GDP revisited

Economic progress as measured by growth of the Gross Domestic Product (GDP) has long been the principal objective of economic policy. GDP is however simply a measure of economic activity. By mistakenly conflating such economic growth with improvements in living standards, welfare, and prosperity, politicians and other public policy makers have been persuaded to embrace the growth ethic with almost monotheistic fervour. GDP has as a result become a nigh universal measure of economic improvement and well-being, yet its use for such purpose is certainly inappropriate and almost wholly inadequate, especially if broader-based sustainability imperatives are taken into account.

Economic activity, welfare, and sustainability are distinct concepts that are difficult to capture in a single indicator, and GDP was never intended to reflect anything more than productivity, i.e., the level of economic activity as measured by marketed output. Since its modern-day incarnation in the 1930s, economists have been aware that GDP does not measure welfare although Simon Kuznets (1934), one of its architects who is often mistakenly referred to as the father of GDP, argued at the outset that it should endeavour to do so. Unfortunately, the needs of wartime production following the concept’s inception favoured a more pragmatic focus on measurement of the level of economic activity, which is why GDP was eventually structured as it is¹.

It has been suggested by some commentators that this is not a serious problem because there is in any event a positive correlation between GDP growth and economic welfare. Although this may be true in the early stages of economic development, as economies mature the two indicators start to diverge as the sustainability and ramifications of unfettered economic growth become an issue. Negative externalities such as pollution, environmental degradation, and the depletion of both natural resources and biodiversity (none of which are properly captured by GDP) impose significant social costs and start to compromise economic welfare, challenging the idea that economic growth is always synonymous with improved well-being. Because GDP does not properly reflect the economic or ecological sustainability of activity, more and bigger is not always better, a problematic proposition for mega infrastructure projects that increasingly need to dovetail with sustainable development parameters, and one that has been brought into particularly sharp focus by climate change.

The essential purpose of economic activity should be to foster human development, welfare, and well-being in a sustainable manner, and not to simply facilitate and promote economic growth for its own sake. Given the complexity and interconnectedness of the multiple social and environmental challenges that are now prevalent at all spatial scales, there is clearly need to go beyond GDP as currently formulated and to embrace criteria that explicitly address the links between the economy, environment, and society by creating performance metrics that promote truly sustainable development, i.e., development that improves the quality of life within the carrying capacity of the supporting ecosystems.

The idea of a single and holistic headline indicator of an economy and its performance is extraordinarily seductive, and GDP attempted to fulfil this purpose for many years. Its simplicity, linearity and universality served the post-war economies of the developed world well, but as presently structured and deployed it has long passed its sell-by-date. More appropriate metrics that reflect genuine and sustainable economic welfare, social development, and human well-being are required and, to this end, numerous studies have been undertaken. Detailed scrutiny of these is beyond the scope of this short commentary, but they can nevertheless be briefly categorised under three broad headings that either adjust, replace, or supplement GDP (see for example: Stiglitz et al. 2009; Schepermann et al, 2009; Jackson and McBride 2005) as follows:

1. Adjusting GDP

In this approach, GDP and other traditional indicators of similar ilk are adjusted by simply adding appropriately monetised social and environmental factors as inputs, without compromising the logic and basic structure of the underlying algorithm. Unfortunately, the results of such exercises have yet to yield robust and reliable outputs because their apparent veneer of objectivity, based on deployment of observable market prices as the guiding principle, fails to mask the inherent uncertainties involved in monetising or identifying appropriate shadow prices for social and environmental goods. Indeed, the whole question of monetising different aspects of economic welfare has proved especially elusive. Although the search for the holy grail continues, there is growing acceptance that no single such monetised measure can be developed that provides all the information required to assess and manage an economy.

2. Replacing GDP

Approaches that seek to replace GDP purport to be more holistic by explicitly recognising the conceptual distinction between economic activity and welfare, and seeking to assess well-being more directly, e.g., by assessing satisfaction and/or the achievement of basic human functions. This requires multi-dimensional inputs showing the links between the economy, environment, and society. It also involves dispensing with money as a performance indicator and enumerator, and its replacement with numeric scoring. The problems of aggregation remain however, because of the heterogeneity of the various inputs. Unfortunately, simply adding the scores for a variety of different dimensions based on what are essentially subjective weightings and scaling has often only added to disagreement over the relative importance and/or implicit values of the respective inputs, rather than on more considered scrutiny of the methodology itself and the efficacy of the resulting metric(s).

3. Supplementing GDP

Failing to adjust GDP to improve its utility or to develop an appropriate and more holistic substitute has resulted in an increasing focus on simply retaining GDP to measure economic activity to inform fiscal and monetary policy (the functions for which it was originally designed and where its effectiveness is well established), but supplementing it with other measures of welfare, progress, and well-being that are afforded equal recognition by policy makers yet use different and more appropriate methods to capture and quantify their respective notions. Although the reliability and robustness of some of the metrics that have been developed for this purpose is still questionable, the recognition and deployment of an acceptable set of such indicators would undoubtedly improve decision-making in support of more sustainable development, albeit almost inevitably making it more complex, as well as tempering the pursuit of ambitious and often ill-informed growth targets, green or otherwise². It would also almost certainly facilitate better and more equitable determination of infrastructure investment priorities, not least for those major projects designed to address spatial inequalities in pursuit of regional development objectives and/or similar so-called levelling-up agendas. Against this backdrop, the expansion of GDP accounts by a supplemental set of standard and discrete indicators, both underpinned and linked by an appropriate statistical framework or dashboard, is fast emerging as the preferred way forward.

Social scientists, and economists in particular, have long been aware of the pitfalls of public policies that focus unduly on stimulating economic growth as measured by GDP and the resulting problems of then associating such growth with economic progress. Of particular concern has been the use by politicians and other policy makers of what is essentially a relatively narrow measure of market performance (GDP) as a proxy to gauge improvements in the much broader concepts of welfare and well-being. What we measure affects what we do, and inaccurate or misleading measures inappropriately applied distort the decision-making process. If measurements are flawed, plans and strategies are also likely to be so, be they concerned with infrastructure and/or other aspects of development. The progress of society should be valued through more explicit focus on quality-of-life improvements, and to effectively measure progress in sustainable development, welfare, and well-being, one therefore needs to look further than just GDP.

In his play Lady Windermere’s Fan that was first performed in 1892, Oscar Wilde had one of the characters, Lord Darlington, describe a cynic as ‘a man who knows the price of everything and the value of nothing’. It seems that Wilde was ahead of his time and Lord Darlington’s quip could be equally well applied to those policy makers who continue to lend such unconditional support to the pursuit of GDP growth for its own sake, with scant regard for the social and environmental consequences.

Brian G. Field
Bartlett School of Planning, University College London, London, UK
[email protected]

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 After the Bretton Woods conference in 1944, GDP became the main tool for measuring a country's economy, although Kuznets (1934) continued to warn to no avail against its use as a measure of welfare. He also highlighted some of its other deficiencies such as the focus on market activities and the exclusion of household production.

2 I’m persuaded that so-called green growth is something of a false panacea as currently promoted, fuelled by a mantra that is nothing more than a persuasive oxymoron. It is self-evident that future development must be cleaner and greener, but this doesn’t necessitate continuing with unquestioning support for the growth ethic per se. For example, in pursuit of the UN’s sustainable development goals (STGs) and as we fast approach the global limits to growth, logic dictates that the developed “north” should actually be doing less and perhaps even starting to contract, if only to create the bandwidth required to allow the developing countries of the “south” to make economic progress without further compromising the carrying capacity of the planet.