Welfare is a Stock, GDP is a Flow

I am not exactly sure if I heard him say it in his talk on 6 May 2021 as part of a series broadcasted by the Oxford Martin School, or if I read it in the first pages of his review, but it did provoke a train of thought, Sir Partha Dasgupta’s statement that “Welfare cannot be measured by GDP, since Welfare is a stock and GDP is a flow”. When you measure welfare with GDP, you are actually saying that the only thing that informs us about our welfare is what we produced last year. As if all the tangible and intangible assets we already had are of no value at all. 

I decided to draw a stock-flow diagram of the statement, in which the arrow represents a flow, which adds to the stock, represented by the rectangle:

Welfare is a stock, GDP is a flow

The diagram shows how GDP contributes to welfare. It also places our assets at the center, thus highlighting the importance of maintenance and repair. 

Before I continue, I want to tell you something about the way welfare is approached in Dutch economics education. The Dutch make a distinction between welfare in the narrow sense of the word and welfare in the broad sense of the word. We call the broad welfare concept, well-being, to distinguish it from welfare in the narrow sense. So, when I think of welfare, I, as an economics teacher, have the tendency to think of welfare in a narrow sense, being defined by GDP per capita. Which is very narrow, I must admit.

What I found is that in my son’s A-level book, this distinction is not made. (Economic) welfare is defined as “the level of well-being or prosperity or living standards of an individual or a group of individuals, such as a country”. Since Sir Dasgupta is professor emeritus at the University of Cambridge I assume he does not make the distinction either. So, when he states that welfare is a stock, he must refer to well-being also. 

For a while, this put me off a little, since, given the definition I grew up with, I thought of welfare as tangible assets, like buildings and roads and kitchen appliances. But further on in the article, I read ‘health is an asset’, which is clearly intangible. Health is seen as a part of human capital. 

Why I thought this is interesting to write about, is because when you see welfare as a stock, and you consider the different parts of that stock, it allows for a whole new train of thoughts, namely: How to keep assets up to date, and in good shape. Like I said above, it highlights the importance of maintenance and repair. This raises the question: “How well does GDP contribute to maintenance and repair of our assets, our welfare?” 

Now, you must agree with me, this is a whole other ball game. I feel, with just this small statement, Sir Dasgupta changed the rules of economic performance. And in my opinion, he changed them in the right direction – to cherish what we have.

Let’s think a little more about health as an asset. You can probably answer what contributes to it and what does not. You will likely have quite a clear notion of what is detrimental to it. Now, if you next look at GDP, ask this question again: what contributes, what is detrimental. 

I came up with things like:

  • My personal healthcare: do I get enough sleep, do I get enough exercise, does my food contribute to my health, do I take precautions when the solar power is high?
  • The environment I live in: what is the quality of the tap water, how healthy is the air I am breathing?
  • My mental health: how do I handle anxiety and stress, do I keep exposure to sources of anxiety and stress within limits?
  • The healthcare industry: do I have healthcare available to me when I cannot manage myself, like when I break my wrist or burn my ankle?

You may have noticed that the above is a combination of things that do contribute to GDP, like the food I buy, and the Pilates subscription I have, and some things do not, like the amount of sleep I get, the walks I make, the times I decide to take my bike instead of the car (both assets). Did you also notice that GDP can either have a positive or a negative contribution to my health? Negative, when there are traces of medicines in the tap water, or when there is air pollution. This means I have to draw the stock flow diagram as follows:

GDP, or unsustainable activities underlying GDP, also subtract from Welfare

In this diagram I also used an outflow, represented by the outgoing arrow. An outflow distracts from the stock. An example could be an old historical building which is well maintained. This building is an asset which many would argue adds to our welfare. Maintenance of this building keeps it in good shape, so this is an ingoing flow, upholding our welfare. However, acid rain is doing damage to the building. Acid rain is – through the enhanced greenhouse effect – caused by greenhouse gas emissions, which are caused by productive activities, contributing to GDP. Thus these activities are distracting from this asset – the outgoing arrow.

Now, I am not getting any younger – fantasizing about it, but that does not make it a reality -, and the same counts for buildings, roads and kitchen appliances, so I also need to add depreciation to the diagram. This is the distinction between Gross and Net Domestic Product.

I like to leave it at this. Although new questions are already popping up in my head, I like to muse a little longer on this concept of welfare at the center stage.

henny@21steconomics.org – You can also find me on LinkedIn

Image by jwvein from Pixabay