May 8, 2008
Retiring the GDP (Gross Domestic
Product)
by Ron Robins*
The GDP statistic has to be retired. It is like an
old shoe that no longer fits. GDP is fatally flawed as a
measure of economic and societal well-being and
economists know it. Yet it is universally used to
compare living standards and economic growth like one
compares sports scores. Furthermore, as each nation
compiles it a little differently, especially regarding
the inflation ‘deflator’ component, such comparisons are
nonsensical. What is exciting is that there are some old
and new indices getting attention that could replace the
GDP. This is most welcome.
Alternatives to the GDP
Technically, GDP is the total market value of all final
goods and services sold in an economy in any particular
time period. As we progress in an era of
Enlightened Economics, it is destined to be
superseded by new indices geared to more accurately
measure affluence, sustainability and quality of life,
generally. Such indices include the
Index
of Sustainable Economic Welfare (ISEW), the
Genuine Progress Indicator (GPI), and variants of
them. Other intriguing indices include the
Calvert-Henderson Quality of Life Indicators, the
UN’s Human
Development Index, and the
Invincibility Index. The common thread in these
indices is that as well as including economic activity,
they also account for societal and environmental factors
related to real human development – which the GDP does
not.
The GDP statistic should be retired because…
- According to economist Clifford Cobb and
colleagues, “Much of what we now call the growth
of GDP is really just one of three things in
disguise: (1) fixing blunders and social decay from
the past [paying for pollution, costs of crime,
etc.]; (2) borrowing resources from the future [GDP
excludes the costs related to farmland depletion,
water, other resources]; or (3) shifting functions
from the traditional realm of household and
community to the realm of the monetised economy
[i.e. eating out, rather than at home].” (Text
in parenthesis has been added for additional
clarity.) For a fuller explanation, see
“What’s wrong with the GDP.”
- Losses associated with natural and man-made
disasters are not deducted from the GDP. For
instance, Hurricane Katrina brought mass
devastation. Yet the enormous economic losses were
not deducted from GDP. But the clean-up costs were
added though!
- GDP does not account for the value of
non-monetary, economic, transactions. Such
activities would include elder care by family
members, and volounteer activities. In 2002, the
International Monetary Fund (IMF) found that such
activities represented the following shares of
economic output: up to 44% of GDP in developing
nations, 30% in transition economies, and 16% in
Organization for Economic Cooperation and
Development (OECD) economies (Schneider and Enste,
2002). See
The Genuine Progress Indicator 2006.
- GDP was initially created to measure WW11
wartime production. Its principal creator Simon
Kuznets cautioned that
“[t]he welfare of a nation can scarcely be inferred
from a measurement of national income” (Kuznets,
1934).
- There is even evidence that a focus on GDP at
the expense of other quality of life indicators can
lead a society to a false sense of worth and even
create unhappiness. In The Loss of Happiness in
Market Democracies published in 2000, Emeritus
Professor Robert Lane of Yale University compiled
exhaustive research data showing the relationship of
GDP to increasing unhappiness. He states, “Amidst
the satisfaction people feel with their material
progress, there is a spirit of unhappiness and
depression haunting advanced market democracies
throughout the world…” From his perspective, the
rigors of modern market economies increasingly
create family and relationship break-ups with
subsequent loss of companionship and happiness.
- Acknowledging this trend, the World Health
Organization recently predicted that by 2020,
depression will be the 2nd leading cause of
disability, just behind cardiovascular disease.
(However, with rising consciousness, I believe this
trend will be reversed.)
- GDP is short-sighted accounting. Things that
bump-up GDP in the short-term often have harmful
long-term human and financial consequences and
costs.
From the foregoing it is clear that the GDP statistic
has little relevance as a measure of our present day
material and social well-being.
GDP provides a false sense of progress
Comparing the GDP to GPI (Genuine
Progress Indicator) numbers illustrates how false is the
sense of gain with the GDP in regard to our human
condition. Look at this chart comparing the real
(inflation adjusted) US per capita GDP and GPI growth
between 1950 and 2004. Note how the GPI figure
significantly lags GDP. It suggests that when items such
as resource depletion, crime costs, and volounteer
sector costs,’ etc., are accounted for, the per capita
net benefit of a rising GDP is fully negated.
Source:
(c) 2007 Redefining Progress
Retire the GDP now
Some of the ways social and
non-market costs are included in the ISEW, GPI, etc.,
are definitely controversial. Perhaps for these reasons,
such indices have not as yet achieved common usage. But
the GDP, created for the very reason of measuring WW11
wartime production, has been badly and wrongly used as a
measure of our quality of life.
Enlightened Economics demands the GDP be retired
and replaced with more enlightened indices!
*
Ron Robins, MBA, is founder, Investing for the
Soul (http://investingforthesoul.com/),
Huntsville, Ontario, Canada. He advocates, teaches, and writes
on the subject of ethical investing. To contact him,
e-mail
to Ron Robins or call 705-635-3034.
© Ron
Robins, 2008. |
