Notes on the Front

People are rightly questioning whether the measurement of national output– GDP –actually measures the real worth of economic activity.  President Sarkozy even set up a commission – the Commission on the Measurement of Economic Performance and Social Progress – to ascertain whether there were alternative measurements to capture the wealth and social progress of a nation.  From what was once a fringe interest the question of how to break from ‘GDP fetishism’ has now moved mainstream, five decades after Senator Robert F. Kennedy stated:

‘Our Gross National Product, now, is over $800 billion dollars a year, but that . . .  counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage.  It counts special locks for our doors and the jails for the people who break them.  It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl.  It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities.  It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.  Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play.  It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.  It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.’

While we still remain wedded to GDP-ism, we have a range of new indicators that attempt to provide a wider measurement of our economic and social health.  The UK’s Office of National Indicators has started to chart this area with measures of well-being which include personal well-being, relationships, health, personal finance, education, economy, environment, etc.

But one thing researchers into national well-being have overlooked is how to measure the real value of the enterprise.  If businesses are the motor of wealth-creation in a market economy, then this is a big omission.  The only measurement we have of an enterprise’s value is the financial accounts that count profit, loss, assets, cash-flow, etc.  In this tabulation, the higher the profit the more successful an enterprise.  But does this truly capture the value of a firm?

We know that a firm may be profitable but at a cost to the economy and society.  A typical example is the firm that pollutes the nearby river which the state has to pay to clean up.  This is called ‘externalising’ costs – the firm makes money by transferring the costs of its activity on to someone else.

Another example would be the firm that relies on precarious contracts.  In competing with others that provide permanent contracts (full-time or part-time), the precarious firm may make more money and grab greater market share; hence, more successful.  However, these precarious contracts externalise costs on to the Exchequer (either through social protection payments such as Family Income Supplement and/or reduced tax revenue), on to the employees (the stress of uncertainty) and on to other businesses (reduced consumption from precariousness).  The balance sheet says one thing but everything else tells another story.

If we are a long ways from measuring social value at a macroeconomic level, we are even further away from measuring value at the micro-level – in businesses.  But there are some interesting developments:

• The government intends to introduce gendered payroll reporting for firms, to fight the gender pay gap.
• The Central Bank is taking steps to ensure gender equality at the boardroom level of firms under their regulatory oversight
• In the US they are going further – with requirements to publish payroll based not just on gender but the ethnicity and race (though whether this got through Congress I can’t say)
• Staying with the US, companies will have to disclose the gap between CEO pay and average employee pay (the median wage)

There are a number of areas companies could be required to report on annually – wages, working conditions (benefits, collective bargaining, precarious contracts), environmental auditing, etc.

Just as we can’t automatically assume that a high GDP brings about real value, we should not automatically assume that high profitability brings about real economic and social value.  This is open to measurement, debate and action.

If one accepts the proposition that the enterprise is a social space comprising dense layers of contractual interaction between various stakeholders (shareholders, employees, managers, suppliers, the environment, the community), then measuring the enterprises’ social value becomes not only logical but desirable.  Even necessary.

This is one small step in bringing market activity into alignment with the democratic interest.