Stanford Social Innovation Review : Informing and inspiring leaders of social change

SUBSCRIBE | HELP

Economic Development

There’s No G-D-P in “A Better Economy”

Shifting the focus away from GDP would lead to real economic progress.

The year-end numbers have been tabulated, and America is winning the race by a large margin. The nation's closest competitor, China, scores only half as high, and European nations, Japan, and Brazil lag way behind with little chance of catching up.

This statement is not about medal counts from the summer Olympics; it's not about citizens' health; and it's certainly not about student test scores in math and science. It's about GDP. The United States continues to dominate the race for the biggest economy.

Gross domestic product has become the most watched and most misinterpreted of all economic indicators. It's a measure of economic activity—of money changing hands. Despite the mundane nature of this economic indicator, politicians fiercely compete with each other to see who can promise the fastest GDP growth. Government programs and investments in technology get the green light only when they are predicted to spur GDP growth. Economists, bankers, and businesspeople pop the champagne corks when they hear "good news" about quarterly GDP numbers.

And while the United States leads in GDP, it also leads in military spending, the number of people in prison, and the percentage of people who are obese. These other first-place finishes seem at odds with America's position atop the GDP standings—that is, until you realize that spending on war, incarceration, and disease, as well as other "defensive expenditures," all count toward GDP. The arithmetic of GDP doesn’t consider what the money is actually being spent on, and over time, we’ve been spending more and more money on remedial activities and calling this "progress."

Counting all these negatives in GDP (not to mention omitting positive activities such as raising children, volunteering, and caring for elderly people) seems like an oversight or an accounting mix-up. But it also seems like something that could be easily fixed. Many people, including Nobel laureates in economics (and even the laureate who invented national income accounting) have issued stern warnings not to confuse GDP with national progress, and many forward-thinking economists have proposed alternative indicators of progress.

One such indicator, touted by The Economist, was designed expressly to assess quality of life in contrast to GDP. You can think of it as a "where-to-be-born" index, and it takes into account a lot of things besides GDP, including markers of health and happiness. Back in 1988, The United States was number one on this index, but it has been falling off the pace and now sits way back in the pack behind nations like Switzerland and New Zealand.

Even though we have a technical solution to the problem (new indicators are proliferating; for examples, see the Ecological Footprint, Happy Planet Index, Genuine Progress Indicator, and the United Kingdom's Sustainable Development Indicators), nations have failed to embrace alternative indicators and put them into widespread use. Politicians and the media continue to obsess over GDP. The reason we're having such a tough time abandoning GDP, despite all the criticisms that have been heaped upon it, is that the economy, as it’s currently configured, must grow to escape recession. And GDP is the marker of economic growth.

But it doesn’t have to be this way. With different economic policies, it’s possible to create an economic system that is not geared for growth and that does not require growth to guarantee jobs. For example, we can use the benefits of technological progress to reduce working hours and lower unemployment, instead of using them to produce and sell more stuff. We can give the Federal Reserve the power to manage the money supply directly, instead of allowing private banks to create most of our money in the form of interest-bearing loans. By reforming certain key economic institutions, we can do away with the growth imperative that is built into our economy at the moment.

So long as the economic system calls for growth, GDP will continue its reign as the primary economic indicator, a situation that sets up a chicken-egg conundrum. On the one hand, consigning GDP to the dustbin of history would help shift the focus of the economy away from growth and toward human well-being. On the other hand, shifting the focus away from growth would impart a demand for adoption of better measures of progress. No matter which comes first, there's a need to change economic direction—to make a transition to an economy that operates on the principle of enough, rather than one that perpetually chases more. When will the United States and other nations pull out of the maddening race for more and recognize that it's the journey to enough that really matters? And on that journey, we need to measure what really matters—the health of our societies and the environmental systems that contain them.

Read an excerpt from Enough Is Enough.

Tracker Pixel for Entry
 

COMMENTS

  • BY Charles Fleeman

    ON January 7, 2013 05:15 PM

    GDP also survives because it can be influenced easily by government spending… and that serves the interests of representatives seeking re-election.  GDP in the US is negative if you back out borrowed spending.  But all the misguided or complicit media reports is that GDP is up and the representatives are therefore successful.  It is a great big lie.

  • BY Joe Zammit-Lucia

    ON January 9, 2013 01:29 PM

    Economics has always assumed that financial wealth (and we can debate how best to define that) is a surrogate for ‘quality of life’ (or utility). This is far from perfect but it may or may not be a reasonable approximation. One issue with going towards ‘quality of life’ measures directly is that what constitutes QoL is a highly personal matter and not relevant across populations. Progress has therefore been defined as creating the conditions in which more people can pursue whatever QoL happens to mean to them. To date that has meant creating more wealth as the mechanism for allowing individuals to seek for themselves whatever they believe is ‘a better QoL’. Starting from centuries of culture that has embedded this idea, it is hard to envision the practicalities of getting to a model where improvement in QoL of a population is dissociated from the generation of wealth. I am skeptical of the idea that we can generate a common definition of ‘happiness’ or QoL; it goes against my post-modern beliefs grin. But we need to explore alternative ideas of ‘progress’ and alternative paradigms of how to create the conditions where people can make their own choices of how they want t improve their own QoL. Your book will be an important contribution for exploring ideas of how to get there.

  • Will DeKrey's avatar

    BY Will DeKrey

    ON January 10, 2013 01:21 PM

    We’re told American success equals economic growth. The data tells a different story: GDP doesn’t predict better lives, but civic measures do.

    Check out http://www.whygdp.org/

    The paradigms that a society holds (i.e, the pervasive, shared but often unstated assumptions) define the lanes of progress for systems, institutions and individuals in that society.  Unfortunately, the current paradigm of “Success=GDP” is deeply entrenched in our collective minds.

    Thank you for challenging the paradigm.

  • Is the point that GDP is not the only indicator?  I would hope that there is not only 1 indicator but many.  Do we educate our kids well?  Do we have a good sense that justice is being served?  Do we measure our effectiveness at dealing well in a complex society?  Can we teach this skill well?  Do we have a good handle on the key issues of the day and society and are they consider problems in need of rationaly solutions?  Does philosophy lead the way and do academics rise above team politics (case in point how is the concept of freedom fairing these days and how is free enterprise seen)?
    I would put forth that we are confused about a lot of things, and do little of any of these well, including understanding how to grow GDP.

  • Unfortunately GDP is still the only economic indicator taken into consideration when talking about a nation’s wealth, but I agree with you, we have to move our attention to other important factors to evaluate the quality of our lives. We need a different economic system, not centered on mere profit, but on social good.
    In socialbusinessworld.org (the first social network for a sustainable world) we’re trying to gather all people sharing these values and build a fairer economy.

Leave a Comment

 
 
 
 
 

Please enter the word you see in the image below: