GDP: we need a better measure of economic growth
Written by Simon Wilson via Money Week on 3/3/2018
Is GDP a useful measure?
You would think so. News bulletins still solemnly report the latest infinitesimal adjustments to the previous quarter’s growth figures, as if tiny tweaks to provisional estimates were major economic events. But even so, to judge from the recent stream of books proclaiming the end of its usefulness, the days of treating gross domestic product as the pre-eminent statistic that dominates macroeconomic measurement are surely numbered. Ehsan Masood’s book The Great Invention, published in 2016, Eli Cook’s The Pricing of Progress and Lorenzo Fioramonti’s The World After GDP released last year, and most recently The Growth Delusion by David Pilling (published a few weeks ago) have all made the case that even if the statistic was once a more-or-less useful measure of how each national economy was doing, it certainly isn’t now.
What exactly is it?
GDP is the total market value of all the final goods and services produced within a given country in a given period of time, normally a quarter or a year. It is thus an aggregate measure of output or value added, adjusted for inflation. The measurement of the growth of national economies is a surprisingly recent idea, with its roots in the early 1930s. Faced with the Great Depression, the US government asked economist Simon Kuznets (a Russian émigré) to find a way of measuring national income – it wanted to know something about how big the problem was in order to help fix it.
How is it arrived at?
It’s complicated. Diane Coyle, author of GDP: A Brief but Affectionate History, reckons GDP is best understood as an “act of imagination” rather than one of measurement. There is no such thing as GDP out there waiting to be measured: it is an artificial abstraction that tries to add together everything from tractors and shoes to street cleaning and yoga classes. In the UK, the Office for National Statistics is entrusted with calculating the figure after collecting survey data from tens of thousands of firms, as well as government departments. But according to its growing band of critics, GDP is such a blunt instrument that it is no longer fit for purpose. Invented in the manufacturing age “as a way of totting up mainly physical production, GDP is less and less useful for measuring the innovation, quality improvements and low-carbon output of today’s digital economy”, says Pilling.
Is such criticism a recent thing?
Not at all. Economists have been warning about its limitations and possible dangers ever since it was invented. Indeed, Simon Kuznets himself, in his first report to the US Congress in 1934, specifically warned that GDP needed to be handled with care, since (a) it is a measurement of income, rather than national welfare, and thus doesn’t take into account issues of distributive equity; and (b) the very act of boiling down an economy to a single figure is likely to entail risks, since it suggests a level of precision and certainty that simply doesn’t apply to economic measurement. As Kuznets put it, in general “the valuable capacity of the human mind to simplify a complex situation in a compact characterisation becomes dangerous when not controlled in terms of definitely stated criteria”.
Because simplicity can be misleadingly reductive – and there’s a clear risk that GDP growth becomes an end in itself at the expense of genuine advancements. As Kuznets wrote some years later in 1962, “distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.” Much of the recent criticism of GDP is rooted in similar worries. For example, GDP takes no account of improvements in technology or the calibre of services. It takes no account of the damage done to the environment – and therefore to the long-term sustainability of an economy – by the activities it measures.
What are the other criticisms?
The excessive fetishisation of GDP figures stokes social and environmental crisis by encouraging growth at any cost. GDP gives a false picture of countries where the informal economy is a major part of the whole, or that can’t afford the costly surveys needed to arrive at a half-accurate figure. It is woefully inadequate in representing developing economies, failing to capture both significant progress and the persistence of extreme poverty. And swathes of non-monetised activity is invisible entirely. Most obviously, this includes all housework and caring for relatives. It also includes other zero-priced services, such as the value derived from using Twitter or Facebook, say.
What’s the alternative?
One immediate change favoured by David Pilling is for the standard economic measurement to be shifted from national GDP to average GDP per person, preferably the median rather than the mean (to avoid letting the picture be unduly skewed by a small proportion of very high earners). More broadly, many critics have proposed more wide-ranging metrics that account for environmental, human and quality-of-life factors. One such exercise is the Inclusive Development Index proposed by the World Economic Forum, which aims to measure growth and development, social inclusion and intergenerational equity. On this measure, the world’s biggest economy by GDP, the US, ranks 28th, just ahead of Panama. China falls from second to 53rd, just ahead of Iran and Albania. Germany is 12th and the UK 21st. The world’s “richest” countries? Norway, Iceland and Luxembourg.