[Marxism] Is It Time to Abandon GDP?

Louis Proyect lnp3 at panix.com
Sun Nov 6 08:18:10 MST 2016


Is It Time to Abandon GDP?
by Edoardo Campanella

Like many great inventions, gross domestic product has been used in ways 
that its creators never intended and might not approve. Given that it 
misses so much that contributes to human wellbeing – and excludes even 
more – why do we continue to rely on it as our primary welfare indicator?

NOV 4, 2016 20

   MILAN – In a year of populist discontent across the West and 
narrowing prospects for major emerging economies, the future may end up 
being shaped in an unlikely setting: the world’s statistical offices. 
Among ordinary people and specialists alike, there seems to be an 
increasingly powerful sense of dissatisfaction not only with the pace of 
economic growth, but with how that growth is defined and measured.
There are two reasons for this. First, aggregate economic growth in the 
developed world has brought little, if any, benefit to the vast majority 
of citizens in recent decades – a trend that has been particularly 
pronounced against the backdrop of the 2008 global financial crisis. As 
Nobel laureate Joseph Stiglitz reminds us, “in the ‘recovery” of 
2009-2010, the top 1% of US income earners captured 93% of the income 
growth.”

But second, and arguably more important, defining welfare solely in 
terms of what can be measured by markets misses much of what contributes 
to – or detracts from – human wellbeing. In 1968, Robert Kennedy, 
campaigning for the presidency of the United States, lamented that this 
approach “measures everything except that which makes life worthwhile.” 
It says nothing, for example, about environmental quality, the cohesion 
of communities, or the stability of individual and group identities – 
all of which clearly influence wellbeing.
Such shortcomings not only stoke suspicion of “experts” who tell us that 
we should be happier than we are; they also prevent the experts 
themselves from accounting for welfare effects implied by economic 
dynamism and innovation. As Barry Eichengreen of the University of 
California at Berkeley points out, the United States’ recent slowdown in 
productivity growth has been attributed to “the stagnation of 
technology.” But this seems “implausible,” he says, given the “radical 
technological advances in robotics, artificial intelligence, 
biotechnology, and materials design going on all around us.”

Not surprisingly, such considerations have invited increased conceptual 
scrutiny of gross domestic product, which in less than a century has 
emerged as the worldwide king of welfare indicators. Indeed, GDP serves 
as far more than a gauge of economic growth, material progress, and 
human wellbeing. It determines countries’ status and access to exclusive 
clubs, from the OECD to the G8 and the G20, thereby affecting the 
balance of global power. It steers international capital flows, signals 
swings in standards of living across countries, and decides the fate of 
political leaders.

Of course, no welfare indicator can capture all the dimensions of life, 
and much of what people value may never be amenable to quantification. 
Nonetheless, many Project Syndicate commentators make a compelling case 
that GDP is ripe for refinement, if not replacement.
The Birth of an Indicator

For Philipp Lepenies of Berlin’s Free University, GDP “is the most 
powerful metric in history,” and he approvingly recalls the US Commerce 
Department’s description of it as “one of the greatest inventions of the 
twentieth century.” Today, it is an invention that most people take for 
granted; but, as Lepenies points out, until the Great Depression, tax 
revenues represented the only aggregate statistical measurement of the 
economy. It was only in the 1930s, with the US and other countries 
suffering mass unemployment and widespread poverty, that the need to 
build more sophisticated indicators of national wealth became apparent. 
This imperative coincided with the embrace of Keynesian theory, with its 
emphasis on macroeconomic management, by a growing number of economists 
and policymakers.

In 1932, the US Congress turned to Simon Kuznets, a future Nobel Prize 
winner, to develop an estimate of national income. By definition, the 
income earned by workers, managers, landlords, and shareholders equals 
the value of overall production. Given the misery of the era, Kuznets 
was more concerned with the left-hand side of the equation: income, or 
the amount of money people had in their pockets. When World War II 
began, however, policymakers’ attention shifted to the right-hand side: 
production, or the industrial capacity needed to support the military 
effort.

But the end of WWII did not bring about a change in perspective. US 
politicians continued to care more about the size of the economic pie 
than about how it was distributed. Meanwhile, the definition and 
measurement of the economy in terms of GDP started to spread around the 
world. Post-war assistance under the Marshall plan was conditional on 
the production of GDP estimates, and membership of the United Nations 
entailed common national accounting standards.

Eventually, GDP ended up being the key metric to guide and manage 
countries’ economic growth. But, as Stockholm University’s Kevin Noone 
points out, Kuznets himself recognized that GDP was a highly imperfect 
indicator that had to be used “only with some qualifications.” Or, as 
the UN’s Zakri Abdul Hamid and Anantha Duraiappahput it, in Kuznets’s 
view, “the welfare of a nation can scarcely be inferred from a measure 
of national income.”

The Limits of GDP

Kuznets’ skepticism was warranted. As a monetary measure of the market 
value of all final goods and services produced in a year, GDP “sounds 
like a good indicator of wealth,” says Bjørn Lomborg, Director of the 
Copenhagen Consensus Center, but “it includes things that do not make us 
richer and leaves out things that do.” GDP declines if energy-efficient 
products reduce electricity consumption, for example, but rises with 
polluting activities that deplete the stock of natural resources. And if 
we invest in anti-smoking campaigns or in fighting terrorism, GDP 
increases, without creating any wealth.

To put it another way, GDP is fixated on “more,” not “better.” It 
measures the flow of goods produced, without capturing changes in their 
quality. From a national accounting perspective, a car with air 
conditioning, a state-of-the-art sound system, and GPS may be the same 
as one with no gadgets, regardless of differences in users’ experience. 
Stiglitz uses an example from the health industry: “How do we accurately 
assess the fact that, owing to medical progress, heart surgery is more 
likely to be successful now than in the past, leading to a significant 
increase in life expectancy and quality of life?”
Moreover, GDP dismisses all activities that take place in the economy 
for no price. This includes, most importantly, the domain from which the 
term “economics” itself is derived: household maintenance. Nobel 
laureate Paul Samuelson famously joked that GDP falls when a man marries 
his maid. Likewise, to the extent that higher female workforce 
participation leads households to outsource to the market those 
activities – for example, cleaning, cooking, and caring for children and 
elderly parents – that were previously provided within the family, GDP 
fictitiously picks up.

Edward Jung, founder and Chief Technology Officer at Intellectual 
Ventures, notes that the emergence of the digital economy makes the 
problem even more serious. National accounts ignore most of the highly 
valuable services provided for free by tech giants like Wikipedia, 
Facebook, Twitter, or Google. And that is true of new ideas and novel 
business models more generally. “Tomorrow’s most disruptive innovation,” 
Jung argues, “may have no effect on [foreign direct investment] or GDP 
today.”

But innovation is not necessarily GDP-neutral, much less, as Eichengreen 
puts it, “a harbinger of better times.” Innovation can lead to a decline 
in GDP even when it increases society’s welfare, says Charles Bean of 
the London School of Economics. Booking a flight or a hotel online is 
cheaper and faster than it was 20 years ago, when customers had to rely 
on a travel agent. All else being equal, GDP statistics would reflect a 
drop in the value created by the booking industry. Likewise, the price 
of a smartphone is lower than the sum of the prices of its components – 
such as GPS, camera, or MP3 player – that used to be sold separately. 
That, too, implies a drop in GDP. Yet, in both cases, consumers are 
better off.

Bill Gates, the founder of Microsoft, offers another compelling example. 
In the 1960s, he notes, encyclopedias were expensive, but held great 
value. Now, the Internet makes all of that information available for 
free. Has that really reduced human welfare relative to the 1960s, as 
the impact on GDP (again, all else being equal) would suggest?
Massaging the Numbers

National statistics offices make continuous efforts to update their 
methodologies and keep up with major economic developments and 
structural change, revising – sometimes substantially – their estimates, 
even those from the distant past. In some cases, they add new activities 
to the basket of goods and services, as the European Union recently did 
when it included drugs, prostitution, and other illegal or informal 
activities in its GDP calculations. Or they give greater weight to 
thriving industries, like mobile telephony and filmmaking in Africa.

While these technical advances improve the accuracy of GDP data, they 
make it difficult to compare the value of baskets of goods and services 
across time, and can distort the picture even for shorter time horizons. 
As Gates notes, in 2010, after updating its data-reporting methodology, 
Ghana announced a 60% increase in GDP estimates. But this “was just a 
statistical anomaly, not an actual change in Ghanaians’ standard of 
living.” And statistical aberrations of this kind happen in the advanced 
world, too. Last July, the Irish authorities reported that the country’s 
GDP had grown more than 26% in 2015 as a result of changes in the tax 
domicile of some multinationals. Again, no one felt richer.

GDP revisions are more rare in authoritarian regimes. But this does not 
mean that their figures are reliable. On the contrary, inflated GDP 
numbers help preserve domestic order and impress international 
competitors. The Soviets were masters at manipulating their growth 
statistics to keep up with the Americans. Today, as the economist Heleen 
Mees argues, China is widely seen (unjustifiably, in her view) as 
embellishing its data. “Skeptics,” she points out, “often cite the 
discrepancy between reported GDP growth and energy demand,” as well as 
then-Vice Premier Li Keqiang’s “notorious 2007 proclamation that China’s 
GDP figures are ‘man-made’ and ‘for reference only.’”
Whether massaged or not, China’s growth figures exemplify a typical 
problem in cross-country GDP comparisons. In 2014, the World Bank 
announced that China’s economy was larger than that of the US, measured 
according to purchasing power parity. It seemed like a global milestone, 
with enormous geopolitical resonance. But, as Harvard’s Joseph Nye 
rightly pointed out at the time, “even if China’s overall GDP surpasses 
that of the US” according to the market exchange rate of the US dollar 
and the Chinese renminbi, “the two economies will maintain very 
different structures and levels of sophistication.” Moreover, “China’s 
per capita income – a more accurate measure of economic sophistication – 
amounts to only 20% of America’s, and will take decades, at least, to 
catch up (if it ever does).”

Discontented Development

Despite its conceptual and technical limitations, GDP has inspired and 
sustained a sort of fetishism in the decades since the end of WWII. 
Maximizing measured output through innovation, trade liberalization, and 
deregulation became an end in itself. But the belief that a rising GDP 
tide would increase individual welfare and happiness was delusional. As 
Harvard’s former president Derek Bok makes the stark observation that 
“people are essentially no happier today than they were 50 years ago, 
despite a doubling or quadrupling of average per capita income.”

This should not be surprising. GDP is an income aggregator, not a 
measure of income distribution. As a result, two countries that are 
equally wealthy in aggregate terms might differ greatly in terms of 
individual welfare and happiness. And, where technological progress and 
globalization have boosted the size of the economy, the elite have been 
rewarded disproportionately, while many have been left worse off. Kemal 
Dervis, vice-president of the Brookings Institution, reports that in the 
US, the income share of the top 1% has more than doubled since the late 
1970’s. Similar trends characterize the entire West.

In addition, GDP not only conflates aggregate and individual costs and 
benefits; it also omits factors – such as relationships, altruism, civic 
engagement, and mental health – that contribute to life satisfaction but 
have nothing to do with income generation. And Gus O’Donnell, Chairman 
of Frontier Economics and a former chief of the British civil service, 
notes that the disconnect between GDP and wellbeing can widen as 
countries become richer and people come to care less about material 
accumulation and more about their free time, personal development, and 
intellectual enrichment.
Beyond GDP

Challenges to the hegemony of GDP are not new. In 1980, the UN unveiled 
its Human Development Index, and in 1995 the think tank Redefining 
Progress created the Genuine Progress Indicator. Now, disruptive 
innovation, widening material inequality, and climate change are putting 
even more pressure on policymakers to rethink the way they measure human 
welfare. In 2008, then-French President Nicolas Sarkozy convened the 
Commission on the Measurement of Economic Performance and Social 
Progress. The OECD has adopted a dashboard of indicators for its Better 
Life Index, and in 2011 the UN adopted the resolution “Happiness: 
towards a holistic approach to development.”

The inspiration for this framework came from the Himalayan Kingdom of 
Bhutan, which for more than 40 years has maximized Gross National 
Happiness (GNH) rather than GDP. As Jeffrey Sachs of Columbia University 
explains, GNH revolves around four pillars: sustainable development, 
preservation and promotion of cultural values, conservation of the 
natural environment, and good governance. GNH is gaining support 
worldwide, and the United Arab Emirates has even appointed a Minister 
for Happiness, Ohood Al Roumi. “The question we ask,” she says, “is not 
whether we are providing adequate services and sound economic policy to 
our people, but whether we are making our people happy,” by which she 
means “a state of being beyond satisfaction, a flourishing and ambient joy.”

But there are dangers with these alternative metrics. GDP, however 
flawed, captures an objective dimension of growth, whereas alternative 
measures are biased toward more subjective features of development. 
Princeton’s Peter Singer notes that it is difficult to find a widely 
accepted definition of happiness. We are not all happy in the same way. 
Some people might place more emphasis on material life, and others on 
spiritual factors, making cross-country comparisons difficult. And 
dictators could easily manipulate happiness-related indicators, when 
they fail to boost their economies.

Rather than dismissing GDP, it would be wiser to refine it and combine 
the information it contains with other socioeconomic indicators, 
including GNH. Statisticians should focus on placing a monetary value on 
environmental depletion and free digital services, collecting better 
household data for disposable income, giving more weight to quality 
changes, and building so-called satellite accounts to measure non-market 
activities. And, as George Washington University’s Tara M. Sinclair has 
emphasized, governments should rely more on Big Data to track the 
performance of the economy in real time and limit revisions.
Like many great inventions, GDP has been used in ways that its creators 
never intended and might not approve. It is now time to recognize GDP’s 
limitations, as well as its strengths. As the World Economic Forum’s 
Klaus Schwab and Richard Samans, put it, countries should target 
“broad-based improvements in living standards, rather than simply 
continuing to use GDP growth as the bottom-line measure of national 
economic performance.”

That seems like the right approach. GDP cannot measure much of what most 
people would consider crucial for a “good” life – for example, dignity, 
a sense of holistic security, or “ambient joy.” But it is difficult to 
imagine that any of these qualities could be maximized without the 
economic insights and policy tools that GDP has made possible.



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