A case for using Integrated Success Index

It is estimated that if income proportions in the US were like those of the Scandinavian countries (which I consider to be a totally impossible future, taking into account American values), the sense of mutual trust among people (additionally strained during the crisis and the 2012 electoral campaign) could increase by as much as 75 per cent, and the number of people suffering from mental disturbance and obesity could drop by two-thirds. The number of teenage mothers would drop by half, and the number of convicts by three-fourths. Overall, people would live not only longer but also more happily as their working hours could be reduced even by one sixth, or a total of two months a year. If these estimates are exaggerated as to specific indices, and surely they are, they still speak volumes.

The United States is not the navel of the world and it will never again have the same capacity to impose their values on others that they had right after the end of the cold war. Still, changes taking place there are having an impact not only on Americans, but also on other places in the world where lots of people still idolise the USA. After all, a great majority of opinion-forming books in economics and other social sciences are published in English, right there, in the United States.

In this context, maybe it's a good thing that the volume expansion in the form of a traditionally defined economic growth weakens once the GDP (gross domestic product) threshold of 20 thousand dollars per head is exceeded. Even if it turns out that in the conditions of the present scientific and technological revolution, the dynamics slows down at a higher level, let's say at 30 thousand dollars at today's prices, we will have to be glad as this will mean a higher chance of survival for the natural environment and more time for continued technological progress that will reduce the excessive consumption of non-renewable resources. So maybe we should rejoice as with the slower volume growth, economists and politicians will give more attention to other aspects that co-determine the quality of life and the resulting life satisfaction.

I suggested a different economic progress metric, that I called Integrated Success Index (ISI). It depends only partly on GDP since the value of this composite index is co-determined by other factors. In detail, the aggregated value of ISI is composed of:

(1) gross domestic product - 40 per cent;

(2) subjective well-being related to the overall life satisfaction, including the standard of social services, and projections of its future prospects - 20 per cent,

(3) an assessment of the state of the natural environment - 20 per cent, and

(4) an estimate of free time and cultural values that fill it up - 20 per cent.

This suggestion, quite an arbitrary one, is not about details, but about the line of inquiry. Whether we emerge unscathed from the present mess is contingent upon the imperative to redefine economic development goals. Therefore, while not insisting on ISI, which is just a general concept rather than an operational metric, at this point we can advocate the widest, possibly universal use of the Inequality-adjusted Human Development Index (IHDI) which is already being applied by the United Nations Development Programme (UNDP) for international comparative analyses. The time has come to demand that politicians take this matter seriously.

Let's imagine that the desirable and absolutely possible future is approaching fast and in the US House of Representatives, in the British Parliament, in the German Bundestag and in the Spanish Cortes, in the Brazilian Senate and even in the Chinese National People's Congress, deputies are discussing the ways to increase the value of human capital and to improve the social tissue by limiting income inequalities. Let's imagine that the idea on how to increase IHDI is the main point of dispute between White House contenders in the 2020 election in the United States or when deciding, with the door kept more ajar, on the composition of the Politburo of the Communist Party of China in 2022 (it will exist and it will be in power). Let's imagine deputies to the Sejm of the Republic of Poland and the Russian Duma, who, rather than squabble over how to interpret historical circumstances or whether or not to limit sexual minorities' rights, argue over the direction of institutional solutions and over the macroeconomic policy instruments which lead to increasing IHDI; if only because they know that this is one of the things their future political fate will depend on. Is it that hard to imagine? Is it still just political and economic science fiction?

ECONOMICS OF MODERATION: To make it happen, especially to cause concepts and proposals of economics as a normative discipline to be followed by relevant measures by political economy, it is indispensable to grasp the essence of the economics of moderation, which is what New Pragmatism is all about. The economics of moderation means adapting the volume of human, natural, financial and material flows to the requirement to keep a dynamic balance. Turbulent transformations of the last several decades are caused both by acute imbalances in various fields, and by their outcome. What we are surrounded by is an economy of a permanent imbalance as there is always either too much of something or too little of something else. A surplus of something is available while there is a constant shortage of something else, and yet a good economy should be that of moderation. Hence, what is also indispensable here is a thought that promotes such desirable state of affairs, namely the economics of moderation.

In the future, we need economics of moderation rather than that of excesses, imbalances and crises. All of those will happen more than once to humanity and the interconnected global economy as well as to the national economies, but it should be exception rather than a rule. What should be the rule is knowing where to stop and adapting to real economic growth opportunities; moderate income disparities rather than extremes that wear out vast numbers of people and lead to new revolutions, toning down the marketing folly which creates needs that are utterly detached from the realities of the effective demand. Last but not least, what should be the rule is not overdoing it when transforming more and more pieces of the Mother Earth into goods that are meant to be sold at a profit by their manufacturers, although possessing and using them no longer improves consumer satisfaction.

There is a shortage of some raw materials and budgetary incomes while we have an excess of garbage and all kinds of debts contracted by households, companies and entire countries. A technology to produce clean and renewable energy is missing, while there is a surplus of technologies for producing weapons of mass destruction. There is an abundance of banks with excess liquidity, willing to grant loans to naïve consumers, while there are not enough loans for small enterprises as it takes more effort to monitor them. In many countries and regions, there is an evident surplus of people who cannot be properly nourished while somewhere else areas that were prosperous until recently are becoming depopulated. In some economies, in the wake of speculative bubble on the real estate market, too many houses and apartments were built, which are now standing empty and getting dilapidated as there are no buyers while there is no shortage of people over there who have nowhere to live and are camping out. In some industries, there is not enough manpower while in others it's excessive. In some places surplus food goes to waste while somewhere else there is not enough of it to meet elementary needs. In some hospitals doctors sit idly by as there are not enough patients who can afford the treatment, while in others people die as there is not enough staff to save lives in time.

Generally speaking, in developed countries, there is an oversupply of consumer goods on the market, and a shortage of the population's effective purchasing power. In consumerism-tainted societies there is an indisputable excess of needs, while a shortage of economic capacity to satisfy them is evident. While an overwhelming majority of us is constantly short of funds to buy what we really need, a lot of entrepreneurs are afflicted by surplus productive capacity which they cannot exploit in a cost-effective manner as there are no buyers for goods they could manufacture. One might say maliciously: there is constantly too much or too little of everything, depending on the angle from which you look at it. In other words, there is nearly always both too much and too little of nearly everything. Of economists, too.

The greatest deficit in the contemporary economy is most palpable where we need to be moderate. Moderation is generally in short supply. In the future, however, there should be as much of it as possible. And this is one of the fundamental canons of the political economy of the future. It is necessary to create mechanisms for balancing economic flows and resources. One might say, again: that's nothing new. Well, in the approach suggested here there is a lot of new content, as it does not rely on the deceptive assumption, typical of some other trends in economics, that market money mechanisms are capable of solving the problems of deficiencies and surpluses that is of dynamically balancing the economy. If they were, we wouldn't be going through a time of turmoil, as we are, but would be enjoying an age of prosperity.

Once, at another stage of civilisation and at a much lower level of overall development, in some countries attempts were made to solve this syndrome by adopting a bureaucratic supervision over economic processes. Theoretically, this was meant to eliminate wasteful overproduction crises which are characteristic of a badly regulated capitalist economy, while in practice it led to the emergence of a socialist economy with its inherent structural shortages. Hungarian economist János Kornai saw shortage as the main constitutive feature of that system and called it the 'shortage economy', while for its theoretical description he coined the term 'economics of shortage'. Almost all countries involved, except for Cuba and North Korea, managed to get out of such an inefficient system and there are no fears anybody will be tempted again to try using statism and command central planning as instruments of balancing the economy.

The writer is a former Deputy Premier and Finance Minister of Poland and currently the Director of TIGER (Transformation, Integration and Globalization Economic Research) and Professor at the Kozminski University in Warsaw (ALK). The article is adapted from his public lecture, organised by the Bangladesh Economic Association (BEA), in Dhaka on  Tuesday (February 02, 2016).