GDP Turns 80

Tasked with estimating the income of the U.S., in 1934 Simon Kuznets developed the prototype for Gross Domestic Product (GDP). First used to help increase production during WWII, GDP is now the single most important economic indicator. It is assumed that an increase in GDP benefits everyone; therefore, its growth should be the primary focus of policy.

This is despite Kuznet’s own warnings that, “the welfare of a nation can scarcely be inferred from a measurement of national income.” Later, in 1962, he criticized the scope of GDP’s use, saying, “Distinctions must be kept in mind between quantity and quality of growth.”

As GDP turns 80 this year, it is worth questioning why we measure our economy this way. It is a topic of great interest to me, and I wrote my Master’s thesis (available here) on the topic. But I’ll just make some summative points here.

Namely, GDP growth is wrongly assumed to translate into increased societal well-being. (And yes, well-being can be measured accurately, but I won’t go into those details here.)

Take a look at how GDP growth in the U.S. compares to American life satisfaction.

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This is really the crux of the problem. People are no more satisfied with their lives despite huge advancements in the GDP of the country. The same is true in Canada and other developed nations.

Understanding that well-being and GDP do not correlate (in developed nations), we come across two main issues. First, there is a measurement issue. At the end of the day, the point of economic activity is to improve people’s lives. We want to “grow” the economy because we want to improve the way we live. We want increased well-being. But if we focus on a faulty metric that has no bearing on well-being, we are not measuring real progress. Included in GDP are many things we would not consider “good.” The costs of cleaning up an oil spill, hiring lawyers for divorce proceedings, going to war, increasing debt, smoking cigarettes – these all cause GDP to rise. Whereas air quality, poetry, leisure time, and community are not reflected in GDP and are therefore worthless. Only that which can be obtained in the market is given any value.

A multitude of alternative measurements have already been developed, including the Genuine Progress Indicator (GPI). GPI, and other measurements like it, take into account a wide variety of indicators that influence well-being, including pollution levels, leisure time, governance, and so on. These alternative indices more accurately reflect meaningful societal progress. Developing a superior alternative to GDP is not the problem; the problem is the political will to use such a measurement.

The second issue is that the measurement of an economy affects the direction and priorities of an economy. The famous economists Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi note that, “What we measure affects what we do. If we have the wrong metrics, we will strive for the wrong things.” In other words, changing what we measure changes what we do. If a History teacher began to grade her students’ essays only on their spelling, you would no doubt create students highly proficient in spelling with a low knowledge of history. The nation of Bhutan recently switched from GDP to GNH – Gross National Happiness. And while we can debate how much “happier” the people of Bhutan are today, it has undoubtedly altered the direction of the Bhutanese economy.

People are no happier than they were fifty years ago because they are pursuing the wrong goals. Research can tell us the factors that contribute to well-being – marriage, social relationships, employment, perceived health, religion, quality of government, etc. – and the factors that detract from well-being, including the pursuit of money and material possessions. Unfortunately, societal pressures encourage people to pursue the latter goals, and people are no happier as a result.

Now, I can already hear people criticizing this as subjective. If someone want to buy a Ferrari and work 70 hours a week, who am I to say that that is wrong? People should be free to pursue their happiness as they see fit.

My response is this: not everything is subjective and value relative. Wine is superior to crack, and I can make a strong argument to back this up. Academia in the past few decades has stopped promoting what it sees as the good life, and has instead treated everything as equal. This is a mistake. And while policymakers should not dictate what they believe is good, they can and should – based on evidence – push and encourage society in a direction that leads people to a better life while still respecting individual rights and freedoms. Modern liberal societies already do this. For instance, smoking is heavily taxed, the arts are highly subsidized, and marriage is a legal contract. Governments – and, by extension, the electorate – are making value judgements about what is good. And while mistakes can be made, the principle is not wrong.

I am making claims about well-being because they are proven and objective, not simply subjective matters of opinion. Having a strong relationship with your family is not better than buying a new house just because I say so. Years of research have proven it to be true (you can read my paper for actual citations and proof). Studies have shown that the pursuit of money and material possessions simply do not make people any more satisfied with their lives. What, then, is the point of pursuing them with such ideological fervor?

We do not want a society like the one illustrated in Aldous Huxley’s Brave New World, where citizens are content but deprived of their autonomy. People’s satisfaction with their lives cannot be the ultimate and singular indicator of how society is doing. But still, there is something to be said for the importance of well-being, and the fact that it has gone down while GDP has gone up should give us some cause for concern. In a country where all of our basic needs (and then some) have been met, there is no longer a point in focusing efforts on GDP growth. We need to measure our economy differently in order to a) measure progress more accurately; and, b) focus societal goals on what actually improves people’s lives. Dumping GDP can get us there.