Inside the Ethical Markets Quality of Life Indicator
Statistics always lag the real world, falling further behind as global change accelerates. The data from the Ethical Markets Quality of Life Indicators (EMQLI) help interpret the new politics of statistics and the proliferating debates about indicators and indexes of our national wealth, progress, health, and well-being: debates about the “chained CPI” and whether the Consumer Price Index (CPI) overstates inflation (by up to 1.5 percent as the Boskin Commission reported) or if the core CPI is understated (because it omits energy, food, and assets such as houses). The technical manual for the Quality of Life Indicators provides a statistical bedrock assessment of a wide range of key factors affecting the overall quality of our lives and our children’s future. Many copies have been ordered by statistical and government agencies in other countries and in the USA by local officials and politicians to use as a “recipe book” to construct local quality of life indicators for towns and states across one country. The research team has done the “intellectual ditch-digging.” The EMQLI model can be adapted or expanded to meet unique community needs.
All the world’s industrializing societies are undergoing similar changes and restructuring, as they move beyond the Industrial Revolution. Part of this great transition is toward information-based economies. Knowledge, intellectual capital, and the more intangible human and social assets replace manual labor and some of the tangible capital earlier economic textbooks called the “factors of production.” This transition is accompanied by a deeper knowledge of natural processes and ecological assets and the services nature provides. We are slowly shifting to recycling our industrial materials in closed-loop production, waste-reduction, re-manufacturing, and re-use. An industrial design revolution is quietly under way. A member of our Advisory Board, architect William McDonough is a leader in this design revolution, having advised Mayor Richard Daley in his plans to make Chicago the “greenest” city in the USA and is currently designing a “closed-loop”, zero emissions factory in India, as well as helping China design its “eco-cities.” This industrial design revolution is driven by the need to make human societies ecologically sustainable, which in turn will require greater equity — closing the gap between rich and poor, between and within countries. Such a new agenda for humanity was endorsed by the world’s leaders at the United Nations in 2000 as the Millennium Development Goals and updated at Rio+20 as the Millennium Sustainability Goals. But all societies still have a long way to go, and we at Ethical Markets track this progress toward low-carbon, cleaner technologies in our Green Transition Scoreboard® and through our Principles of Ethical Biomimicry Finance™ co-developed with our partner company Biomimicry 3.8. The Ethical Markets Quality of Life Indicators help us keep track of US performance in all 12 areas to gauge improvement towards our goals: reforming markets and metrics while growing green ethical economies worldwide.
How was it that macro-economic statistics fell so far behind in mapping these fundamental shifts? A large part of the problem is that conventional economics and accounting considered air, water and nature’s purifying cycles to be “free” goods. Only recently have textbooks begun to embrace “full-cost” prices and life-cycle costing, which account for all the social and environmental costs of production. Most companies’ balance sheets still “externalize” these costs to society and future generations, as discussed in “Time to Internalize Those Externalities and Get Prices Right.” Only in the past decade have we seen the rise of environmental and ecological economics, full-cost accounting, and life cycle costing for investment purposes. In 2012, a group of institutional investors pledged to include natural capital in their asset valuation. The rise of social and environmental auditing, accounting for “intangibles” and intellectual property, the ongoing debate about how to measure productivity and the many attempts to overhaul GNP and GDP represent an ongoing revolution in accounting and statistics as discussed in The Ethical Economy. For example, better measures of ecological and biodiversity assets and the services they provide can help save rainforests, watersheds, wilderness and endangered species. Such services have been estimated at over $30 trillion annually, while a recent report by Trucost for the UN finds that externalized costs of global corporations exceed their reported profits. Scientists are still studying the complex ways that planetary systems, the Earth’s atmosphere and oceans interact with all species to keep the climate stable and physical conditions hospitable to human life. The Encyclopedia of Life Support Systems, published by UNESCO (Paris, 2002) can be accessed at www.eolss.com and the TEEB (The Economics of Ecosystems and Biodiversity) reports, 2010-2012, are available at www.teebweb.org. In 2012 at the G-20 summit in Mexico and at the Rio+20 summit in Brazil a total of 191 countries pledged to accelerate their transitions to cleaner, more equitable green economies.
On the foundations of conceptual innovators, a host of efforts to redefine human development, wealth and progress emerged in the 1980s and 1990s. David Morris of the Institute for Local Self-Reliance (ISLR) produced the Physical Quality of Life Index (PQLI) for the Overseas Development Council and ISLR now tracks the emergence of efficient, renewable energy. Herman Daly and John Cobb created the Index of Sustainable Economic Welfare (ISEW) with Clifford Cobb in 1989. These indices deduct from GNP many “defensive” environmental and social costs, arriving at a significantly lower “net GNP.” Versions have been adapted widely in Europe, Australia, and the United States as the Genuine Progress Index (GPI), still based largely on macroeconomic approaches using money coefficients published by Redefining Progress. Mathis Wackernagel, who serves on our Advisory Board, helped create and now leads the Ecological Footprint Analysis (Wackernagel 1995). Other approaches include the Fordham University Index of Social Health, the Canadian Index of Wellbeing and the OECD’s Better Life Index, of which the latter two go beyond economics, as does our EMQLI. In 1995, the World Bank released an innovative Wealth Index, which re-categorized the wealth of nations as comprising 20 percent environmental assets, 20 percent human-built capital (factories and other financial assets) and a full 60 percent as human capital and social capital. Slowly, such broader views of capital assets, ecological assets engender broader views of investment, which include those to improve health and education.
The Clinton Administration attempted to “green” the GDP by means of an Integrated Environmental and Economic Satellite Account (IEESA) developed by the Bureau of Economic Analysis (BEA) of the Department of Commerce in 1994. The Congress directed the BEA to halt this work and charged the National Research Council to review the entire issue. In late 1999, the Council issued its report, Nature’s Numbers (National Research Council 1999), urging that the BEA be funded to re-start this effort. All this caused a major change in the economics profession. Many of its best minds embraced pieces of the new thinking, including Joseph Stiglitz, formerly the World Bank’s chief economist and recipient of the Bank of Sweden Prize in Economics in Memory of Alfred Nobel. Stiglitz and Amartya Sen were commissioned in 2007 by then President Nicholas Sarkozy of France to study and recommend overhauling GDP. This followed the “standing room only” conference in the European Parliament in 2007, for which Hazel Henderson served on the Advisory Board and Organizing Committee (www.beyond-gdp.eu). Former Harvard economist Jeffrey Sachs who had advocated the disastrous “shock treatment” in Eastern Europe is now President of Columbia University’s Earth Institute. Paul Krugman, winner of the John Bates Clark Medal, who teaches at Princeton University, now covers broader issues in his New York Times column. The International Society for Ecological Economics (ISEE) and the Association for Evolutionary Economics (AFEE) are in the forefront of reconceptualizing conventional economics, along with the World Economics Association and its journal Real World Economics Review. The Institute for New Economic Thinking (INET), funded by George Soros, pursues reform within conventional models and finance.
A widely used and quoted formula is the United Nations Human Development Index (HDI), produced by the UN Development Programme every year since 1990. The HDI began by weighting per capita income (in terms of Purchasing Power Parity which corrects for fluctuating values of different currencies), education, and life expectancy to produce a rank for every one of the 193 member countries of the United Nations. The HDI updates and enhances its methodologies regularly to include military vs. civilian budget ratios, environmental factors, poverty gaps, gender, and human rights data. The HDI has become a world benchmark on government performance and has given rise to some 50 national HDI versions. The 2002 HDI focused on Deepening Democracy in a Fragmented World (see www.undp.org) and the 2003 HDI focused on the Millennium Development Goals, the Compact, which commits the member states of the United Nations to cut poverty and increase funding for health and education, as discussed in Section II of the Update. The 2004 version’s theme was migration, an important, largely unanticipated consequence of the globalization of finance markets and technology (see the updated section “The Global Boom in Indicators“). More recently, HDI has focused on consumption (to which Hazel Henderson contributed the proposal TIAASA to reduce the total volume of commercial advertising without impinging on freedom of speech). The annual HDI reports are still a ubiquitous benchmark used in most countries and available from UNDP (www.UNDP.org).
The deeper methodological debate over new measures of wealth, progress, and human development has concerned the extent to which money coefficients and macroeconomic models can capture broad new areas of concern: human rights, health, education, environmental, and overall quality of life. Many things humans hold most dear cannot be measured in money terms. These debates characterized the ICONS conference in Brasil, November 2003, where Hazel Henderson presented on the then Calvert-Henderson Quality of Life Indicators and discussed in Indicators: Past, Present, and Future and “Statisticians of the World Unite.” Conventional methods currently weight all data from different economic sectors into one index. Defensive expenditures, such as cleaning of pollution, costs of accidents or insulating houses near airports from aircraft noise, are all added to GDP as more production – mixing in these “bads” with the goods. Many believe, as we do with the Ethical Markets Quality of Life Indicators, that aggregating all these “apples and oranges” into one index is inappropriate and often confusing. Another issue concerns the use of “satellite accounts” for such environmental and social data. This designation gives an impression of lesser value for such important data, which leads to their omission in media and its obsession with GDP.
Quality of life indicators should not rely on subjective opinion surveys and focus groups exploring personal satisfaction or happiness. The widely followed Gross National Happiness indicator for Bhutan is appropriate for a small Buddhist nation – but less useful than output measures of wellbeing as a UN conference in 2012 found (www.ethicalmarkets.com Beyond GDP). Even scientists poorly understand threats to quality of life in many areas, and often the public is ill informed or misinformed about toxic substances, climate change, budget priorities, human rights and many other factors affecting personal satisfaction and quality of life. The diverse areas of quality of life covered in the Ethical Markets approach deserve their own metrics, specifically metrics that are most appropriate within the diverse disciplines that study such fields. For example, money coefficients cannot quantify human rights, air and water quality, recreational satisfaction, education, health, public safety, or national security. Money is a unit of account and often mistaken for the real wealth it tracks: human skills, productivity and Nature’s wealth (as shown in our TV special seen on PBS stations The Money Fix). Money measures and percentages of national budgets can give clues about quality of life but are often simply input data. Composite indices do not measure outcomes or results. GDP is so highly aggregated that it is akin to flying over a country at 50,000 feet – where much significant detail is lost.