Monday, 16 May 2011

Gross Domestic Poppycock

Somebody might suggest that a discussion on GDP is perhaps not the most scintillating of topics.  That, of course, is an absurd notion, but should a rebuttal be deemed as necessary then let me state this, that taking a look at the significant failings in this most feverishly scrutinised of metrics, is a very good way to prompt debate about what really is important to us. So, on that basis, I shall grant myself permission.

As I'm sure you're aware, GDP, Gross Domestic Product, denotes the total value of goods and services produced by a country over a given period of time, usually a year.  And it is generally used as an indicator of a country's economic health, and so in turn of the general standard of living of a country's citizens. All well and good.  If, that is, the indicator was meaningful.  Unfortunately, it is somewhat flawed.

Firstly, it gleefully ignores any negative impact that results from activities that contribute to it. In this way GDP can be considered as analogous to the revenue of a company.  And although it's good to know that a company is taking £1 million a year in revenue, it is a worthless figure without knowing that the same company's costs are, say, £2 million.  Similarly, GDP tells us the total value of our output, without even a hint at the value of the costs to society. These costs might be: environmental pollution, noise pollution, depletion of resources, crime, stress, reduction of leisure time, loss of community and family values.  This negligence on the part of GDP can lead to ludicrous results.  For example, natural disasters such as the Japanese earthquake and environmental disasters like Exxon Valdez do wonders for GDP - so does this mean we should have more of them? On a smaller scale, an individual that sits for two hours a day in traffic jams to get to/from work, actually has a greater positive effect on GDP than someone who travelled there congestion-free, because of all the extra money spent on fuel.  So, this tells us that clogged up roads are good for the economy, right? Such examples are endless.

The second problem is the flip-side.  The fact that, although the supposed role of GDP is to measure a country's output, it completely ignores a huge sector of unpaid but productive work. Imagine a mother who stays home to care for children - this is productive work which is not accounted for. It would have been, of course, if she'd paid a nanny instead - but where's the difference? Further imagine if, whilst this mother is at home, she also grows fruit and veg in the garden to feed her family. There is a very tangible output to this activity which is also not counted.  Also, what if she cares for an elderly neighbour and volunteers at a charity shop and bakes cakes for the WI raffle and sits on the PTA. She's a busy lady, our mother, it's true.  In fact, she is effectively in full-time productive (albeit unpaid) employment, and yet, apparently, it is not valued, it is not important!

But having had such fun tearing shreds out of GDP, let us step back, and ask, why are we even bothering to attempt to measure economic output in the first place? Do we really care how many Dysons we've bought and how many Ben & Jerrys we've consumed between us?  Shouldn't we be more focussed on how these things make us feel ... and indeed how we feel in general? Isn't the goal to maximise our well-being, not our DVD back catalogue?

It's interesting to note that the politicians and world leaders already get this.  Or at least some of them do ... to some degree.  Back in 2008, President Sarkozy of France asked economists to set up the Commission on the Measurement of Economic Performance and Social Progress (CMEPSP).  We've all heard lots about this haven't we? And in the US, one alternative being considered is the "genuine progress indicator" (GPI) which attempts to address the issues with GDP by discounting costs to society and including work done in the unpaid economy. And only last month the UK's Office for National Statistics started collecting data on happiness and satisfaction, albeit on a small scale of 200,000 people - the first country to do so at a national level.

These are promising steps, and remarkably they're even in the right direction, but until there is consensus among the world nations on a new measure to replace it, GDP will be all we have to rate our performance, which we all so love to do. Until then, GDP will continue to be touted by the public media as the primary indicator of a country's health, and so policy makers will have no choice but to strive to maximise a meaningless number, with increasingly dire consequences.

So the discussion continues: what should our social barometer be?


Dee said...
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Dee said...

I'd be interested to know what GDP was intended to measure - was it just a simple (/naive) measure of productivity or was there more thinking behind it? Were its shortfalls acknowledged or taken into account in any way? Perhaps it was just a simple way of comparing the level of development of relative countries and has just become outdated so we now need something more?

Paul J. Newell said...

Thanks for the questions. I think the first part can be answered nicely by this Scott Adams strip:

That is, the economists who devised it knew very well what GDP was measuring and what it wasn't. However, the details of this were probably steadily eroded as they passed up the layers of seniority on the way to the head's of state, who ultimately saw it as a much more general purpose metric.

But, so as not to be too harsh on the governments of the time, it's important to note there were two things very different about the world back in the 1930s and 40s when GDP was developed. Firstly, economic growth at those times, particularly when rebuilding a country post-war(s), was far more closely linked to national welfare, because so many lived below a basic 'acceptable' standard of living. So a drive to increase economic output was totally rational. Today, increased welfare will not so directly follow from increased income, because we are so better off.

Secondly, due to the nature of international relations, countries acted in competition to a greater extent - their relative performance was of keen interest. So a simple, globally meaningful measure was extremely important. Nowadays, perpetual competition on economic growth with, say, Germany, is not of long-term benefit to anyone. The solutions have to be more global.

So, it's true that times have changed and so must our goals, and the way we measure them.

Hope that answers your questions.

Dee said...

Thanks Paul, that does answer my questions. Now I can see that GDP was a legitimate and useful measure at the time, we just need something more meaningful for today, and the future. And thanks for the Dilbert reference :)