Home > Economic growth, Genuine wealth > Time to bury the GDP

Time to bury the GDP

At long last it seems that calls to overhaul or even abandon completely the Gross Domestic Product as a measure of national economic well-being  are reaching a critical mass. Although many pioneers in the field (notably Herman Daly) have long pointed out the serious flaws inherent in equating GDP with genuine well-being, his and other like-minded voices have, until recently, been mere cries in the wilderness, largely ignored, even ridiculed by mainstream economists.

This is all beginning to change. On August 9, the New York Times published an op-ed article by Eric Zencey in which he states that the GDP is “a deeply foolish indicator of how the economy is doing. It ought to join buggy whips and VCRs on the dust-heap of history.” Another article in the Times published last September when the economy was in full nose-dive wondered why many Americans were feeling so anxious when the gross domestic product was still going up. None other than Nobel prize-winning economist Amartya Sen noted recently that “We may be in the early stages in the United States of recognizing that the gross domestic product is very misleading and something must be done to get better measures of well-being.”

The Gross Domestic Product was originally devised in the early 20th Century as an attempt to determine national income and since then it has become our most commonly cited economic indicator. We are now so unquestioningly devoted to the supremacy of the GDP that news reports will go so far as to cheer its every rise and lament its decline.

So what’s the problem with the GDP and why does it matter? To start, as Zencey says, the GDP, or at least those who report on it, conflates economic activity with progress and well-being. While the GDP has been steadily increasing since its inception, reported level of well-being and life satisfaction have not improved for decades. As Bill McKibben points out in his book ‘Deep Economy‘ (and as he discusses in the interview on this blog), in the U.K. “per capita GDP grew 66% between 1973 and 2001, yet people’s satisfaction with their lives changed not at all. Japan saw a fivefold increase in per capita income between 1958 and 1986 without any reported increase in satisfaction.” The trend is even worse in the U.S. In one place after another, “rates of alcoholism, suicide and depression have gone up dramatically even as the amount of stuff also accumulated.” After certain basic needs are met, study after study shows that it is relative wealth (how people see themselves in comparison to others) that determines much of the self-perception of happiness.

Eric Zencey points out another problem: GDP excludes a great deal of production that has obvious value. For example, my wife will be spending the next four months (at least) home with our newborn child, working very hard in the task of child rearing, but not contributing a penny to the GDP, despite the unassailable importance of the task. Neither volunteer work nor domestic services are measured, yet our standard of living surely benefits from both.

In his book ‘Beyond Growth‘, Herman Daly points out that the GDP gives us no indication of whether we are living off income (as we should be) or natural capital (as we should not be). The depletion of “fossil fuels, minerals, forests and soils” reduces our natural wealth yet is reflected by increases in the GDP.

Moreover, the GDP has no way of distinguishing between costs and benefits. Increases in traffic accidents, crime, oil spills and divorce rates (thereby leading to more litigation) are all reflected by increases in the GDP despite the fact these are surely forms of economic activity that we as a society want to reduce. As author and activist Marilyn Waring once famously noted, if all we want is to increase the GDP, we may as well deliberately crash an oil tanker like the Exxon Valdez into an Alaskan reef every year rather than deliver its cargo safely ashore. The resulting economic activity in terms of clean-up costs and litigation are worth much more (according to the GDP) than the market value of the oil being transported.

Finally, as Peter Brown and Geoffrey Garver point out in their book ‘Right Relationship: Building a Whole Earth Economy‘, GDP growth contains no measure of distribution, so inequity, poverty and outright starvation can, and often do, rise at the same time as the GDP.

Fine, many economists might say. GDP is not perfect but countries with higher GDPs per capita also show better health and educational outcomes, longer longevity, lower infant mortality rates and so on. It is a crude indicator perhaps but it should be used in conjunction with others.

But the problem is, first, it is not being used in conjunction with others, and second, the GDP may be doing more harm than good. We already have better, proven economic indicators at our disposal to more accurately measure genuine well-being but governments (like Canada’s) still almost universally rely on the GDP as the principal economic indicator and set policies to ensure its increase as expediently as possible, despite what these policies might entail. What government wants to face the electorate with a stagnant or declining GDP? And so it is little wonder why some hugely destructive, but enormously profitable, economic activities such as the tar sands developments in Alberta continue at full pace.

GDP is simply a measure of throughput, not welfare, and a new approach is long overdue. Many innovative and insightful people are hard at work developing alternatives. As Mark Anielski discusses in his interview on this blog, he has developed what he calls a Genuine Wealth Indicator. Similar efforts include the Genuine Progress Indicator and Daly’s Index of Sustainable Economic Welfare, all of which do a much better job at reflecting actual economic costs and benefits, while giving us a clearer indication of genuine changes in well-being. Many organizations, such as the New Economics Foundation in the U.K., have long been dedicated to the task of moving beyond the GDP. And now it seems some governments (not Canada’s) are finally beginning to take note.

Nicolas Sarkozy, the French president, recently appointed a commission to come up with a better measure for France, chaired by two Nobel laureates, Amartya Sen at Harvard and Joseph Stiglitz at Columbia. While Sarkozy’s goal is to showcase a “quality of life” at odds with the country’s more modest GDP gains, the high-profile effort might yield dividends elsewhere as well. Bhutan is one of the few countries to have abandoned the GDP in favour of a gross national happiness index.

Economists, the GDP has outlived its usefulness. It does a poor job of measuring genuine wealth and it perversely encourages destructive economic activities. Like an old relationship that once worked but has long since gone sour, sometimes it’s hard to let go. It was worth a try but the poor old GDP just isn’t working out as planned. Would we as a society really be any worse off if we decided just to scrap it altogether and start over?

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