Nobel Prize winning economist, Joseph Stiglitz, has called on governments to dump GDP as the key economic measure of progress and instead focus on better measures of societal wellbeing:
The way we assess economic performance and social progress is fundamentally wrong, and the climate crisis has brought these concerns to the fore…
The standard measure of economic performance is gross domestic product (GDP), which is the sum of the value of goods and services produced within a country over a given period. GDP was humming along nicely, rising year after year, until the 2008 global financial crisis hit. The global financial crisis was the ultimate illustration of the deficiencies in commonly used metrics…
Politicians, looking at these metrics, suggest slight reforms to the economic system and, they promise, all will be well…
Standard metrics do not fully reflect the adverse impacts of the austerity measures, either the magnitude of people’s suffering or the impacts on long-term standards of living.
Nor do our standard GDP measures provide us with the guidance we need to address the inequality crisis…
If our economy seems to be growing but that growth is not sustainable because we are destroying the environment and using up scarce natural resources, our statistics should warn us. But because GDP didn’t include resource depletion and environmental degradation, we typically get an excessively rosy picture…
It is clear that something is fundamentally wrong with the way we assess economic performance and social progress…
Getting the measure right – or at least a lot better – is crucially important, especially in our metrics- and performance-oriented society. If we measure the wrong thing, we will do the wrong thing. If our measures tell us everything is fine when it really isn’t, we will be complacent.
And it should be clear that, in spite of the increases in GDP, in spite of the 2008 crisis being well behind us, everything is not fine. We see this in the political discontent rippling through so many advanced countries; we see it in the widespread support of demagogues, whose successes depend on exploiting economic discontent; and we see it in the environment around us, where fires rage and floods and droughts occur at ever-increasing intervals.
Fortunately, a variety of advances in methodology and technology have provided us with better measurement tools, and the international community has begun to embrace them. What we have accomplished so far has convinced me and many other economists of two things: first, that it is possible to construct much better measures of an economy’s health. Governments can and should go well beyond GDP. Second, that there is far more work to be done.
NZ Prime Minister, Jacinda Adern, recently raised similar sentiments:
New Zealand Prime Minister Jacinda Ardern criticized the tendency among countries to measure success by economic growth and gross domestic product…
Ardern said that governments should instead focus on the general welfare of citizens and make investments in areas that unlock human potential…
“Economic growth accompanied by worsening social outcomes is not success,” Ardern said. “It is failure.”
She said the global obsession with economic growth as the ultimate measure of success intensified in the 1980s, when countries around the world began to cut social safety nets and promote privatization. As a result, inequality began to soar, with some people becoming spectacularly wealthy while others struggled to escape poverty.
Ardern has become a champion of changing this framework. She advocates for a new paradigm of success that uses the United Nations’ Global Goals as its guiding set of principles.
She said every policy pursued by a government should improve the human welfare of all people in a society.
I have explained previously why I believe that real GDP is a rubbish measure of economic well-being (here, here and here), and have argued that “economists’, the media’s, and the Government’s infatuation with GDP is one of the biggest shortcomings in macro-economics”.
This infatuation has led to spurious policies like the pursuit of endless population growth on the basis that it stimulates headline GDP (more inputs equals more outputs), even though it provides next to no benefits to everyone’s share of the economic pie and reduces living standards of the pre-existing population.
Then there is the focus on the quantity of growth in GDP, rather than the quality (and sustainability) of growth, such as the Government and RBA’s never ending drive to increase house (land) prices and private debt, which creates structural imbalances and damages longer-run productivity and competitiveness.
GDP also takes no account of environmental damage, and effectively treats the earth as a business in liquidation. Digging up finite resources boosts GDP, but does not account for what was lost.
With GDP, we can bulldoze a perfectly good home to build a new one, and this process will boost GDP. But again, no account is taken of the loss of the old building, even though the asset base did not actually increase.
The Productivity Commission agrees that GDP is a useless measure of wellbeing, noting the following in its Migrant Intake Australia report:
While the economywide modelling suggests that the Australian economy will benefit from immigration in terms of higher output per person, GDP per person is a weak measure of the overall wellbeing of the Australian community and does not capture how gains would be distributed among the community. Whether a particular rate of immigration will deliver an overall benefit to the existing Australian community will crucially depend on the distribution of the gains and the interrelated social and environmental impacts.
The ABS did try to develop new ways of measuring Australia’s progress, which included a bunch of qualitative factors such as health, safety, equality, etc. However, I understand that this development has been shunned.
What a shame.