Is it time to bin GDP?

Gross Domestic Product, or GDP, is the market value 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's transcended this rather prosaic definition. It's become the barometer of a country’s progress, an indicator of a land’s prosperity, and the ultimate yardstick for assessing living standards. 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 growth 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?

Its birth

Russian-born economist Simon Kuznets first developed GDP, initially known as Gross National Product (GNP), in the early 1930s. His design came at the behest of the US government which, during the Great Depression, was seeking a more accurate measurement of economic output to guide its interventionist governmental policy. As economist Kate Raworth describes, 'GDP enabled President Roosevelt to monitor the changing state of the US economy and so assess the impact and effectiveness of his New Deal policies'. A few years later, as America readied itself to enter the Second World War, GNP was again of use. In his book, How to Pay for the War, John Maynard Keynes explained how important aggregate economic statistics like GNP are for converting an industrial economy into a planned military one. Knowing what was available for a country to mobilise was essential to any credible war planning.

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 clear distinction between the quantity and quality of growth. Economic welfare, he claimed, could only be ascertained if personal distribution of income is known – something GDP does not calculate. In his own words: ‘goals for more growth should specify more growth of what and for what’.

His 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 further gathered pace during the Cold War, as growth was seen as the best means of judging which economic ideology - the central planning of the Soviet Union or the free market of the west - could churn out more stuff. Its confirmation as the buzzword of 20th-century economics came in 1999 when the US Commerce Department heralded it as one of the ‘great inventions’ of the last 100 years. Only more recently, particularly since the financial crisis, 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 - 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. It's perhaps no coincidence, that it's women that have traditionally carried out these activities.

A further concern is what actually contributes to GDP. Take, for instance, crime. Few in their right mind believe that crime is a signifier of a healthy, progressive society. Yet, when it comes to GDP, crime can be very helpful indeed. Consider the scenario: inequality is spiralling, concentrating wealth in the hands of a diminishing few, while increasing the number of those with very little. The disparity then prompts an increase in crime, as it so often does. And yet, for GDP this bears no burden; in fact, it's beneficial. To a growth fundamentalist, only concerned with growth, a smashed window is not seen as violation of basic social rules; it's 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.

The same logic also applies to catastrophes, which are another 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 both production and employment.

The environment foots the bill

In our age of climate deterioration, the relentless pursuit of GDP growth 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?

Thankfully, yes we do. 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, responding 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 can be said with more certainty is that the management of the world's economies needs transformation. Climate catastrophe threatens all life, and inequality in much of the Western world has been on the rise for decades - GDP accounts for neither. Our measuring stick for progress fails to address two of the biggest problems we face. It makes no sense. It's high-time we heeded economist, Joseph Stiglitz’s, call - made now over a decade ago - to put an end to 'GDP fetishism'. We need metrics that speak to the needs of the twenty first century, not ones that exacerbate them.