New Economy Journal

Gross Domestic Efficiency: An Ecological Measure of Prosperity

The Ecological Economics Issue

Volume 1, Issue 4

July 2019

By - Steven Liaros

Piece length: 1,394 words

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Cover photo by Zane Lee on Unsplash
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Any approach we adopt for measuring economic activity should have a meaningful and useful underlying objective, such as to improve human health and well-being or the encouragement of activities that improve the health of natural systems. Indeed human health and environmental health are intimately interconnected. The acknowledgement that humans are part of a natural ecological system allows us to consider the possibility of adopting physical laws as a measure of the success or otherwise of our economic system.

This article proposes the adoption of Gross Domestic Efficiency (GDE) as a measure of economic prosperity. I show that using GDE will improve environmental health and also reduce the cost of living.

Production Output versus Productivity

To understand what is meant by ‘efficiency’, it may be useful first to compare the current approach to measuring economic growth with the concept of ‘productivity’.

Economic growth is a measure of the added value of production in an economy and is usually described by the Gross Domestic Product (GDP). The ‘value added’ is the total outputs, less the cost of material supplies and services used to produce these final goods or services. These inputs include energy, raw materials and labour as well as ‘intermediate consumption’ such as a tyre sold to a car manufacturer:

Productivity, by comparison, is a measure of the efficiency of production. It can be expressed as the ratio of output to inputs used in the production process, that is, output per unit of input.

Productivity is sometimes called the ‘efficiency of production’ or ‘productive efficiency’ and is equivalent to the idea of efficiency in physics. If we regard the economy as a machine for converting inputs into outputs, then the efficiency of that machine can be measured in terms of the ratio of energy outputs to energy inputs:

There are two distinct ways of looking at this formula when aiming to increase efficiency. The first is to focus on maximising outputs for given, available inputs, extracting as much as possible from them. This aligns with the traditional project of ever-increasing production and ever-increasing work. A second, alternative approach, is to ask how we might minimise the work and energy input needed to achieve given, sufficient outputs.

From this formula it is evident that the project of maximising outputs is diametrically opposed to the project of minimising input energy to deliver certain desired outputs. This second project would be more consistent with the definition of the word ‘economical’, which means “avoiding waste or extravagance; thrifty; or using no more of something than is necessary”. If we strive to be economical we would use the word efficiency and strive to minimise work and energy inputs.

Measuring GDP or production output alone creates a competition that takes us towards infinite outputs. In sharp contrast, measuring efficiency would create a competition that strives towards zero inputs. The shift from inputs as a subtraction in the equation to a denominator changes the way that inputs are viewed. Rather than a negative cost impost on the otherwise positive production process, reducing inputs can provide a positive contribution to the efficiency of the production process.

Gross Domestic Efficiency for Environmental Sustainability

This shift from GDP to the proposed measure of efficiency is also important because it helps to improve environmental outcomes as energy input includes the fuel required to drive the production process. Any reductions that can be achieved in fuel usage, particularly fossil fuels, will necessarily have a positive impact on our natural environment as well as reducing demand for finite resources.

It is therefore proposed that Gross Domestic Efficiency (GDE) be adopted as a measure of national economic prosperity. One way of calculating this could be to simply divide the current production estimate for GDP by the gross domestic consumption of energy as follows:

This would be a relatively simple calculation yet with very powerful consequences. For example, it would acknowledge that unnecessary commuting and transport congestion are a dampener on the economy as they represent a waste of energy. To increase GDE, it would be just as valid to reduce inputs as to increase outputs. The former could be achieved by building a network of work hubs around the city and encourage businesses to support tele-commuting.

The Future of Work and Distributive Efficiency

This approach would have obvious implications for the future of work. As we drive the economy in the direction of minimising input energy, we will also necessarily be reducing the human energy needed in the production process. Rather than seeing this as job losses, this should instead be regarded as the creation of spare time and freedom from unnecessary work.This freedom from routine production enables more creativity, which could result in further efficiency increases but should also be used to produce art, culture, sport, relaxation and other non-economic pursuits.

Efficiency would simplify supply chains and the delivery of goods to consumers. Many products would be available online, produced only when purchased, then delivered directly from the producer to the consumer. This significantly reduces the need for wholesaling, distribution and retailing infrastructure, further diminishing the pool of available jobs. A shift towards ‘print-on-demand’ has already disrupted the publishing industry and has the potential to fundamentally alter many other industries as the capabilities of 3D printers continues to improve.

To create this zero marginal cost society, it is necessary to differentiate distributive efficiency from productive efficiency. An economic system is, after all, a system of production, resource allocation and distribution of goods and services within a society or a given geographic area. Efficiency in distribution also requires that we minimise the energy input needed to deliver the sufficient outputs. This means minimising the energy used to transport resources, goods and people around the system. ‘Work’ in physics is a form of energy and represents the energy required to displace an object with mass (m), a distance (s):

Therefore to minimise the input Work (W) expended in the economic system it is necessary to minimise the displacement (s), that is, the distance travelled by the materials and people in the system, and, where possible, also minimise the mass (m) being transported. Minimising the transported mass can be achieved, for example, by transporting information to a local 3D printer, rather than moving people, resources and goods around the system. Minimising the distance travelled by the materials and people in an economic system requires localisation, or local production for local consumption.

This is particularly appropriate for basic, natural needs such as water, food, energy and shelter, which are dependent on the local geographic and climatic conditions of each place. This would create a deeper connection between people and their place as they work with local natural systems and with their neighbours to provide these basic necessities for all in the community.

If we understand efficiency and also shift our focus from growth in outputs to minimising the total work needed to deliver energy, water, food and buildings for the local residents, then we can imagine a city, town or village as a thermodynamic system. We would then also aim to minimise energy losses through waste and unnecessary commuting, while buildings would be designed to minimise energy demand.

The technology and business models are already available for the development of a prosperous future for humanity. Water, energy, food and built systems can be integrated to create efficient human settlements—thermodynamic systems that provide the basic necessities for their residents. The efficient provision of these basic needs is an effective method for reducing the cost of living and improving environmental health, while creating a lived and shared prosperity for all. Prosperity is both freedom from necessity and also the free time and space to explore, discover, innovate, create, and develop relationships, ideas and skills.

Despite the availability of all the elements required for prosperity, we still lack a social narrative that strives for efficiency through the minimisation of energy inputs. A narrative that accepts that creativity is possible only through freedom from production. An important step in creating this new social narrative is the transition from GDP to Gross Domestic Efficiency (GDE) as the measure of our economic system.

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