11 min read

Introducing GDP 2.0, What it Means, and Why it Matters (for a Civilization in Crisis)

Introducing GDP 2.0, What it Means, and Why it Matters (for a Civilization in Crisis)

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Hi. How’s everyone? Today, I want to introduce you to a little project that we’ve been hard at work on. I think it’s something cool and awesome. We made the world’s first(ish) GDP 2.0. You can call it “Green GDP,” if you like. 

It was a lot of work…crunching a mega-number like this. But I think it’s a number that the world desperately needs, because…hello…we’re hitting meltdown. And we need a real, accurate, true picture of the economy, not just the old, tattered industrial age one, which looks more and more like an illusion by the day.

What’s different—and cool—is that finally, we can have one.

What’s GDP 2.0 and Why Do We (Desperately) Need It?

Now, we'll be releasing the report itself very soon, but for now, let me begin at the beginning. I’ve been wanting to create an updated GDP for quite some time now. If you’ve read my books, and my writing over the years, I’ve talked about it many, many times. There’s a reason for that: GDP is the invisible hand that really runs our world. Governments shape societies, corporations earn and report profits, people work at jobs, banks invest…all based on it.

And yet something’s wrong with GDP. By now, we know, not just theoretically, but the hard way, that it leaves out too much. Everything from unpaid work to emotional labour to exploitation, right down to, for example, young people feeling “numb” and “traumatized.” But the biggest set of costs GDP doesn’t factor in are to do with climate change.

We don’t have to look around too hard to see that the mega-scale impacts of climate change have begun to arrive with a vengeance—like Canada burning, and the air in major American cities becoming unbreathable, or Asia and Europe flooding, or region after region facing mega droughts and crop failures. And yet, astonishingly enough, GDP doesn’t include all this—what are known as the “social costs of carbon,” which in this case, basically mean “climate catastrophe.”

It occurred to me a few months ago that now, we could finally do it—at last, begin to create a GDP 2.0, adjusting for the costs of carbon. For the first(is) time. Ish, because there have been attempts before. But they’ve been tentative ones, experimental ones, ones that are more “thought experiments” than genuine estimates, and I’ll come to some. Now, for the first time, I think, I can share with you a real estimate. Done using pretty standard methods, to arrive at a result that’s accurate, valid, and generally usable.

So off we went and crunched…numbers. A capital L Lot of capital N numbers. The world’s GDP, its carbon emissions, the adjustments. This isn’t just guesswork, by the way. As I’m going to explain, it’s science, and it’s synthetic: we synthesized multiple strands of research, from hard science, like climate science, and social science, economics, to arrive at our new estimate of GDP 2.0. I think that’s pretty cool, by the way. This is all a beginning, so don’t take it as sort of “this is the number”—this isn’t like that, it’s the hard work of science and investigation, a sort of first, rough draft, and I’ll explain why, but first…

What did we find?

What GDP 2.0 Tells Us (About Why Our World’s Melting Down)

Let me sum up the three key findings for you.

  • In real, carbon-adjusted terms, our world economy is shrinking, not growing.
  • The costs of carbon are on the order of 10% of the world economy, and while that might not sound like a lot, it wipes out what little growth there is, and means that we’re in for a lost decade, at least, if not three to five.
  • As we learn more about mega-scale climate impacts, those costs are likely to climb steeply, revising even today’s growth downwards, further into negative territory.

So: to summarize. When we adjust for carbon, the world economy isn’t growing at all. It’s shrinking, perhaps dramatically so. And it’s been stagnant to shrinking, in real terms, for quite some time. And we face an economy that’s going to keep shrinking, in real terms, unless we fix the problem.

I know that’s a lot to chew on. Maybe even overwhelming. Let me try to help you understand it, and the best way, funnily enough, isn’t more math or Big Ideas, but just a little bit of…

The History of How We Think About “the Economy”

So before I get to the results, let me help you understand why GDP is so obsolete and out of date.

The short answer is: it was invented a century ago, and never updated. People think of GDP as issued by some kind of supercomputer in the heavens, but the truth is that it’s based on survey data. It’s a human creation, which was invented in the 1930s, during the Great Depression, to help us get out of it, and back then, job one was just seeing the economy for the first time. So a brilliant economist named Simon Kuznets created then this new marvel called “GDP,” which was a crude lens into the economy. 

And back then, if you think about it, it makes eminent sense that we didn’t include the costs of climate change, because they were scarcely a twinkle (or tear) in anyone’s eye.

But now they are.

So. What did we find? Like I said, we found that when we adjust for carbon, the global economy is actually shrinking, not growing. In other words, in real, carbon-adjusted terms, the global economy is shrinking. Now, you might grumble, “but that’s what I guessed!” Fair enough—the point, though, is that now we’re not guessing. We have a hard estimate, and with that, we can do a lot. Like…

That’s a finding that should explain a lot. Like: how can the economy be said to be “booming,” but people doing so badly, and feeling so pessimistic, like the economy’s…not actually doing well at all? Now we can sort of reconcile that Great Divergence, as I call it, because in reality, no, the economy’s not doing well. It just appears to be, when we don’t count the costs of carbon, which end up being massive enough to wipe out whatever “growth” there is left. 

Economists call these uncounted “externalities,” and GDP should have been updated to include externalities of all kinds, from emotional labour, to the trauma young people face, to unpaid work, and many, many more, for decades now. It’s a thing that should be continuously updated, like most other things in our world—but it isn’t, because, well, politicians got involved, and economists got lazy.

And so the more externalities have piled up, they’ve begun to “dominate” the reported number, rendering it an illusion, beginning to outweigh it. That’s how you get to where we are now: the absurd situation where the economy’s said to be “doing great,” but people are by miserable, pessimistic, and stressed, their living standards going into free-fall. 

A Shrinking World Economy is Leading to Civilizational Flickering

So what does all that imply? By now, you should have an inkling, if you’re a regular reader: stagnant or shrinking economies produce destabilization and collapse, and this number helps us explain, too, why things around us appear to be collapsing by the day—because in reality, again, no, our economies aren’t growing.

Think about any number of textbook examples—Weimar Germany, Roman democracy falling to Caesar. All of those destabilizations, and many more, were produced by economic stagnation and “shock.” Hyperinflation, long-run stagnation, people’s lives hitting the brink and then falling apart. As people become insecure, as their lives become unstable, in the old pattern, they turn to strongmen, for feelings of safety, strength, and purpose again. The strongmen, meanwhile, usually scapegoat innocents, which solves nothing, and so a “zero-sum game” emerges.

That phrase means: for me to win, someone else has to lose. Think about the implications of a shrinking economy, for a moment. How are we all to get bigger slices of the pie? In a growing economy, we can all compete healthily for them, and all get them. But in a shrinking economy, the only way for my slice to grow is to take from yours. In other words, exploitation and predation become the only remaining survival strategies. Sound familiar? It should. Meanwhile, as that corrosion sets in, the most ruthless, brutal, and nihilistic rise, because of course, they’re those who can this game—and that, too, is exactly what’s happening to our societies and civilization.

That’s not an abstract point. It’s hardly a coincidence that democracy’s imploding at the startling rate of 10% a decade, just 20% of the world now democratic—while, in real, carbon-adjusted terms, the global economy isn’t growing, and hasn’t been for many years. That’s a relationship: we’d expect to see precisely such destabilization growing, authoritarianism, fascism, and theocracy rising, as living standards stagnate or fall, and economies can’t deliver for people anymore.

In other words, these figures help us understand how things got so bad, why, and where we’re going next. I recently called all this “civilizational flickering,” drawing on an idea from complexity theory, where systems flicker. The system in this case appears to be…the world as we know it.

How Did We Crunch This Mega-Number?

   Skip this part if you’re not a nerd. Really. But if you are….so how did we get to this figure—the global economy shrinking, in real, carbon-adjusted terms? Big numbers—but eminently straightforward calculations. We’re going to do a little math together, don’t be scared, because by the end of it, you’ll be a mini-economist, too.

GDP’s just an equation—not a real one, like in physics, but a sort of informal one, called an “identity.” It goes like this. 

GDP = C + I + G. 

Like I said, don’t get scared. This is easy! I’m going to explain it to you, because even a child could understand, and we should all know this. C is consumption, meaning, the stuff you buy. I is investment, meaning, what businesses invest. G is government investment. (If you’re a dweeb, yes, there’s a “net export” term, but we’re talking about the world level, and it balances out to zero.) 

So. That’s all GDP is. That’s it! The whole shebang. Now. What do you notice about that equation, or “identity”? We should be including another term. One we might call “CC”—for climate change, or carbon costs. It should be a minus, a negative term, since obviously, we don’t derive benefits from calamity. So the equation should be GDP = C + I + G minus CC.

Now. That’s the basic method, and it’s not mine. It’s a standard way to adjust GDP—we can add whatever terms we like to that little equation, so long as they make sense. This one—subtracting externalities—is called “the Weitzman method” of adjusting GDP. And so a very smart and famous Nobel Laureate in economies called William Nordhaus did just that, a few years back, in 2017 or so. He said, basically, “We should update GDP—we need to. Now, we don’t have the data to do it properly yet, so here’s the experimental method. This is how we should do it, when we have the data: we should subtract the costs of carbon, and then we’ll have an updated, more realistic figure.”

What’s different about now is that we finally have the data. That’s a very, very recent thing. Just a couple of years ago, a large and distinguished team of climate scientists issued an authoritative estimate of what’s known as the “social cost of carbon,” meaning, all the stuff that carbon emissions will cost us, from weather related disasters, to heat, to health, to much more.

So when Nordhaus wrote his essay on how we should update GDP, that estimate was $50 per ton—and he knew it was far too low, which is why he said, “this is just experimental, and we need better data. But now we have, for the first time, a better, and for the first time, beginning to be realistic estimate.

That new estimate is about $200 ton or so. It doesn’t just have scientific legitimacy—the EPA in America uses it, too, lending it institutional legitimacy. So this is a number that’s beginning to have enough accuracy and rigor that we can trust it, use it, and build on it, larger figures, like GDP 2.0.

And yet even this estimate is just a beginning. Remember when I said the scientists estimated carbon costs, for the first time, just a couple of years ago? What we already know today, just a couple of years later, is that we’re in “uncharted territory.” So even those estimates from just a couple of years ago are likely to be low.

That means that you should these results as a lower bound. This is the minimum that climate change is likely to cost us, and in fact, as we learn more about the reality of the mega-scale impacts, the effect on GDP is likely to be much, much more severe.

What Should We Do With GDP 2.0?

Like I said, the point of this mega-number is sort of that it’s not just a “guess” or “feeling” many of us have anymore. Now, economics isn’t an exact science, and in this case, we don’t have to worry, really, about the nth decimal point—rather, it’s the magnitude and trend that should concern us. The point Is that this sort of number is an estimate, informed by science, that we can and should use. For what? For…everything we use GDP for, including…

  • We shouldn’t say the economy’s “booming,” when in real, carbon-adjusted terms, it’s shrinking. That goes for politicians, media, columnists, and any many more, by the way.
  • We should see that different activities really do impact the economy in very different ways, and some are more harmful than others.
  • We shouldn’t go on basing decisions just around old forms of “growth,” because what we should learn now is that they’re out of date, and lead us to the wrong choices. See all those layoffs rocking the economy? Those are coming from CEOs and corporations who got just this insight dead wrong.
  • We shouldn’t speak of the economy in the old way, just sort of numbly reciting GDP. Now we should begin to see it, think about it, and understand it, in terms of real, carbon-adjusted growth.
  • We should even understand the link between an economy that’s shrinking in real, carbon-adjusted terms, and it’s manifold sociopolitical impacts, like falling living standards, exploding pessimism and despair, and imploding democracy.

Heavy stuff. Big stuff. Serious stuff, I guess. Now you see why I say that to me, anyways, this is the sort of thing that matters…a great deal. How it kind of is the invisible hand that shapes our world. The point emphatically isn’t that “my” estimate is the “right” or “only” one—far from it and quite the contrary. It’s just preliminary, and there should and probably will be many, just like there are for GDP itself, and its ilk. Rather, it’s the messages inside the math that we should understand.

So what does all this mean?

That’s a lot to chew on, and we’re going to delve into it even more, in coming days. For now, think about how we often discuss surplus as the most basic foundation of civilization. What let civilization flourish? Agriculture, at first, and then public goods, like universities, roads, books, and then, even more advanced ones, like science, literature, and art. What

Here are two Really Big Picture Takeaways.

That means we are in zero or negative sum territory as a civilization. In plain English, that means that more and more people have to lose for fewer and fewer to “win.” Needless to say, as we’ll explore, that explains—and predicts—profound sociopolitical destabilization, like today’s democratic implosion.

Our civilizational surplus is now in serious and severe decline. What negative growth, or a shrinking world economy means is that our surplus is now getting smaller and smaller. “Surplus” is what we have left over, to invest in, to seed tomorrow’s breakthroughs with, to renew social contracts with—think of it this way: our real wealth as a civilization is now beginning to contract sharply.

Think of what happens to civilizations who face that plight. And now wonder how long we have to absorb the message that it’s happening to us.

Whew, that was a mega-post even for me. Fire away with questions, and I’ll try to answer them over the coming days and weeks. For now, enjoy and I hope that gave you plenty to chew on! Many thanks for reading and being a part of our community.

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