Have we reached the end of progress? Today, this lodestar of the Enlightenment and the Industrial Revolution is shining less brightly than at any time in the past 200 years. And our principal measure of progress – gross domestic product (GDP) – seems particularly tarnished. Growing numbers of people are asking whether economic growth, measured by whether GDP is going up, should be the main priority of governments. Aren’t the environmental costs of growth too high? Is higher GDP worthwhile if it all goes to the rich? Does higher GDP even make us happier, and isn’t that what our governments should really focus on?
All these questions end up tangled in statistical definitions, obscuring the deeper issues they raise. Some of the questions are philosophical. I, for one, don’t want the government dabbling in my well-being. And I do think that economic growth is a sign of progress, but I want it to be more equally shared than has been the case in the past generation. Some of the issues are more technical: what are the binding environmental constraints on growth and how do we measure them? None of these questions can be answered by changing the definition of GDP.
The measurement we now know as GDP (related to the original measure, GNP, or gross national product) was developed by economists in the UK Treasury, working under the guidance of the eminent John Maynard Keynes, and completed in 1941. One of these economists, Richard Stone, led the post-war initiative to spread GDP as a standard within the United Nations. In just a matter of years, national economic accounts were progressively standardised, bureaucratised, and adopted around the world for the remainder of the 20th century. GDP is now the universal benchmark of economic standing.
The case made against GDP is that it does not measure what we truly value. While counting economic activity such as output of cars or meals out, GDP leaves out non-monetary costs such as pollution; it ignores inequality and work-life balance, and counts ‘bads’ (more lawyers, more weapons purchased) as ‘goods’. A typical critic of GDP is Michael Green, a US economist and executive director of the Social Progress Imperative in Washington DC. This organisation created the Social Progress Index (SPI) to measure a nation’s well-being by looking at non-economic indicators such as whether people have access to basic medical care and higher education. As Green told US News last month: ‘There’s lots and lots [GDP] doesn’t capture. [It] doesn’t tell us about the quality of our lives in terms of the real things that matter to real people.’
However, it was never meant to do this, so this failure should not come as a surprise. But there is a profound confusion about what GDP does measure, and about what should be measured, and why.
GDP is simple in principle: it is the sum in a given time period of everything produced in the economy with a monetary value, which should add up to the same figure as the incomes earned by every person and company, and the same as the total spent by everyone. In practice, these separate sides of the accounts are rarely equal because of the difficulty of assembling all the vast sets of statistics. National accounting is an esoteric art that, four times a year, delivers us a figure – up 0.2 per cent! Up 0.6 per cent! – trumpeted (or not) by governments keen to show their constituents that they are delivering.
Criticisms of GDP date back to the 1970s, when high inflation and zero growth (‘stagflation’) led to widespread economic disillusionment. Capitalism did not seem to compare well with Communism. Economic growth had not taken off as hoped in the former colonies. And, perhaps most profoundly, the emerging environmental movement began campaigning about the costs economic growth inflicted on nature.
Environmental sustainability remains central to criticisms of GDP today. The measure ignores the adverse impact of pollution, greenhouse gas emissions, reduced biodiversity, and the depletion of natural resources. And it fails to adjust for the fact that spending on policemen or lawyers is a necessary evil not a positive benefit, or that we spend more time commuting these days, or that the infrastructure of roads and railways is crumbling. GDP-bashers also delight in pointing out that, over time, increasing GDP has not delivered increasing happiness; happiness, as reported in many surveys, has, they claim, risen far, far less.
This last point misconstrues the nature of two types of statistic. GDP is an artificial construct, not a natural object, and it can rise without limit. ‘Happiness’ is a state of mind, typically measured by psychologists on a scale of 0 or 1 to 3, or 1 to 10. But, just as the growth of GDP has contributed to longer lives and taller humans, so it has also contributed to making us happier – there’s plenty of evidence that richer people are consistently happier than poorer people. In that sense there’s a positive correlation.
Still, the emphasis on happiness, or ‘positive psychology’, like that on environmental sustainability, raises some important questions about the purpose of economic policy. To explore these, we need to go back to the origins of GDP, and look at why it was devised in the first place.
Adapted from https://aeon.co/essays/has-gdp-reached-its-limits-as-a-useful-measure