDP.

    Carl Frederik Kontny says January 31, 2013

    Thank you for your thoughtful response.The Legatum Institute seeks to expand on traditional accounting systems, that is GDP, and include 89 variables spread across 8 sub-indices, each of which has been identified as a foundation of prosperity. As you point out, some of these are typically thought of as values in a Western democracy. Then again, you may argue that so is economic growth in itself, and this leads to a whole other, very important discussion of whether the Western idea of development is even desirable in other cultures and countries. I do not, however, agree that safeguarding personal freedom is something only Western democracies value. Nor is the failure of corrupt governments in letting the riches of its country benefit its people beyond the elite. Finally, the desire and necessity of a healthy environment to live in can hardly be doubted as a universal component of well-being. Have a look at for full methodology and for key findings in 2012.

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