Are We Measuring the Economy All Wrong?
Written by Isaac Chotiner via Slate on 1/30/18
In his new book The Growth Delusion: Wealth, Poverty, and the Well-Being of Nations, David Pilling argues that the fundamental measurement we use to gauge the size and success of our economies—Gross Domestic Product, or GDP—gives a skewed and misleading picture of how healthy our societies really are. By focusing on economic transactions that may not actually benefit a society, and not accounting for things like environmental damage and human capital, we have fallen victim to a limited understanding of what it means to flourish.
I recently spoke by phone with Pilling, who is the Africa editor at the Financial Times. During the course of our conversation, which has been edited and condensed for clarity, we discussed our changing conception of what “the economy” is, the countries with a more advanced definition of economic success, and what Brexit tells us about how people evaluate the worth of their societies.
Isaac Chotiner: It seems like you want to draw people’s attention to the subjective choices we make when we measure an economy. What are some of those choices?
David Pilling: We talk about growth and we talk about the economy, and I’m not sure that we really pause to think what exactly “the economy” is. When you delve back into the history of this, you find that the term “economy” and the way we think about the economy now are relatively new concepts. In my own country, in Britain, the economy was not used in a political manifesto in its modern usage before 1950, and yet in the last manifesto of the Tory Party, which won the election, I think it was used 57 times.
The economy really became a thing in the 1930s when [the economist] Simon Kuznets was asked to think about how to measure it, really in response to the Wall Street crash and the Great Depression. But there were lots of question marks. What should we count? What shouldn’t we count? Do we count all production or do we only count production of things that we consider good for human well-being? What is an intermediate input into production, which sounds very technical, but in a sense it’s not.
GDP measures not only everything that we produce, but it measures the value added. For example, you don’t count flour and then bread and wheat because the wheat goes into the flour which goes into the bread. You have to discount each stage. Kuznets, for instance, thought we should discount the roads that took people to work because the roads are really an intermediate input into production. He also thought that maybe we should discount banks, financial speculations, because really they were just a means of allocating capital. In other words, how we define the economy is not natural thing. It’s not like measuring the mass of a mountain.
What is it about our current way of measuring that you think is shortsighted or wrong?
Well, there are many things. One is that we count everything. We count pollution, for example. If you pollute, that’s counted in the cost of production. China is growing at 10 percent a year, but we all know that a byproduct of that, and in China’s case not such a hidden byproduct, is really horrendous pollution. Absolutely toxic rivers, toxic air which can kill people. None of that is discounted from the GDP. In fact, more than that, when China gets around to cleaning that up, it will also be counted at GDP.
In Britain right now, and I think in America too, we’re now beginning to think about plastics. You have plastic production. The more plastic we produce, clearly the better for GDP. Of course, that plastic is going to be with us for hundreds and hundreds of years. In Britain, we produce enough paper cups, which are actually laminated with plastic, every year to circle the world five and a half times. That is going to be in the ocean for generation after generation after generation. Yet, we count that as positive. I think we need to stop and say, “What is it we want to produce, and what is it we don’t want to produce?”
What GDP doesn’t tell us anything about is our wealth and the assets that we need to produce that income. Let’s take Saudi Arabia. Saudi Arabia is producing all this income, doing extremely well. What happens when the oil runs out? GDP just doesn’t measure that. The point is that GDP wouldn’t even think about that. There’s no prism through which we examine these things.
There’s no sustainability at all brought into our prime measure of economic well-being.
Other people have come up with different ways to measure the health of a society. The Indian economist Amartya Sen, for instance, wants to look at indicators having to do with different kinds of freedom. How does your view differ from people like Sen or are you on the same continuum?
I definitely have some sympathy with people like Sen. What I’m saying is that we should think about other things as well. Income is a means to an end. It’s not the end in itself. Economists will argue with some justification, “Yeah, but there’s this very good correlation between income growth, GDP, our economy as a nation as it’s measured by the GDP and the things that we want, health, education, etc.” I would say, “Yes, but … ” The but is quite a big but.
For example, in America, one of the wealthiest countries on earth: When you begin to delve into the numbers in a way that GDP doesn’t really tell us at face value, there are pockets of incredible poverty. We now discover that American life expectancy has actually gone down in the last two years. This is weird in a country that’s as wealthy as America. In other words if you delve beneath the numbers and begin to pick them apart, you find things that GDP covers up.
Is there any country that you think is doing a good job of evaluating the actual state of the country as it matters to people and over the long term?
Norway is a country that comes to mind. There’s a little bit about this in my book. Norway started counting its trees 100 years ago because it was basically exporting them all. The government thought, “Hang on, they’re going to be gone, so let’s count them.” One of the messages of my book if you get into measuring something it’s usually because you care about it. They had to count their trees and then count fewer trees the next year and fewer trees the next year. They decided to do something about it. They’re still counting their trees. In fact, now you have forests covering Norway.
When Norway discovered oil, they didn’t just spend all the oil money as many countries including Britain and many developing countries do, blowing their oil wealth in one go. They established the biggest sovereign wealth fund in the world, which is really the legacy that they’re leaving to future generations.
Norway was kind of a predictable answer. I don’t mean predictable like it was a bad answer, but when I asked the question, I thought, which Scandinavian country is he going to list? Are there any countries that are more surprising?
Let me name two. One is not a country. It’s a state: Maryland. Another is a country, a big one: China. Let’s start with China. Bizarrely, because there I was in a sense talking about the problem with Chinese growth before. The interesting thing is they recognize that, and there’s an economist in my book called Niu Wenyuan who invented what he calls Green GDP, which is really a way of trying to discount some of these things.* He tried to discount things like pollution. He tried to discount what he thought of as a useless expenditure. Some of what we count as GDP is not much better than digging a hole and then filling it up again. He said if you do that, like if you build a bridge and then decide it’s rubbish and knock it down again or if it falls down or no one uses it, then that’s kind of useless GDP. And this is beginning to influence Chinese policy. I’m not saying China is a paragon of virtue, but it’s definitely recognized something, and their policy reflects that.
What about Maryland?
Maryland has adopted this thing called GPI, the Genuine Progress Index. It’s only a side thing. They haven’t ditched GDP and replaced it. The GPI is a more sophisticated version of that Chinese Green GDP really. They adjust for various things.
Just to give you a slightly quirky example. They take off alcohol consumed in binge drinking. They decided alcohol normally drunk, good. Alcohol consumed in health destroying, socially reprehensible binge drinking, they take off GDP. They also take off burglar alarms, because that’s what they call a defensive expenditure. They take off wetlands destruction. None of these are perfect. They’re very hard to weight, but they kind of make policymakers say, “What is it we want?”
Canada has a similar index. Again, it’s peripheral, on the edges of things that begin to influence thinking. What is it we want and how might we achieve that rather than let’s get to growth at all costs.
Britain is preparing to leave the European Union. There’s been a lot of talk about whether this will help or hurt its economy. What is your biggest fear about the impact on Britain, not in terms of GDP, but just in terms of these other things you’re talking about?
That’s a quite pertinent question, but the answer is quite complicated. British people were told in this referendum that if you vote it will damage the economy. I actually think that is true. I think Britain will be worse off as a result of leaving Europe and losing untrammeled access to the biggest market in the world, Europe.
However, a majority of people for various reasons, good and bad, mostly bad but sometimes good said, “We don’t care. Even if it’s bad for our economy, we still want to go this way.” I do think that with some of the reasons that people had were misguided. But it helps feed into my argument that some people said, “Well, it’s not the economy, it’s something else. It’s national identity or it’s because they want a sovereign parliament.” I think there is a kind of a zeitgeist, which is really why I decided to write this book. People [say], “Yeah, we want the economy to be bigger. We want growth,” but that’s become a bit of a mantra. People know there’s something a bit fishy here, something a bit wrong.