Back in 1934, when Gross Domestic Product was first being developed in the States, the economist in charge, Simon Kuznets, wrote “…the welfare of a nation [can] scarcely be inferred from a measure of national income…”. Right from the start, the economists were saying GDP was merely a measure of economic activity, not of the wealth of a country, not of the standard of living of its people. But that’s exactly what it has been used as ever since, a proxy for standard of living. It’s just not up to the task.
All GDP does is measure economic activity. It doesn’t count anything that isn’t bought and sold – volunteers, clean air, cost of crime, etc etc. It doesn’t measure how much of the wealth produced is retained and continues to increase our welfare into the future. It doesn’t measure how much wealth is destroyed in making new stuff. It doesn’t measure whether the economic activity is for good stuff – spending on military equipment or building a new coal power plant counts as well as spending on teaching a child.
Kuznets later added on GDP: “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.”
It hasn’t happened. Any growth, at any other cost, is taken as a good outcome in and of itself.
We need a measure of standard of living, of human welfare, that takes into account everything that GDP misses, especially the damage done to our environment and our society in pursuit of more economic activity.
The Genuine Progress Indicator is the best attempt at that. Rather than merely measuring economic activity, GPI takes into account what we lose as well. Costs like resource depletion, crime, environmental damage are added, as are benefits like unpaid labour. GDP could be seen as like a company’s revenue. GPI is the net profit.
GPI has its problems (standardisation of metrics, timeliness etc) but so did GDP until the early 1980s. It can be developed into system for measuring the economy’s ability to deliver human well-being, replacing the idea inherent in GDP that economic growth is its own end. But GPI isn’t finding a lot of support from officialdom because it exposes an uncomfortable truth.
The legitimacy of capitalism rests on the foundation stone of perpetual growth – sure 5% of people own 50% of the stuff and everything you produce is owned by someone else who then pays you as little as they can get away with but you got a 50 cent an hour pay rise this year, be content, don’t rebel against a manifestly unjust system. It is no coincidence that GDP started to be measured during the last great crisis of capitalism, the Great Depression. GDP’s default position is up, growth happens naturally and, so, taking GDP as a proxy for our wellbeing gives life to a myth that our standard of living is improving.
A New Zealand team is currently working on the first GPI for this country. The results should be out soon. It will be interesting to see what they say.