Beyond GDP

Written By: - Date published: 7:45 am, October 7th, 2009 - 31 comments
Categories: economy - Tags: ,

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.

us gpiGPI shows that to be a lie. When the price we have paid for more economic activity is counted, developed countries have been going backwards for decades.

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.

31 comments on “Beyond GDP”

  1. Well known Socialist Robert Kennedy has a wonderful quotation about GNP (applicable to GDP). It goes like this:

    “The Gross National Product includes air pollution and advertising for cigarettes, and ambulance to clear our highways of carnage.

    It counts special locks for our doors, and jails for the people who break them. GNP includes the destruction of the redwoods and the death of Lake Superior.

    It grows with the production of napalm and missiles and nuclear warheads… And if GNP includes all this, there is much that it does not comprehend.

    It does not allow for the health of our families, the quality of their education, or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike.

    It does not include the beauty of our poetry or the strength of our marriages, or the intelligence of our public debate or the integrity of our public officials…

    GNP 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 whether we are proud to be Americans.”

  2. jcuknz 2

    People know the cost of everything and the value of nothing.
    For a long time now I have had doubts as to the value of “improving’ GDP figures. Negative GDP is bad but surely the future rests with a stable GDP? The graph suggests to me that while some are chasing the GDP [ which includes industrialists as well as unionists] ever rising in actual fact we have a planet saving slightly decreasing situation … would be nice to think so.

  3. Ianmac 3

    And the worse the crime the greater the GDP so lets get more crims!

      • Bill 3.1.1

        You forget about the circulation of debt money. I think the argument you link to applies only in scenarios that don’t allow for money to be borrowed.

        • Quoth the Raven 3.1.1.1

          It relates directly to the fallacious thinking that government spending on prisons, the military etc leads to economic benefits without thinking about the unintended consequences.
          If you want to talk about the circulation of debt money and the perverse role of government and central banks in that then I’m all ears.

  4. roger nome 4

    It’s also interesting to note that people in the US, on average, report being less happy than in 1955, when GDP was less than half what it is now.

    http://www.sustainablescale.org/images/uploaded/GDP%20AND%20HAPPINESS%20%20USA.gif

  5. roger nome 5

    On the other hand, GDP appears to currently be roughly correlated with happiness amongst the world’s countries, though past a certain level of wealth, it’s importance seems to decline rapidly.

    i.e. Venezuela, which has a GDP per capita of just $7,000, has and average “life satisfaction” reportage higher than the US, which has a GDP per capita of over $35,000.

    http://blogs.mccombs.utexas.edu/mccombs-today/files/2009/09/happiness-chart.png

    So why all the bleating over the tiny reduction in GDP growth that the ETS is going to bring? Hardly seems a big deal when you think about it.

  6. Bill 6

    GNP and GDP are reasonable measures of outcomes from a market economy insofar as they measure the things that a market economy deems important.

    You can create whatever other measure you wish, the GPI or whatever and all you will do is measure some things that market economies do not and can not award importance to.

    The problem is not the measurements. The problem is the systems you are trying to measure, ie market economies

    • Quoth the Raven 6.1

      Bill – This post had nothing to do with pro-market anti-market argument. I’ve seen almost identical posts about this very issue on pro-market sites, not to mention the numerous articles from said people criticising government’s obsession with growth.

      Anwer me this riddle Bill. I have a pear you have an apple. I value the apple more than I value the pear I propose we exchange apple for pear. You agree. Is that so horrifying?

      • Bill 6.1.1

        There is no riddle at all.

        The market insists (for the purpose and measure of individual success or even merely well being and survival) that I attempt to maximise my return while diminishing yours. It insists that you do likewise.

        Your riddle assumes exchange sans the dynamics of competition inherent to the market economy.

        • Quoth the Raven 6.1.1.1

          Bill – You should look up double inequality of value.

          • Draco T Bastard 6.1.1.1.1

            Have you read the Dahlem Report yet? Or how about Debunking Economics?

            The market isn’t as simple as you make it out to be and a lot of what you’re reading and then spouting off about here is based upon false assumptions. Hell, a lot of the false assumptions were mentioned by the original authors of the economic theories when they put them forward. They put forward those assumptions only because they couldn’t model the complexities. In most cases, this was over a century ago – nothing has changed since and those false assumptions are still being used as gospel.

            • Quoth the Raven 6.1.1.1.1.1

              Draco – The first paper is The Financial Crisis and the Systemic Failure of Academic Economics. I would expect a similar sort of paper from Austrian economists and they’re certainly not anti-market. The first part of the paper discusses models again you would find criticisms of such pratices from Austrians because as they well note economics is not a science.

              Do you think the author’s of that paper are anti-market?

            • Quoth the Raven 6.1.1.1.1.2

              That debunking economics looks interesting. Shame you have to pay for it, Keen’s not a free culture guy I guess. Looking at the overview, he’s seems to have a lot in common with Austrians, and he sees merits in that and other heterodox schools. He himself is post-keynesian. In any event he’s not anti-market either and is critical of Marxists. Since we’re exchanging link here’s one for you – mutualist.org

            • Draco T Bastard 6.1.1.1.1.3

              Do you think the author’s of that paper are anti-market?

              Nope but that doesn’t negate their criticisms of the mainstream neo-liberal theories. It’s not a question of being anti-market but more a question of actual understanding and that is something that we don’t have of the market hence my pointing out that it’s not that simple.

              Shame you have to pay for it, Keen’s not a free culture guy I guess.

              It’s US$10 for the ebook – I’m sure even a student can afford that. No, he’s not a free-culture guy – he says that in his book – but in saying that he does have a blog which contains a hell of a lot of discussion and even a couple of his lectures.

            • Quoth the Raven 6.1.1.1.1.4

              Draco – No it doesn’t negate their criticism of mainstream neo-liberal theories, but me and Bill weren’t discussing that.

            • RedLogix 6.1.1.1.1.5

              @QtR,

              I’m happy to say that I’ve come to respect, if not especially agree with, your point of view. You often have something interesting to say, and better still, express it well.

              So it’s with open candour and good intent that I’m adding my 2c backing up what Draco is saying… Steven Keen is worth investing some real time on. His blogsite is extensive and fascinating… I’ve spent many, many hours getting my head around his material.

              The critical thing is that coming from an engineering background, Keen is the first and only economist I’ve ever read, who makes sense at a gut level. In my world stuff has to work, even in complicated, indeterminate scenarios…or it’s rubbish. Keen gets this; stuff is dynamic and markets do not automatically reach equilibriums. He routinely uses a solid background in differential equations to underpin his ideas. He pisses of neo-classic economists … which gives him street cred, and he was one of just a handful of academics to formally predict and publish the current fiscal crisis. Plus he’s readable…

            • Quoth the Raven 6.1.1.1.1.6

              Red – And so do many others like the Austrians (and like him they saw the recession coming) take this from FEE:

              Interestingly from an Austrian perspective, part of what Meyerson likes about Keynes is his grasp “that an uncertainty attends human affairs that transcends quantifiable risk.’ Any Austrian can say something similar. Austrians eschew mathematical economics precisely because human action doesn’t fit into equations and the knowledge presumed by mathematical modeling is denied real human beings.

              People are not molecules or planets or rats or bloodless calculators reacting to outside forces or instinct. They are entrepreneurial actors who form preferences and plans based on expectations about the uncertain future, none of which can be quantified. Moreover, these factors manifested in action are not fixed and known in advance; people don’t behave according to predetermined utility functions or indifference curves. Plans and preferences emerge when people choose among alternatives in the hustle and bustle of life, and can change unexpectedly and unpredictably as new situations arise (that is, as other people do unanticipated things.) Value preferences are subjective ordinal rankings of utility, or satisfaction, lacking a unit to which cardinal numbers can be attached and manipulated mathematically. Real costs are subjective utilities forgone and thus unobservable to outsiders. There are no constant quantitative laws in human action, according to which, say, doubling the price of commodity guarantees a predictable quantitative response.

              In other words, as the preeminent Austrian economist Ludwig von Mises asked, “How can economic action that always consists of preferring and setting aside, that is, of making unequal valuations, be transformed into equal valuations, and the use of equations?’

              In short, Austrians — Mises, Hayek, Rothbard, Kirzner, and those who have followed — stand second to none in rejecting scientism, the application of the methods of the physical sciences to the social “sciences.’ They have relentlessly critiqued the mainstream’s out-of-touch preoccupation with mathematically describing the Neverland of general equilibrium, while ignoring real-world entrepreneurial action under uncertainty. No wonder Austrian economics has often been dismissed by the mainstream for rejecting the mathematicization that Meyerson properly ridicules.

              BTW – I’m not an Austrian adherent they just have their influence on my thought.

            • Quoth the Raven 6.1.1.1.1.7

              Redlogix – Looking through the archives of Carson’s blog I found a comment of his I think is interesting:

              On Keynesianism more generally: I consider the free market responses to Hobson and Keynes, based on Say’s Law, to be true–as far as they go. The problem is, they don’t go very far. Say’s Law applies to a free market. And Hobson and Keynes were describing the maldistribution of purchasing power under state capitalism. They were quite shaky on the *causes* of such maldistribution, and the question of whether it could arise from a strictly laissez-faire system. But given the *existence* of such maldistribution under state capitalism, their descriptions of its operation were pretty much on the mark. Keynesian fiscal policy fulfills a necessary function for the corporate economy, given the problems of underconsumption created by state capitalism. Joseph Stromberg pointed out that left-wing analyses of overaccumulation and overproduction were quite valid within an Austrian framework, as a description of how the economy actually worked given state-created cartels of overbuilt industry that can’t dispose of their entire product at cartel prices. It’s the corporate capitalists themselves who promote fiat money and state intervention, as a necessary corrective mechanism *given* the distortions that their privileges have already introduced into the economy.

          • Bill 6.1.1.1.2

            My original point was meant to be along the lines of….there are measurements being taken of (to be metaphorical) a steam train. The measurement of gdp correlates with say the velocity of the wheel rims, from which can be determined a host of other factors.

            But a lot of factors are missing and a lot of things remain incalculable from those measurements, so some people want further, different measurements taken.

            Meanwhile, it’s a fucking steam train and we are standing in the middle of the track, but what with all these measurements being taken and their meaning or import debated, the obvious observation is overlooked and the intelligent action that might have flowed from that observation just doesn’t look like it’s going to happen.

            On a different note…or maybe it’s the same note… I cannot understand why, if you advocate democratic participation in the political sphere that you do not advocate for a similar level of democracy in the economic sphere.

            The market is not neutral. It has inbuilt biases. It encourages less than laudable behaviour from those who participate. It favours some individuals or actors over others. It is the market, not the state, that atomises and individualises….and so on.

            So finally the choice is not between a free market and a command economy, or somewhere on a spectrum between the two. Just as it is possible to organise politically through democratic participation, so it is possible to run an economy based on the same democratic principles.

  7. Lanthanide 7

    Really the progress, or lack thereof, of society over the last few decades is obvious to anyone who ponders it for a few minutes.

    Back in the 60’s and 70’s, most families were supported by a sole bread-winner, the father, who went off to work to provide for his family. Since about the mid 80’s, and especially the 90’s, families with two working parents are the new norm. The mother has to work some hours a week simply to make ends meet – and a lot of these families in NZ still qualify for WFF, which is a tacit admission by the government that wages in NZ are too low.

  8. Bill 8

    “a tacit admission by the government that wages in NZ are too low”

    I always saw WFF as welfare for the bosses….as well as a big bloody stick being wielded over jobless parents.

    As for generational progression down the gurgler….far too many obvious pointers for that one.

  9. Draco T Bastard 9

    Right from the start, the economists were saying GDP was merely a measure of economic activity,…

    Right from the start many economists used simple assumptions because they couldn’t deal with the complexity at the level that was needed. They said this in their thesis. These days, despite over a century passing in some cases, those simple assumptions are still in use. Some economists did try to get at the underlying complexity but they are few and far between – they also tended not to be all that “successful” (ie, well off). Only the economists that supported capitalism have been “successful”.

    The lesson is plain, if you want to make a living as an economist – support the false assumptions of mainstream economics that support capitalism.

  10. Adrian 10

    From the graph it looks like the golden years was when Nixon was president. Once he was forced to leave it was all down hill.

  11. rainman 11

    Western civilisation is broken, on average – it no longer makes us all wealthier, just in some cases more comfortable/entertained, and that generally on a non-sustainable basis, too.

    Capitalism as currently practiced clearly can’t continue, but won’t be easily given up by those that benefit from it – or those that naively dream that they too, could achieve the same “successes”. (Current diet and lifestyle further ensures that the emperor’s lack of clothing is unlikely to be perceived by many. And don’t get me started on the media).

    The only sane response I can see is to seek to build a more compelling alternative – even if that is only more compelling once the current mess collapses down a notch or two. (Kevin Danaher’s “party on the yacht” example, for those that may know his speaking). This, however, takes bravery and serious effort, and few will even attempt it. I sincerely doubt any political party will make any difference in this regard.

    In short, we’re screwed.

  12. RedLogix 12

    @Marty,

    Interesting as always, and a really good thread to follow. I meant to ask this earlier in the day, but the data series in the graph stops at around 1994/5.. which seems awfully long ago.

    Any reason?

  13. Phil 13

    I pitched this idea to my colleagues (economists and statisticians) when Red Alert first bought this up. It’s not new, and it’s not novel, but nether-the-less the idea generated a fairly good discussion…

    Firstly; GPI’s are remarkably difficult to measure, and slow too. We’re already frustrated by the fact it takes roughly 5 months too see what GDP q/q% was, and there aren’t a great deal of ways to speed that up. GPI’s might make an interesting analytical study, but I just don’t see them as remotely practical for real-time fiscal or economic policy implementation.

    Secondly; Part of your anti-GDP stance rests on tackling GDP as an individiual measure. It is not.

    The real value of GDP is in understanding how it ‘fits’ with prices and trade, and other measures. It’s all very well to place a value on clean water and clear skies, and claim they make us better off, but they sure as hell aren’t going to pay our import bills.

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