Peter Marber (professional money manager and faculty member at Columbia University) writes this nice article on the topic.
He begins saying how much medical science has advanced over the years. But economics has remained much the same..
In some respects, the fields of medicine and economics have much in common. Both are multidisciplinary fields that strive to improve and maintain the health of complex systems. But unlike medicine, economics hasn’t progressed much in the last 40 years. In late 2008, the United States and many other countries suffered a major economic heart attack that might have been prevented by better diagnostics. Today, more than three years later, societies on every continent appear to be recovering, though many still face the threat of relapse. The reason so much of the world is on edge, with many countries still on life-support, is that governments have simply been prescribing the equivalent of economic bed rest and morphine (low interest rates and some fiscal stimulus) without any significant lifestyle changes.
Yet there are better, more sophisticated treatments that should be prescribed—new sets of statistical indicators to help monitor economic health, as well as fresh policies based on new numbers that can help diagnose and treat these ailments to the principal organs of our fiscal well-being. Traditional measures point to an American economy that’s up even when Americans are feeling down. Across Europe and in Japan, there is also a sense of confusion over current economic directions—a universal sense that the numbers that have been our staples are increasingly meaningless to everyday people.
He says economic structures have changed so much in the last decades. But economic measurement indicators are much the same:
Traditional, commonly held economic views and perspectives seem downright quaint today. Economically, the world of the early 1970s was a patchwork of inward-focused economies, with most goods domestically made and sold, together with small quantities of cross-border trade in finished products between 20 or 30 countries. We forget that back then, much of the world operated under some communist or socialist model. Even in the United States, trade comprised less than 10 percent of the economy. The widespread abandonment of socialist and isolationist policies since the mid-1980s in favor of global trade and investment—plus new information technologies—has ushered in the first truly global era where goods, services, capital, talent, and ideas move across borders faster than ever before. Over the last generation or two, the world has been transformed into a complex system of interdependent and constantly changing relationships
Yet we are still using methods of a simpler past to measure, diagnose, and direct our economy today. The most widely used and closely tracked of such metrics is the Gross Domestic Product, created in the 1930s when congress asked a young University of Pennsylvania economist Simon Kuznets to develop a uniform set of national accounts. The intention was to help government officials get a grasp on Depression-era economic realities. These stats became the prototype of the GDP—the premiere measure of economic well-being the world over. GDP, defined as the total market value of all final goods and services produced in a country in a given year, has permanently changed how we look at public policy. There was some genius in Kuznets’ simple, easy-to-understand statistic. Previously, economists had rarely been consulted on public policy, but equipped with powerful new statistical tools, they have become the policy authorities of the postwar era.
Even Kuznets seemed to have warned over the excessive use of GDP:
Even its creator, however, realized the limitations of GDP. In 1934, Kuznets warned, “the welfare of a nation can scarcely be inferred from measurement of national income.” He wrote again in 1962, “distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long run.” In other words, GDP and its components can and do give us a measure of how much we produce and consume—but reflect none of the qualitative aspects of the economy. GDP cannot answer such essential questions as whether we are consuming too much of the wrong things or saving too little. To any government statistician tallying GDP, $100 spent on textbooks is sadly no more valuable to society than $100 spent on cigarettes. Americans spend more than $80 billion on smoking each year and an estimated $160 billion on the health care costs related to smoking-induced illnesses. Together that’s about 1.5 percent of American GDP—nothing to boast about. Debt also boosts GDP in the short run by stimulating consumption but could curb future growth when both governments and households have to pay it back and spend less. Consider the over $5 trillion in new U.S. government borrowings with interest since 2000.
There is a Goodhart’s law of statistic:
GDP as a statistic may have fallen victim to the phenomenon of Goodhart’s Law. Devised by an adviser to the Bank of England in the 1970s, the law states that as soon as an indicator is relied upon for policy decisions, it stops being effective. For example, the police can reduce the rate of shoplifting by diverting more resources from other crime-fighting activities. Shoplifting rates go down, but other crime rates go up. As a result, shoplifting becomes a useless indicator of overall crime trends. In this respect, when a particular yardstick like GDP is used as a performance indicator of a complex system—like a national economy—the government may choose to target the measure, improving its value but at other costs to the country. As such, GDP may improve, but it becomes less useful as a measure of the broader economy and national well-being.
Similarly he takes on unemployment, inflation etc.
On the surface, calculating the unemployment rate should be straightforward—divide the number of unemployed workers by the total labor force. However, defining an “unemployed worker” and the “total labor force” is necessarily an imprecise task. America’s headline unemployment rate is actually based on the number of people who draw unemployment benefits. The British use a similar measure. But once those benefits end, those who are still unemployed, but no longer eligible for benefits, statistically evaporate. They are no longer counted, and neither are the discouraged, frustrated people who stop looking for work.
For example, let’s say there are 100 eligible workers, and five can’t find jobs—that’s simply 5 percent unemployment. One year later, the economy hits a rough patch and five more people lose jobs. Now we have 10 percent official unemployment. But let’s assume that of the original five unemployed people, three are no longer eligible for unemployment benefits. The way government statisticians adjust for this is to reduce the total labor force by three to 97. Official stats now calculate a labor force of 97, with seven more unemployed, dropping the “unemployment rate” to 7.2 percent.
According to government statistics, if the same number of Americans were job-hunting today as in 2007, the official unemployment rate would be more than 11 percent, not the official rate of 8.3 percent released in early 2012. The labor pool has been reduced by the so-called “discouraged” workers who permanently drop out of the official numbers. Logic tells us more “discouraged workers” are a bad sign for any economy. Yet such a practice actually makes the official unemployment rate look better. In Japan, the historic practice of companies keeping idle employees on the books versus outright firing them is believed to depress unemployment rates substantially. Some economists believe the real rates may be as high 12.2 percent compared to the current “official” rate of 4.6 percent.
Read similar criticism on inflation, productivity etc..
So what you need is a brave new math:
If economists begin to consider what progress really means in the modern world, then new ways of measuring, analyzing, and gathering data may more accurately reflect our holistic well-being. With a clearer and more realistic picture, better policies could be crafted to prevent future economic heart attacks.
There are already important strides in this direction, particularly in understanding progress beyond GDP growth. The UN’s Human Development Index is a single statistic that measures health, education, and living standards, with yearly country rankings. Similarly, the Organization for Economic Cooperation and Development developed the Better Life Index—a composite of 11 broad topics that include housing, income, and jobs as well as quality of life (community, education, environment, governance, health, life satisfaction, safety, and work-life balance). The Index already covers the 34 OECD member countries with plans to expand to its partner countries including China, India, Indonesia, Russia, and South Africa.
Some countries are designing their own national indexes to measure well-being. The UK is developing an index that not only measures economic performance of the country but also takes into account environmental and sustainability issues. Similarly, Canada has adopted something called the Genuine Progress Indicator, which starts with GDP but adjusts for negatives and economic regrettables like health care and law enforcement. In 2005, the tiny Himalayan nation of Bhutan developed the Gross National Happiness index, which takes into account health, culture, education, ecology, good governance, community vitality, and living standards—a broad way of assessing progress beyond pure GDP growth. .
Instead of focusing on the country, you could lok at mega regions:
Unlike other areas that have become multi-disciplinary, economics has been cloistered and slow to evolve. But increasingly, academics from a diverse range of social and hard sciences are seeking to understand and explain economic phenomena in new ways. Urban planner Richard Florida, for example, argues that governments should cultivate concentrated economic activity in cities or larger “megaregions” versus watered-down national efforts. Florida has identified some 40 global megaregions in advanced and emerging markets that comprise less than 18 percent of the world’s population but account for two-thirds of global economic activity and more than 83 percent of scientific research and patent innovations. Florida believes that these megaregions have been successful at attracting and cultivating his “3Ts”—talent, technology, tolerance—which appear to foster innovative, sustainable economic activity. He’s created several new indexes trying to capture data ranging from urban light emissions to scholarly scientific publications, patents, gay and artisan populations, and education levels that correspond to creativity, economic activity, and increased productivity.
Hmm.. Interesting stuff. Though these criticisms have been there for a while, Marber puts it really well.
Mostly Economics 
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