Why GDP is a flawed yardstick of human welfare

Source: medium.com
MEASURE WHAT MATTERS

It’s a deceptively simple number which captures headlines, makes or breaks governments, and dominates public discourse. Gross domestic product (or GDP) is used to measure the size and health of a nation’s economy and the prosperity of its citizens. Each country’s economic performance is ranked and judged using this common top-line metric.

GDP measures the economic activities of individuals (personal consumption), businesses (private investment), and governments (public outlays). It also factors in the difference between the value of a nation’s exports and imports. GDP became the prime economic indicator during the Second World War to monitor war production and measure a country’s economic progress.

Workers and businesses are generally better off when an economy is expanding as growth drives profits, jobs, and wages. Still, money isn’t everything which is why an increasing number of economists and politicians believe that GDP is a poor gauge of societal well-being. As a macroeconomic index, GDP has limitations and many are pointing out its deficiencies.

That GDP is not a perfect metric has been known for decades. It’s a measure of raw economic activity, not a complete picture of human progress. As Senator Robert Kennedy famously articulated in a 1968 election speech, GDP fails to capture a lot of what actually goes on in life.

… the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything in short, except that which makes life worthwhile.

GDP is the market value of goods and services produced in a year in a nation – its domestic production. GDP is derived by counting up the dollar value of all new goods and services produced, and includes things such as smart phones, cars, taxi rides, haircuts, music downloads, computers, steel, apples, university education, and cups of coffee.

Most goods and services are produced for sale, so the money spent by individuals, businesses, and governments buying these outputs is used to measure production. GDP only recognises goods and services that pass through official markets. Therefore, production that is not bought or sold does not get counted as GDP works by measuring market price.

So, volunteer work or domestic work – like caring for an aged relative or knitting a jumper – does not get counted in GDP as it is “unpaid production”. Yet most would agree that family caretaking is of enormous value to society and should be included in GDP calculations. (To be clear, if a family hires someone for childcare, that counts in GDP accounting.)

The GDP framework also takes no account of leisure time. Two countries might have equal GDP but one has workers toiling for 12-hours per day while the other only eight hours. Likewise, GDP is not adjusted for pollution costs. If two economies have the same GDP per capita, but one has polluted the air, the well-being of citizens is different, but that’s not captured by GDP per capita.

Another metric not included in GDP is the state of the environment. Economic growth is largely fuelled by consumerism and the rampant rise in household spending is depleting the Earth’s natural resources. Scientists warn that perpetual growth on a finite planet is not sustainable and is causing environmental calamities such as climate change.

A further criticism of the embattled GDP is its failure to reflect inequality as it doesn’t measure the distribution of growth. Income and wealth disparities in society have grown exponentially and extreme inequality is evident in many nations. The rich are getting richer and this skewing of wealth has created universal inequities in accessing education, health care, and finance.

The shallowness of GDP thinking is further evident in the way it counts catastrophes and natural disasters as economic bonuses. When assessing a tragedy such as a bushfire, GDP treats the rebuilding of homes destroyed as a positive economic impact. Yet, it does not capture the negative social consequences on regional tourism or the trauma suffered by townspeople.

Most glaringly, GDP is unable to account for the full impact of technology on our lives. Most of us could not get through the day without utilising digital media. But as GDP assigns a zero value to goods with a zero price, complimentary services like Google searches, Facebook posts, and app downloads go largely uncounted in official measures of economic activity. Similarly, the vast amount of knowledge that Wikipedia provides free of charge is worth zilch in GDP terms.

It’s clear that GDP does not incorporate many of the negative effects of economic growth and misses the main pillars of a progressive society. Certainly, it does not reflect the quality of life or happiness in any given country which is why there is a concerted effort to find alternatives to measure the wealth and welfare of nations.

A CBS News article, quoting The New York Times’ journalist, Catherine Rampell, provides a precis of some of the possible replacements for GDP including:

… China’s “green GDP”, which attempts to adjust for environmental factors; the OECD’s “GDP alternatives”, which adjust for leisure; the “Index of Sustainable Economic Welfare”, which accounts for both pollution costs and the distribution of income; and the “Genuine Progress Indicator”, which “adjusts for factors such as income distribution, adds factors such as the value of household and volunteer work, and subtracts factors such as the costs of crime and pollution”. Finally, there are more direct measures of well-being such as the Happy Planet Index, Gross National Happiness and National Well-Being Accounts.

Half a century on from Senator Kennedy, the world is still obsessed with increasing GDP at almost any cost. Indeed, our economies have become structurally dependent on growth. Governments pursue economic expansion as a primary goal, with rising GDP providing ever more taxes. From GDP’s perspective, bigger is always better – but not according to an article in the Oxford Business Review which states:

GDP is no longer an appropriate goal by which to measure economic and societal success …. It is paramount that something must replace the goal of infinite GDP growth. After all, growth for the sake of growth is the ideology of a cancer cell.

Growth as a metaphor for prosperity is deeply imbedded in our language – we like to see our children grow and gardens too. Growth equates to progress, even though too much can be cancerous. At a UN climate-change summit in 2019, Swedish environmental activist, Greta Thunberg, declared: “We are in the beginning of a mass extinction, and all you can talk about is money and fairy tales of eternal economic growth”.

I reject the notion that growth is always synonymous with improved well-being and therefore accept that the current fixation on perpetual economic growth is not sustainable. But that does not mean that I embrace the other extreme – promulgated by the “degrowth moment” – which calls for advanced countries to adopt zero or even negative GDP growth.

As sometimes happens, I find myself in the middle of an important debate – on this occasion between economists and environmentalists. To be clear, I believe that the economy should not be forced to stop growing or even shrink. Nonetheless, it should be required to adopt more environmentally friendly practices and aim for a slower growth rate.

As I outlined in a previous post, which explained the benefits of sustainable capitalism, we all have a vital role to play as consumers because:

If we don’t like what a company is doing, we can stop buying their products and services and force them to change. Consumers drive markets and sustainable consumer choices can change corporate behaviour. But we all need to take a stand and, for many of us, this will require a lifestyle overhaul, particularly with regard to saying “no” to unnecessary and/or environmentally unfriendly household items.

While I believe that the world-renowned abbreviation, GDP, remains a valuable tool for economic discussions, it does not tell the real story of human well-being. There is more to life than buying and consuming stuff which is why economic and other data would be better presented with a dashboard of broader indicators rather than a single GDP number.

We can have our cake and eat it if we are prepared to change our ways.

Regards

Paul J. Thomas
Chief Executive Officer
Ductus Consulting

4 Replies to “Why GDP is a flawed yardstick of human welfare”

  1. The term “quality of life” is subjective. It can be very different from one person to the next person. To me, quality of life is the degree to which an individual is healthy, comfortable and able to participate in or enjoy life events. You are right when you say GDP fails to capture a lot of what actually goes on in life.

  2. Hello Paul,

    Trust that you, Bev and your family had an enjoyable break in January.

    Your Blog is now being read in northern Thailand, where we live most of the time.

    I really appreciate your GDP learning update on GDP. Notably, as I wrote an update for my Facebook page, which used GDP figures when referring to the size of industry segments and ‘wealth’ here in Thailand.

    Your Blog brought me up to date on the drawbacks of that widely used economic metric. The way ahead out of such a crude measure is certainly fraught.

    Many thanks,

    Des

  3. Great Blog, totally agree. Measuring the ‘overall health’ of community in full blown commercialism is complex!

  4. Paul
    Thank you for your well articulated blog.
    The point you make is very valid.
    One indicator does not fit all. We do need a dashboard of indicators. The debate will always be around which ones should we use and why are they relevant.

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