How To Price a Forest, and Other Economics Problems

Gross Domestic Product is the market value of all goods and services produced within a country in a year. It is, today, the standard snapshot of a country’s economy. But does it deserve this position? After all, it focuses on economic activity while ignoring many of the consequences of that activity, economic or otherwise.

Cambridge economist Sir Partha Dasgupta has long argued for a broader measure of a country’s wealth, and has worked on some of the most difficult challenges involved: How do you assign a dollar value to a forest? To human capital? How do humans understand long-term planning, and the effects of their actions on fellow citizens?

Dasgupta and I met in the Vatican Gardens in Rome, where we were both attending a symposium organized by the Pontifical Academy of Science and the Pontifical Academy of Social Science. Among the most lively and engaged of the symposium participants, Dasgupta challenges us to cast a critical eye onto how we assign value, and how we make decisions.

Why has Gross Domestic Product (GDP) persisted as a measure for all these years?

That’s a deep question and I wouldn’t know how to answer it. What I can say is that GDP was constructed, defined, and then began to be used for a very different purpose than the one we think it was designed for. It was originally designed to give an idea of the level of economic activity. Remember, in the 1930s something like 20 to 25 percent of the workforce was out of work in the United States and the United Kingdom; a great number of factories lay unused. So an indicator was needed to describe the extent of economic activity, because that was of paramount importance. Somehow, 20 or 30 years down the road, after the war, when developing countries were concerned with improving the lives of people, GDP became an indicator of economic progress. And it shouldn’t have been that, because bear in mind what GDP measures: It measures the market value of final output. So it does not deduct the depreciation of assets which may accompany the production of goods and services, and particularly it doesn’t deduct the depreciation of nature, mines, destruction of ecosystems and so forth which might be required or which is put into place in order to produce