Gross domestic product is the main economic indicator in use today and probably the most politically influential of all indicators. Its importance in policy-making is hard to overstate. New policies and technologies are assessed in terms of their impact on GDP. Government budgets are evaluated in terms of their predicted effect on GDP. National progress has become synonymous with increasing GDP. But what is GDP, and is it a good indicator of progress?
In simple terms, GDP is a measure of economic activity—of money changing hands. Consumer spending on food, clothing, or entertainment contributes to GDP. Government investment in education also counts toward GDP. These are expenditures that most people would consider to be desirable. However, if there is an oil spill, such as the BP disaster in the Gulf of Mexico, the money spent by government on cleanup also contributes to GDP. If more people get cancer and require treatment, their medical costs count toward GDP. The costs of war, crime, and family breakdown all cause GDP to rise. In the language of economics, GDP does not distinguish between benefits and costs, but lumps everything together under the banner of economic activity.
Although GDP per capita has been on the rise (it has more than tripled in the United States since 1950), surveys of life satisfaction indicate that people have not become any happier. Beyond the level of income required to meet people’s basic needs and provide for some comforts, additional income does not appear to improve our lives. Studies suggest that a variety of other factors, such as living with a partner, enjoying good health, holding a secure job, having trust in institutions, volunteering, and limiting the amount of time spent watching television, do improve well-being, however.
Our main economic measuring stick, GDP, appears to be a very poor indicator of progress, even in an economy where the goal is growth. It would be an even less useful indicator of progress in a steady-state economy, where the goal is to achieve sustainable scale, fair distribution, efficient allocation, and a high quality of life. GDP provides little information on whether we are achieving these goals. Although GDP growth and increases in resource use tend to go hand in hand, zero growth in GDP would not necessarily be indicative of a steady-state economy. Zero growth in GDP could still be accompanied by declining stocks of natural capital or increasing inequality, both of which are counter to the goals of a steady-state economy. For these reasons, new indicators are required to replace GDP.
Several initiatives around the world are investigating alternatives to GDP. These include the European Commission’s Beyond GDP initiative, the OECD’s Better Life Initiative, and the Commission on the Measurement of Economic Performance and Social Progress launched by French President Nicolas Sarkozy, which released a landmark report.
Governments in many countries, such as France, the United Kingdom, Costa Rica, Ecuador, and Bhutan are seriously considering alternative ways of measuring progress. They are doing this partly because of the criticisms of GDP, but also because of growing recognition that societal goals and priorities are changing. A U.K. poll found that 81 percent of people support the idea that the government’s main objective for its citizens should be the “greatest happiness” rather than the “greatest wealth.” Similarly, an international survey found that three-quarters of respondents believe health, social, and environmental indicators are just as important as economic indicators and should be used to measure progress.
Even with such popular support for change, society still employs measures that are failing to get the job done. Members of the mainstream media religiously report the Dow Jones Industrial Average, with cheers of delight when it rises and howls of protest when it falls. The Dow Jones is an index that tracks the stock prices of thirty supersized US corporations. If Boeing’s stock price increases because it is expected to sell more weaponry, or if Exxon Mobil’s stock goes up because it can exploit tar sands (with accompanying impacts on the landscape and climate), then the Dow Jones tends to go up. Are the activities that increase these stock prices necessarily good for society? Newscasters, investors, and the public overlook the repercussions of a rising Dow Jones because they have become accustomed to shooting for a higher score. CEOs manage corporations specifically to maximize their stock prices.
Just as an obsession with stock prices can promote corporate growth that may harm society, obsession with GDP can promote economic growth that may also be detrimental to society. The current state of global ecological overshoot was at least partially caused by our focus on, and attempt to maximize, a narrow set of economic indicators. Economic growth could not have become such a high priority if indicators such as GDP had never been invented. GDP has undermined the goal of economic welfare that it was supposed to support because people have ended up serving the abstract (but quantitative) indicator instead of the concrete (but qualitative) goal.
“We manage what we measure” is a cliché often uttered in business boardrooms, but it rings true. You could also say that we “mismanage what we mismeasure.” In this case, we mismanage the scale of the economy because we’re treating an indicator of its size—GDP—as if it were a measure of social performance. If we want to achieve a sustainable and fair economy that provides a high quality of life, it’s crucial to get the measures right.
Read authors Rob Dietz & Dan O’Neill’s introduction to this text.