In sports, it’s easy to figure out whether a team is ahead or behind: You just need to look at points, runs or goals scored. If only another score keeping measure—the one used to determine a country’s economic well-being—gave us such clear results. Instead, Gross Domestic Product (GDP) provides a “score” that’s inaccurate or incomplete at best.
Considering that GDP drives nearly every aspect of economic policy today, it’s time to explore alternative measures and how to bring them into wider use.To pursue and promote policies that help rather than harm society, a country needs to know its true economic score.
A Need for the Right Metrics
Even the Nobel Prize-winning economist who standardized the GDP calculation cautioned against using it as an indicator of economic well-being. Simon Kuznets noted in 1934, “The welfare of a nation can scarcely be inferred from a measurement of national income.”
Adding up income is just one of the ways to calculate GDP, all of which theoretically produce the same results. But whether based on income, production of goods and services or expenditures by consumers, businesses and government, GDP misses many of the factors that contribute to national welfare. Despite the complexity associated with its measurement and constant adjustments and revisions, GDP can’t overcome this shortcoming. Again, the words of Simon Kuznets illuminate the problem: “Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes the reverse side of income; that is, the intensity and unpleasantness of effort going into the earning of income.”
When we consider what’s happening to our environment, Kuznet’s comment regarding the “unpleasantness” involved in economic activity seems prophetic. For example, China has earned praise for its rapid economic development, and many pundits are calling the 21st century the “Chinese century.” Yet the air quality in Beijing makes it difficult and even dangerous to breathe outdoors. As heavy smog saturates China’s capital, it isn’t clear whether the start of the Chinese century is economically clear or polluted.
These major economic and quality-of-life issues aren’t part of the GDP calculation. Yet the consequences of failing to keep score correctly—climate change, wasted natural resources, underutilized human capacity, obesity and many others—have an impact on nearly everyone on the planet.
Another Nobel Prize-winning economist, Joseph Stigliz, succinctly summed up the danger of using GDP to determine economic policy.He noted in 2009, “What we measure affects what we do.If we have the wrong metrics, we will strive for the wrong things. In the quest to increase GDP, we may end up with a society in which citizens are worse off.”
This is why we need to rethink what we incorporate in our measurement of economic well-being. Fortunately, countries around the globe are beginning to question GDP and traditional economic growth as the measure of progress. They’re becoming aware that GDP ignores or devalues key components of prosperity, and that a focus on GDP growth can encourage the deterioration of our ecological, social and financial welfare. Nations are also starting to realize that the quality of our lives is of greater value than the goods and services we produce.
In a work commissioned by the former French President Nikolas Sarkozy, Stiglitz and the Nobel Prize-winning economist Amartya Sen argued that government policy should have the aim of increasing “social welfare,” not GDP. They stated, “GDP is neither a measurement of income nor a measure of well-being.”
More recently, the Japanese government commissioned a report on the likely consequences of a relentless focus on economic growth. As leading author Alan AtKisson noted, in a world of constrained resources, economic growth can have a destabilizing effect on well-being. Instead of increasing the quality of our lives, economic growth limits it.
Several more sustainable and restorative economic models already exist, and others are emerging. For example, the Genuine Progress Indicator enables policymakers to measure social and economic well-being at the national, state, regional and local levels. Another model attracting increased interest comes from Bhutan. Gross National Happiness determines a nation’s prosperity using measures such as psychological well-being, health, education, governance, living standard and ecological and cultural diversity.
Government economic policies would benefit from similar thinking. Rather than fixating only on “growing” GDP, we should also account for the natural and human resources consumed in that effort. Countries are not bound to a collective dismal fate in the economic game. We simply need to adopt a better way of keeping score.
Dan Sevall is Adjunct Professor of Accounting and Fred Gellert Family Foundation Faculty at Presidio Graduate School. He will be among the speakers at a Presidio Graduate School symposium event, “Outgrowing GDP: A New Approach to America’s Accounting System,” to be held in San Francisco on April 30. More information about the half-day event can be found at www.presidioedu.org/outgrowing-gdp.