What is wrong with GDP?
GDP is a good measure of economic activity - the purpose for which it was designed. However, a relentless focus on GDP becomes a problem when GDP is interpreted as a metric for the “success of society” or economic growth as an indicattion of “societal progress”. The economy can contribute to success, but it is a means to an end, not an end itself.
Many scientists and politicians have known for decades that GDP is not a measure of progress. In fact, focussing on economic growth alone can actually prevent the achievement of society's goals. This is perhaps best summed up by two famous quotes, the first from the economist who helped to invent GDP and the second from the US politician Robert Kennedy:
The welfare of a nation can scarcely be inferred from a measure of national income…
Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things. Our Gross National Product .... counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence in order to sell toys to our children.
Yet 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. And it can tell us everything about America except why we are proud that we are Americans.
Policy makers, scientists, media and the general public are increasingly aware that measuring the level of economic activity, is insufficient to provide an overall picture of whether things are getting “better” or “worse”. There are five main arguments why GDP figures should be viewed critically:
- Measuring the modern economy is difficult. The primary aim of GDP is to measure the size of the economy. Recent developments, such as digitization and globalization, are making this increasingly difficult. For example, when some internet multinationals inflate their profits in one country at the expense of another for tax purposes, they have an impact on GDP. Another example is the many free products (social media and resources such as Wikipedia) used all over the world, but which have no price. These issues pose significant problems for statisticians.
- It is not a measure of wellbeing. Historically, GDP and wellbeing have been very closely correlated. In low-income regions any additional income generally leads to increases in wellbeing. However, empirical evidence has shown that when countries or people become sufficiently rich, they reach a threshold where their wellbeing stagnates.
- It does not show inequalities. You can only derive the average income of people in a country using GDP. If the average income increases, it might be that the rich are getting richer at a faster rate than the poorest getting poorer. This obviously has large impacts on wellbeing, but it can also threaten social stability. Income inequalities have been rising across many countries, with drastic health and social impacts. Focussing on GDP masks how the fabric of society can fray, even while GDP itself grows.
- It does not tell us about future wellbeing and sustainability. GDP measures the current level of economic activity, but it does not tell us about the future. Imagine taking out a loan to buy something, it could improve your wellbeing but also limit your ability to take out future loans, and the repayments could become harder. At some stage in the future the whole debt needs to be repaid. Something similar happens with GDP which ignores “debts” not sold on the market, such as climate change or biodiversity loss. Debts which future generations will be burdened with. While natural threats are amongst the most obvious, other long-term social and economic problems pose significant challenges as well. Examples are an aging society, breakdown of social cohesion and lack of investment in infrastructure and education/innovation.
- It is not a good proxy for progress. Most economists would agree that GDP is too narrow to be a direct measure of progress. However, it is often argued that GDP is good proxy for progress. The rationale is that economic growth is needed to pay for increasing material goods and services like housing, food and other needs. A higher GDP is also an indication of the tax base of a society. Thes taxes are needed to help to pay for public services like health and education, which are vitally important for wellbeing. Some have even argued that higher GDP is a prerequisite for improvements in the environment and inequality. The argument goes that we need to grow the cake to make room for green investment or redistribution. Thus, GDP While intuitively appealing the empirical evidence is mixed for these types of relationships and depend on countries, years and specific circumstances. Even if a positive historical correlation is found, it cannot simply be assumed to persist in the future. GDP can therefore not be taken as a proxy for progress, and we need direct measures of wellbeing, inclusion and sustainability to make a true assessment of progress
There are dozens if not hundreds alternatives to GDP that have been proposed. You can read all about them here.