I continue to be very interested in the study of highly complex organizational systems, that is, systems involving communities of people and the services they perform for each other in pursuit of collective goals. Enterprises, healthcare systems and cities are prime examples of such highly complex organizational systems.
Advances in information and communications technologies are enabling us to better understand the characteristics of these systems. We now have the ability to gather huge amounts of information about their behavior, which we can then analyze and model with powerful supercomputers. This will enable us to better design and manage them, and in general, to make better informed, more intelligent and smarter decisions.
But, in order to properly deal with these highly complex systems, we must have a pretty good idea of the kind of information we need, the values we are optimizing around and the objectives we want to achieve. While thinking about these matters, an article in the New York Times caught my attention a few months ago.
The article covered the release of a report by the Commission on the Measurement of Economic Performance and Social Progress. The Commission was chartered by French president Nicolas Sarkozy in 2008, and was chaired by Joseph Stiglitz with Amartya Sen as his chief advisor, both Nobel-prize winning economists at Columbia and Harvard respectively.The Commission was created to address the increasing concerns raised by leaders around the world about the adequacy of current measures of economic performance, which are mostly based on GDP figures. The GDP is a basic measure of a country’s overall economic output based on the market value of all the goods and services the country produces. If GDP is the primary measure available to government officials, they will make economic decisions based on optimizing or growing GDP, while paying little attention to other critical societal factors.
The report succinctly explains its objectives:
“The Commission’s aim has been to identify the limits of GDP as an indicator of economic performance and social progress, including the problems with its measurement; to consider what additional information might be required for the production of more relevant indicators of social progress; to assess the feasibility of alternative measurement tools, and to discuss how to present the statistical information in an appropriate way.”
It later added:
“What we measure affects what we do; and if our measurements are flawed, decisions may be distorted. . . . So too, we often draw inferences about what are good policies by looking at what policies have promoted economic growth; but if our metrics of performance are flawed, so too may be the inferences that we draw.”
The Commission recommended complementing classical measures of GDP and economic production with additional measurements that captured people’s well being, as well as factoring in measurements of sustainability, to help reflect the evolution of the economy into the future. It established three working groups focusing respectively on classical GDP issues; quality of life; and sustainability, and organized its recommendations around each of these themes.
First, the report recommends improving our existing measures of production, that is, the way we measure GDP itself. “The first main message of our report is that time has come to adapt our system of measurement of economic activity to better reflect the structural changes which have characterized the evolution of modern economies. In effect, the growing share of services and the production of increasingly complex products make the measurement of output and economic performance more difficult than in the past.”
The report then makes several recommendations for measuring economic activity beyond GDP, especially looking at income and consumption rather than production because they more closely reflect economic well being, that is, how well off people are. To better track living standards, the report recommends following household income and consumption in addition to aggregated measure of the economy, as well as measuring not just the averages, but also the distribution of income, consumption and wealth.
A unifying theme of the report is the need to complement measures of economic production with measures of people’s well being. This is very difficult. We know much more about measuring production that about measuring well-being. But, it is very important to come up with such measures of well-being or quality of life, so that the overall economic indicators are better aligned with common sense measurements that people care about. For example:
“Quality of life depends on people’s objective conditions and capabilities. Steps should be taken to improve measures of people’s health, education, personal activities and environmental conditions. In particular, substantial effort should be devoted to developing and implementing robust, reliable measures of social connections, political voice, and insecurity that can be shown to predict life satisfaction.”
Finally, economic indicators should not only focus on present measures of production and people’s well-being, but should also include measurements of sustainability, that is, about how those economic indicators will evolve into the future:
“Measuring and assessing sustainability has been a central concern of the Commission. Sustainability poses the challenge of determining if at least the current level of well-being can be maintained for future generations. By its very nature, sustainability involves the future and its assessment involves many assumptions and normative choices . . . The issue is indeed complex, more complex than the already complicated issue of measuring current well-being or performance . . . At a minimum, in order to measure sustainability, what we need are indicators that inform us about the change in the quantities of the different factors that matter for future well-being.”
The report is quite long, almost 300 pages. I suspect that the primary audience for the full report will be other economists. But, it offers a short, twelve page Executive Summary that makes its findings and recommendations accessible to a more general audience. A number of blogs and press articles have also been written summarizing the report’s main points . (After posting this entry, a friend brought to my attention this interesting blog on the Stiglitz-Sen report posted a few days ago in the NY Times) .
The Commission’s work is particularly timely given our ongoing financial crisis, as well as our failure to anticipate the crisis.
“Between the time that the Commission began working on this report and the completion of this Report, the economic context has radically changed. We are now living one of the worst financial, economic and social crises in post-war history. The reforms in measurement recommended by the Commission would be highly desirable, even if we had not had the crisis. But some members of the Commission believe that the crisis provides heightened urgency to these reforms. They believe that one of the reasons why the crisis took many by surprise is that our measurement system failed us and/or market participants and government officials were not focusing on the right set of statistical indicators.”
The report proposes a series of Next Steps:
“The Commission regards its report as opening a discussion rather than closing it. The report hints at issues that ought to be addressed in the context of more comprehensive research efforts . . . The Commission believes that a global debate around the issues and recommendations raised in this report provides an important venue for a discussion of societal values, for what we, as a society, care about, and whether we are really striving for what is important . . . The Commission hopes that this Report will provide the impetus not only for this broader discussion, but for on-going research into the development of better metrics that will enable us to assess better economic performance and social progress.”