Is it time to bin GDP?
Gross Domestic Product, or GDP, is the sum of all goods and services that a country produces in a given year, adjusted - to make it comparable to previous years - for inflation. In many ways, though, it has become much more than that. It has become the barometer of a country’s progress, an indicator of a land’s prosperity, and the ultimate yardstick for assessing living standards. Some have even gone as far as describing it as 'the statistic to end all statistics'.
When growing (at expected rates), politicians refer to it as proof of the success of their policies. And when rates are not met, or, god forbid, GDP slows, it’s weaponised by those for whom it’s politically expedient. It has the power to both elect governments and bring them crashing down. In the theatre of politics, rarely is it anywhere but centre stage.
However, in these troubled economic times, it’s increasingly unclear whether GDP remains an appropriate measure. After all, it ignores inequality, still rampant across the Western world; it doesn’t take into account the earth’s dwindling natural resources; and it fails to recognise the rapidly deteriorating environment. With such glaring omissions, should it really be trusted to measure the success of our economies, and by proxy, the quality of our lives? Here we take a closer look at the measurement’s history, the charges it faces, and its future, all in an attempt to better answer the question: is it time to bin GDP?
Russian-born economist Simon Kuznets first developed GDP as an idea in the early 1930s. His design was made at the behest of the US government that, during the Great Depression, was seeking a more accurate way to measure economic activity to help guide a more interventionist governmental policy. It was, thus, in the context of an economic crisis that GDP was born. During the depression and the years that followed, GDP was fine-tuned and proved itself a valuable asset. Particularly during wartime GDP became indispensable. John Maynard Keynes reinforced just how important aggregate economic statistics were in his book How to Pay for the War, explaining that without them it was impossible to know exactly what was available for a country to mobilise - essential to any credible war planning. It was here that GDP first made its name.
Interestingly, in the 1934 report Kuznets delivered to US Congress, he warned against the use of GDP as a measure of economic welfare, and placed emphasis on maintaining a strong and clear distinction between the quantity and quality of growth. Economic welfare, he thought, could only be ascertained if personal distribution of income is known – something GDP does calculate. In his own words: ‘goals for more growth should specify more growth of what and for what’.
Listen to any politician from the 1950s onward and clearly this recommendation fell on deaf ears. Economist Moses Abramovitz was something of an anomaly, when in 1959, he cautioned ‘we must be highly sceptical of the view that long-term changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth of output.’ Such admonishments did little to slow the GDP fan train, which in the post-war years would continue to rumble on unencumbered. GDP became the buzzword of 20th-century economics – a fact confirmed by the US Commerce Department in 1999 which heralded it as one of the ‘great inventions’ of the last 100 years. Only more recently has criticism of the measurement begun to mount, showing signs that maybe, ninety years after conception, it’s running out of track.
The charges it faces
One of the most regular criticisms GDP faces centres on what it doesn’t measure - and here the list is lengthy. Among the most conspicuous absentees are volunteer work and unpaid household labour, the latter perhaps a legacy of its wartime origins. Still, that these are not considered as ‘contributing’ towards the wellbeing of the economy is contentious, and sets a worrying moral tone for any society created using GDP as its yardstick. Coincidently, it is women that have traditionally carried out these activities.
A further concern is what boosts GDP. Human suffering is particularly adept at doing so. Take, for instance, crime. Few in their right mind would make the case for crime being a signifier of a healthy, progressive society. Yet, when it comes to GDP, our most frequently turned to indicator of these traits, crime can be very helpful indeed. Consider the scenario: inequality is spiralling (incidentally, unacknowledged by GDP), increasing the number of people with little material wealth, which in turn prompts an increase in crime. For GDP this bears no burden; in fact, it is welcomed. A smashed window is not seen as an irritation or violation of basic social rules; it is seen as an opportunity for a glazier to make a new window, turning a profit and paying tax in the process. This logic holds for much crime and extends to the employment of police, lawyers, judges and prison guards that are tasked with dealing with it.
It doesn’t stop there either. Catastrophes, too, are consistently excellent means of boosting GDP. World War 2 helped drag the US out of an economic crisis, and countless natural disasters - like the Japanese earthquake in 2011 - have boosted economic growth in all corners of the globe, often increasing production and increasing employment.
The environment foots the bill
In our age of climate deterioration, the relentless pursuit of GDP growth, the occupation of most politicians, also comes at a great environmental cost, one that, in the developed world, far outweighs the benefits it brings. The conversion of trees into lumber, of farmland into shopping malls, and most devastating, of fossil fuels into CO2, all underpin GDP growth, contribute to global warming, and are anathema to a sustainable way of living. If the planet is to be preserved in any recognisable state, reliance on GDP as a gauge of progress, welfare, or even health of the economy, will have to be tempered. The question is, do we have alternatives at hand?
Genuine progress indicator (GPI) is one of the leading candidates to replace GDP and differs in that it also takes into account social and environmental factors. Perhaps unsurprisingly given the above, it therefore defines what we currently consider ‘healthy’ economic growth completely differently. An illustrative example is Canada’s oil-rich province, Alberta. According to a study by the Pembina Institute, between 1961 and 2003 it experienced GDP growth of 500%. During the same time period, GPI performance steadily fell, as a response to growing inequality, rising household debt, and an increase in greenhouse gas emissions. Exactly how different the governance of the province would have been if GPI had informed policy instead of GDP is obviously an unanswerable question. It’s safe to say, though, it would have diverged radically. The Index of Sustainable Economic Welfare (ISEW) has also sporadically been used, and includes inequality, crime, pollution and volunteer work in its estimates. How much traction these metrics will gain remains to be seen.
What is certain is that the management of the world's economies needs transformation. Given the scale of the problems we face, failure to do so can only end in calamity - and time is now tight. Perhaps one of the first steps towards change could be following through on Joseph Stiglitz’s call - made a decade ago - to put an end to 'GDP fetishism'. And if this is to happen, economists better get working, because as firebrand historian Rutger Bregman has declared, we will need 'new figures for the new era'.