Illustration by Jack Dylan, 2011

In 2008, the global financial crisis hit the headlines almost every day, every week, for almost a year. The International Monetary Fund estimated the loss of financial capital to Wall Street and City of London firms at US$2.4 trillion. Around the same time, The Economics of Ecosystems and Biodiversity (TEEB), a global United Nations-backed study of the economics of nature, estimated the annual economic loss of the earth’s natural capital to be between US$2 trillion and US$4.5 trillion. In other words, the losses to ecosystem services each year are greater than the losses suffered through the financial crisis. However, scarcely a newspaper headline screamed this number.

The question begged to be asked is: Why not?

Was it because natural capital losses are losses of public wealth, and therefore less newsworthy than private wealth? Or was it because nature’s benefits are difficult to quantify and express in monetary terms, having no markets and no prices? Or perhaps it was because natural capital and its benefits—and losses—are missing from that ubiquitous measure of national economic performance, gross domestic product (GDP).

GDP is the most commonly used paradigm today for measuring human progress. Virtually all economic policy is currently oriented directly or indirectly towards maximizing GDP growth. It is so deeply ingrained that people forget that it is an entirely artificial construct created in the mid-20th century as part of the war effort and Marshall Plan recovery that followed.

Of course, rulers from ancient times have kept some record of economic activity for the purposes of taxation. However, national accounts as we know them were designed by economists Richard Stone and James Meade, with support from John Maynard Keynes, as a way to keep track of wartime economic activity. Given the circumstances, their framework was necessarily industrial in its essence. There was no space in it for niceties such as environmental degradation and socio-demographic developments. After the war, this framework was adapted to create the GDP number that is now used around the world.

Lost in the margins

In theory, GDP is a measure of the value added by an economy in a particular year; that is, the value of all outputs after deducting the value of all inputs. A simple method, yet in practice it has proved to be a limited and often arbitrary measure for three main reasons.