Chasing GDP growth is destructive — we need an alternative
Our economic system is built around the indicator of Gross Domestic Product (GDP). It measures how much we have produced as a country over a period of time. It does this by adding together the market value of what we have produced. As a result, an increase in the market value of what we have produced signifies that our economy is growing. But should it?
In the grand scheme of human history, GDP is relatively new. It was created to allow the US to better understand how to develop schemes to tackle the Great Depression and to measure the overall effectiveness of these schemes. It was never intended to be the dominant feature of economic policy, indeed on page 6 of the final report presented to the US Congress on national income, it’s inventor stated:
“…no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.”
GDP as a dominant theory was further entrenched by Okun’s Law, named after Arthur Okun, an economic adviser to JFK. This ‘law’ states that if you can grow GDP by 3%, unemployment will fall by 1%. Clearly, politicians looking for an easy answer went for it — however this link, if it ever existed, is now broken.
GDP ‘values’ an incredibly narrow set of things. Crucially GDP rates volunteering as irrelevant, if we all got together to build a house our efforts would contribute nothing to the value of the nation, but if we paid a company to do it, it would be valued. Consider the recent trends toward open source development of (among other things) computer software and we can see how irrelevant this notion has become.
Another downside is that GDP does not account for resource depletion; China created a ‘green GDP’ index in 2006. Under this index, growth in China would have been 3% lower in 2004 than it actually was. GDP as an indicator encourages unsustainable growth. How can we have infinite growth on a planet with finite resources?
This needs to change, an economy simply built around how much we produce and consume (as long as we pay for it) is an economy built on a false premise. However, moving away from GDP will be difficult; indeed people have been calling for such a move for decades. Just two days after announcing his intention to run for President in 1968, Bobby Kennedy said on GDP:
“…it measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans.”
Several international institutions such as the UN, EU and OECD have developed projects to look at alternatives. These range from complementing GDP with additional measures such as environmental or social factors, adjusting GDP to include other ‘monetised’ factors such as resource depletion or replacing GDP with other indicators. Of all the options I would argue for GDP to be adjusted. (The Wuppertal Institute has done a good study assessing the alternatives so far).
As the global financial system developed, GDP became the key indicator to compare countries and their economic well being and growth against each other, peeling away from what has become the spine of our economic system will be difficult. However this difficulty shouldn’t dissuade us from attempting it — nor should we be frightened of the likely uproar for even suggesting it. However, as Kuznets (the creator of GDP) said:
“Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.“
We need to focus our efforts on defining the growth we want to see and why, rather than continue this deference to GDP. It is incredibly British to underestimate our worth, both individually and as a nation. But Britain can and should lead the debate in finally moving us away from GDP ‘growth’ as a target of our economic policy. As a party the Lib Dems should play a key part in this, to seek to end the conformity which has developed by pushing for change at all possible opportunities and Nick Clegg has somewhat started the debate.
‘When a measure becomes a target it fails to be an effective measure.’
In our day to day routine we seek to focus our efforts on certain targets for good reason, such as to provide meaning to the direction our lives are heading in or to allow us to demonstrate quantifiable progress. These are all admirable traits, but we know only too well how easy it is to fall into the trap of seeing everything else as having secondary importance, only for it to come back and bite us.
We should seek to value more than just the market value of what we produce.
Originally published at chrisrichardslibdem.wordpress.com on December 16, 2012.