Why our obsession with GDP ignores harm done to welfare and the world

Tziamalis, Alexander | February 15, 2018 | Leave a Comment


One of the first things economics students learn about is Gross Domestic Product (GDP). GDP is also a central concept in many political debates, including Brexit. Will it rise? Will it fall? What effect will this have on our lives?

Gross Domestic Product measures the total value of goods produced and services provided in a country, calculating the net value added by each economic “actor”. So if you produce a car sold for £10,000 but you bought parts and materials worth £8,000, then your contribution to the GDP is £2,000. GDP assesses the size of an economy as well as the incomes it generates and the pace at which it grows (or shrinks) over time.

A new book by economics journalist David Pilling suggests that in some developing countries GDP has become a national obsession – and with good reason. A nation’s GDP can invite foreign investment, or scare it away.

Even in developed economies a failure to boost GDP yearly can have negative economic and political repercussions. But despite its wide use, there are problems with attaching so much importance to GDP.

Any economics textbook will admit that GDP is flawed when it comes to measuring production in an economy. (One of the first to highlight this was the economist who invented it, Simon Kuznets, who in 1934 warned US Congress of the fundamental inaccuracy of his calculations and the inadequacy of GDP in assessing an economy’s true welfare).

One problem is that the black market, cash-in-hand payments and tax evasion are all excluded from GDP calculations. We’d like to include them, but we simply don’t have the data. A second issue is the number of non-monetised items produced in an economy.

A joke among economists goes that if you marry your car mechanic, GDP will fall. A service you used to pay for is now free of charge and therefore included in GDP. The same applies to non-chargeable activities like childminding by grandparents, or cooking food at home.

A further limitation concerns public goods. Economists are still perplexed by the economic contribution of the army or a primary school for example. In many cases we just add up the cost of a public good in the GDP calculation yet this is clearly wrong. A public good can cost little and offer great value, or vice versa.

There’s also the difficulty of measuring the economic contribution of banking and financial services. To capture the value produced by banks, statisticians use the concept of “spread” – the difference between the interest rate on a risk-free asset and the lending rate. Then they multiply this by the number and value of loans in an economy. Yet in the financial crisis of 2008, the spreads rose due to uncertainty, making the economy appear to be producing more from financial services than it was before. And it really wasn’t.

GDP spin

And while GDP fails to provide us with an accurate picture of economic activity, it fails even more in illustrating our true welfare. This is one of the main arguments in Pilling’s new book, the Growth Delusion.

When BP spilled oil in the Gulf of Mexico in a major environmental catastrophe in 2010, the GDP in the US went up as a result of expenditure on salvaging work. Likewise, cutting down the Amazon forest actually raises GDP in the region.

Trees come down, GDP goes up | Shutterstock
Trees come down, GDP goes up | Shutterstock

In these instances, the economy appears stronger (according to GDP measures) despite clear damage being done to the planet. In fact, almost nothing would increase a country’s GDP more than a war – with all the government expenditure and frantic production this brings.

Another major limitation is that inequality is not portrayed in GDP. In a world where 1% of the population owns more than 50% of the wealth, perhaps we should be asking who benefits from economic activity – not simply how much economic activity there is.

GDP even fails to capture our true welfare from consumption, an area which is supposed to be one of its strong points. For example, it is likely that people now listen to more music than ever before – without physical purchases. Long-distance phone calls were once expensive, but can now be made for free, so do not form part of the GDP calculation.

But GDP isn’t all bad. It may not be completely accurate, but data and measurements have improved over the years and will continue to do so. And it was never designed to capture our society’s welfare and longer term environmental sustainability, so we can’t blame it for that.

Our problem remains though. GDP’s grand figure attracts attention, gravitates towards the centre of economic debates and ultimately masks the most fundamental issues in our economies and societies. Speaking out about the limitations of GDP is a good step but it’s not enough. The power of GDP’s simplicity will eventually win again.

As Pilling suggests, what we really need is another index. To that end, a number of ideas have been proposed by academics, while the United Nations and the Bhutanese government argue for measure of happiness. It’s now time we furthered this discussion in earnest.

Taking over the world | Shutterstock
Taking over the world | Shutterstock

The ConversationUniversally agreeing on a new index will not be easy. It will be hindered by national priorities, differing cultures and political party agendas. Yet we succeeded before with GDP, and we can certainly do so again. Or, we can just sit back and let the current obsession with GDP consume our economies – and our planet.

Alexander Tziamalis, Senior Lecturer in Economics (Associate Professor) and Consultant, Sheffield Hallam University

This article was originally published on The Conversation. Read the original article.

The MAHB Blog is a venture of the Millennium Alliance for Humanity and the Biosphere. Questions should be directed to joan@mahbonline.org

MAHB Blog: https://mahb.stanford.edu/blog/gdp-obsession/

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  • Elelei Guhring

    GDP is the obsession of sociopaths who desire wealth and control of everyone else. They are incapable of caring for us. Their only concern is for their own pleasure. Until we stop following them and listening to them we haven’t a chance. Talk with people in your community and build your own local economies, your own schools and police forces, your own local governments. Replace all the structures that destroy with ones that enrich in a new democratic environment that lives in harmony with nature. If you can think of an excuse to not start, you’re still following and playing their game. This summer I stop following. I’ll have a book out by 2019 on how everyone else can follow someone who is on the right path. The book will be free.

  • stevenearlsalmony

    The current colossal scale and fully anticipated growth of distinctly human overproduction, overconsumption and overpopulation activities now overspreading the planet on our watch, are patently unsustainable on a celestial orb of the size, composition and ecology such as Earth.

  • I feel reminded of Donella Meadows who pointed out that the goal of a system will determine the course it takes. Our so called “economy” has the single minded goal of “producing” more money. That’s what it does. No matter what. In 1999 I had written a novel in German titled “Rabenwelt” (Raven World), that contains a metaphor: In some not too distant future the Earth is discovered by aliens. There are no living beings, the atmosphere is yellowish and acidic, but the planet is covered, ever inch of it, by glass towers packed with computers doing nothing else but running processes that increase a certain numeric value. That was before the advent of crypto-currencies. An “economy”, entirely virtualized, entirely freed from natural constraints and the quirks and irregularities of human behavior, solely devoted to increase money, is the logical end-point of our current economic structure. I recall that Douglas Adams long ago wrote something along the lines that one day there will not only be video-recorders that record movies – there will also be video-recorders that watch them for us. Meanwhile my friendly Dobermann stretches out in the sun next to me, giving out a deeply contented grumble. No money involved in that kind of satisfaction, no consumption or possession of anything, and no economic growth. Move out of the sun you, Diogenes told Alexander the Great, when he offered to fulfill him any wish he desired…

  • Mary L. Keller

    What if we shift to an ecological index as suggested by Emanuel Pastereich https://www.huffingtonpost.com/emanuel-pastreich/environment-eco-currency_b_3298602.html As surely as economists and financiers have invented instruments for a fiat economy, a new science of natural resource value can be navigated, is already being navigated. Who doesn’t know that water is the most precious commodity of the coming decades? We already know the stakes–this is a matter of emerging onto the policy scene using such big data tools as the Yale Natural Resource Index. With Rod Morrison, an organic farmer and rancher, I have proposed the FCV as a currency, the Food Calorie Value. With such a currency, your gallon of petrol would cost the 31,000 calories that it burns, plus the calories to extract, refine, transport, and live with its waste (since it will generate heat in its eliminated state as well). Weigh the cost of your next flight (jet fuel is closer to 36,000 calories per gallon, plus extraction, refinement, transportation costs, at 3-4 miles per hour, divided by 100 people on the plane for your cost) compared to the cost of a locally produced carrot. Priorities will become much clearer.

  • Mike Hanauer

    “Growth will solve our problems”. I have heard it so many times. It is a billboard that must be destroyed and replaced.

    • Growth can solve our problems. Only it can hardly be the growth of available virtual pseudo-money on bank accounts, ever more concentrating in the hands of a few.

  • Jason G. Brent

    All measures of economic activity are stupid. The earth is finite and, therefore, economic growth will cease. No action by humanity can change that fact. The economy of each nation and the economy of the entire planet grows in a compound manner. If the economy were to grow at the annual rate of 3.5% it would double about every 20 years—by the year 2100 there would be four doublings 2,4,8,16. The economy would be over 16 times as large as the current economy. That cannot and will not happen. When economic growth ceases, population growth will cease or cease shortly thereafter. Any attempt to maintain either or both economic and population growth will lead to the collapse of civilization, the deaths of billions and even the extinction of the human species. Governments and people go crazy when any measure of economic activity declines.Governments and people need to understand and prepare for the coming declines that cannot be prevented. jbrent6179@aol.com

    • I’d not even say that “the economy” growth. It is only a certain financial indicator that inherently follows a mathematically induced forced growth mechanism. Our economic system suffers from deep mathematical flaws, at least if the purpose of economic activity is meant to enable an enduring good livelihood for the population of Earth within a stable bio-geosphere. Forced exponential growth and ever accelerating capital concentration increasingly push this common sense purpose of all economic activity beyond the horizon – a horizon pushed further and further by the quasi religious promise of growth and empty appeals to greed, desire and the invocation of the darkest sides of the human soul.