GDP as an indicator of economic well-being: abolish or correct?

As is well known, GDP growth has been the main indicator of economic success for decades, and the relative well-being of countries has been measured -at least as a first approximation- based on the value of GDP (or National Income, an indicator quite similar) in per capita terms.

Fortunately, this vision is in crisis (although the resistance to change it at a political and academic level is enormous). In the political debate, almost everything is justified in the name of economic growth and, in economics faculties, students are still being taught an ideology according to which economic growth is the main objective of economic policies.

It’s growth, but wasteful

The theoretical and empirical criticisms are so many, so old and coming from so many fronts that what is surprising is that the identification between growth and social prosperity is so persistent.

Herman Daly, one of the main referents of ecological economics, coined a provocative term, uneconomic growth (uneconomic growth), to refer to the fact that GDP growth, which is what economists understand by economic growth, could cause more additional costs than additional benefits.

The GDP is nothing more than “the sum of the added values ​​generated during a period of time in a certain territory”, which coincides, by definition, with the sum of the monetary income derived from the different economic activities.

Everything that does not entail monetary remuneration is left out of accounting since it is not considered economic activity. Thus, women who work day and night caring for other people in the family are considered as not economically active.

One consequence of this is that, when in a country the activities carried out in the family or community environment unrelated to money are commodified or assumed by the Government paying for the work required, the GDP grows, but not because there are more services but because the scope (from private to public) in which they are carried out has changed.

Economic growth, social inequality

GDP does not tell us if more weapons are being produced or more money is being spent on advertising or if more food or educational services are being produced. Like the other side of the coin, it also tells us nothing about how the income or income generated is distributed. Thus, it is not surprising that one finds great contrasts between social indicators and economic indicators.

In a study by epidemiologists Richard Wilkinson and Kate Pickett originally published in 2009 and translated into Spanish under the title Inequalities. An analysis of collective (un)happiness, the results of different social and health indicators from different rich countries and from different US states were compared, concluding that GDP per capita did not explain the differences at all. On the other hand, the level of inequality was clearly correlated with the results of the indicators studied: more unequal societies presented worse social results.

GDP versus environment

Some of the most important criticisms of the usual macroeconomic indicators come from ecological economics, which emphasizes three aspects above all:

1. The usual economic indicators (such as GDP but also the Net Domestic Product, which takes into account the wear or amortization of manufactured capital) do not say anything about what is happening with the natural resources and, therefore, whether the activities are more or less sustainable over time. The irreversible loss of non-renewable resources (as in the case of fossil fuels and also material resources such as copper or lithium that can only be partially recycled) is not taken into account and there is talk, for example, of oil production since produce equals generating income. Another example: talk about fish production and it is accounted for by the economic value of the catches, whether it is a sustainable extraction (which allows the reproduction of the species) or unsustainable, when it exceeds the maximum reproduction capacity.

2. The indicators do not inform us of the environmental damage that is associated with certain production and consumption activities that are outsourcer on society as a whole (and often also on other societies and on future generations). The males generated by many activities could well be considered greater than the estate produced, especially in affluent societies where more and more consumption does not seem to result in more and more happiness.

3. There is a paradox that environmental problems and risks generate many monetary expenses (called defensive o compensatory) to try to deal with them and, in the accounts, it appears not in liabilities but in assets, making GDP grow when these expenses are assumed by citizens or by governments.

The examples could be multiplied. The health expenses derived from the major diseases caused by pollution, the municipal costs of managing more and more waste or the public resources dedicated to restoring a contaminated area… all of this will result in a higher GDP. Or an example from another area: if there is more crime in societies, public and private spending on security will multiply, increasing – like any other monetary spending – GDP.

Measure not only economic growth

There have been many proposals to correct GDP, to make it a better indicator and, in particular, to take environmental aspects into account. Already in 1989 they were collected in a book (Environmental Accounting for Sustainable Development) some of the presentations on the subject of a symposium organized by the World Bank and the United Nations Environment Programme. Interesting debate that helped to deepen the subject but, since then, the correction of the national accounts has practically not advanced and it is not strange. The measuring stick of money is not adequate to capture environmental problems. How to account for the expected damage from climate change in, for example, human lives or forced migrations? How to value the loss of biodiversity in money?

We must leave the GDP as what it is, an accounting of added values, and abolish its use as an indicator of economic success. If we want to assess whether things are going well or not, let us be guided by a set of social and environmental indicators and let us not dream of finding a new aggregate monetary indicator to guide and assess economic policy.

Jordi Roca Jusmet, Professor of Economics, Barcelona University

This article was originally published on The Conversation. Read the original.