‘GDP measures everything except that which makes life worthwhile,’ said John F Kennedy. But what are the alternatives to GDP? Three economists weigh in
It’s an odd quirk of history that, on the first day of his ill-fated presidential campaign in March 1968, Robert F Kennedy chose to talk to his audience about the limitations of gross domestic product (GDP) – the world’s headline indicator of economic progress.
It is strange to think that, despite the power and impact of that famous speech, GDP growth remains the dominant measure of progress around the world. It is the key to economic success. It is used to evaluate government policy. It is crucial for political survival.
Kennedy’s speech inspired a host of critiques. It has been cited by presidents, prime ministers, and Nobel laureates. GDP has survived, however, much better than most. Despite growing concerns about national economies’ inability to address the multiple threats posed to them by climate change, spiralling energy prices, and increasing levels of inequality, it seems as urgent as ever to have a different definition and measure of progress.
The good, the bad, and the missing
In simple terms, GDP is a measure of the size of a country’s economy: how much is produced, how much is earned, and how much is spent on goods and services across the nation. The monetary total, whether in dollars or euros, yuan or yen, is then adjusted for any general increase in prices to give a measure of ‘real’ economic growth over time. This is how governments evaluate their policies for economic growth.
Since 1953, GDP has been the main measure in a complex system overseen by United Nations. These accounts were created during the Second World War and were primarily motivated by the need for a way to determine how much government could spend on the war effort.
But in measuring the monetary value of economic activity, GDP can incorporate many of the ‘bads’ that detract from our quality of life. War, pollution, crime, prostitution, traffic congestion, disasters like wildfires and the destruction of nature – all can have a positive impact on GDP. But they are not components of economic success.
There are also many aspects of life that are simply not covered in the traditional account. Inequality in our societies. The unpaid contributions. The labour of those who provide care for the elderly and young at their homes. The destruction of biodiversity and natural resources. And the value data and many other digital services.
What lies outside the market, which includes public services funded out taxation, remains unmeasured by a metric for monetary exchange. Kennedy was blunt: “[GDP] measures everything, in short, except that which makes life worthwhile.”
It’s a sentiment that has resonance half a century later. A UK academic attempted to warn a public audience about the dangers associated with leaving the EU in a striking exchange during the Brexit debate. The impact on GDP would dwarf any savings from the UK’s contributions to the EU budget, he told the audience. “That’s your bloody GDP!” shouted a woman in the crowd. “It’s not ours.”
This perception of GDP as an indicator that is out of touch with reality could be one reason there is momentum for reform. When GDP hides key differences between the richest and poorest members of society, it invariably says little about the prospects that ordinary people face.
There are many other reasons to consider a new approach. The pursuit of GDP growth as a policy goal, and the impact that has on government, business and personal decision-making, has accompanied increasing devastation of the natural world, a loss of forests and habitats, the destabilisation of the climate, and near-meltdowns of the world’s financial markets. However, GDP has become an insufficient measure of technological transformation in society.
Despite its limitations, GDP’s persistence as a measure for progress is due to factors that are both technocratic and sociological. GDP is the most important measure in a complex system of national accounts. It has a technocratic simplicity and an analytical elegance that is unsurpassed by other measures. Its ability to measure both production output and consumption expenditure simultaneously gives it authority.
Despite its complexity, it still offers the deceptive simplicity that a single headline figure can be directly comparable year to year across countries. This is based on a simple, but not insignificant, idea that greater economic activity equals better life.
However, the combined technical authority and political usefulness of this idea has led to ‘path dependence’ and forms of social lock-in that are difficult to address without significant effort. You can think of switching to an alternate as switching from driving on the right-hand side to the left.
But what we measure is important. And while we’re busy looking in the wrong direction, as Kennedy pointed out, bad things can happen. Kennedy’s campaign – and his critique of GDP – was cut cruelly short on 5 June 1968, when he was fatally wounded by an assassin’s bullet. Kennedy’s call for reform in how we measure progress (or lack thereof) has never been stronger, more than half a century after he died.
The problem with GDP: Historical flaws
Over the centuries, society’s understanding of progress has changed significantly. Measurement of ‘the economy’ as a whole is a relatively modern, 20th-century concept, beginning with efforts by statisticians and economists such as Colin Clark and Simon Kuznets in the 1920s and 1930s to understand the impact of financial crisis and depression.
Kuznets is best known for his work with the Kuznets. curveWhen describing the relationship between GDP, income inequality, he was particularly concerned to develop an economic welfare measure rather than just activity. For example, he argued for omitting expenditures that were unwelcome necessities rather than services or goods consumers actively wanted – such as defence spending.
The Second World War displaced these earlier notions of an economic welfare measure and absorbed them into modern gross national product (GNP) and then GDP. The imperative – set out on the Allied side by John Maynard Keynes in his 1940 pamphlet How to Pay for the War – was measuring productive capacity, and the reduction in consumption required to have enough resources to support the military effort. Economic welfare was a peacetime concern.
Post-war, unsurprisingly, US and British economists such as Milton Gilbert, James Meade and Richard Stone took the lead in codifying these statistical definitions through the UN – and its process for agreeing and formalising definitions in the system of national accounts (SNA) is still in place today. However, there have been many important inadequacies with the SNA as well as the GDP since at most the 1940s. These inadequacies have been widely discussed and documented.
Margaret Reid published her book in 1934. Economics of Household ProductionThe article emphasized the importance of including unpaid work at home in economic useful activities.
The question of whether and how to measure the household and informal sectors was debated during the 1950s – particularly as this makes up a larger share of activity in low-income countries – but was omitted until some countries, including the UK, started to create household satellite accounts around 2000. Omitting unpaid work meant, for instance, that the UK’s increased productivity growth between the 1960s and 1980s was then overstated, because it in part reflected the inclusion of many more women in paid workThe contributions of these individuals were previously not included in the national GDP metric.
Another major failure of GDP is the inability to include environmental externalities and depletion natural capital. This metric does not take into account many activities that don’t have market prices and ignores the additional social cost of pollution, greenhouse gas emissions, and similar outputs associated to economic activities.
What’s more, the depletion or loss of assets such as natural resources (or indeed buildings and infrastructure lost in disasters) boosts GDP in the short term because these resources are used in economic activities, or because there is a surge in construction after a disaster. But the long-term opportunity cost is not considered. This huge shortcoming was widely discussed in the context of landmark publications like the 1972 Limits to Growth reportFrom the Club of Rome and the 1987 Brundtland ReportThe World Commission on Environment and Development.
Similar to household and informal activity, recent advances in accounting for nature have been made with the development System of Environmental Economic Accounting(SEEA) and publication (but separate) regular statistics on natural capital in a variety of countries. The UKIt has been a pioneer in this field once again, US recently announcedIt would also follow this approach.
New challenges to the GDP value
Other, less obvious problems with GDP have become more apparent in recent years. Although digitization has changed the way many people spend their leisure time and the way many businesses work, the transformations are not documented in official statistics.
Measuring innovation has always been tricky, because new goods or improved quality need to be incorporated into observable prices and quantities – and what is the metric for a unit of software or management consultancy? But it is harder now because many digital services are ‘free’ at point of use, or have the features of public goods in that many people can use them at the same time, or are intangible. For example, data is without doubt improving the productivity of companies that know how to use it to improve their services and produce goods more effectively – but how should a dataset’s value, or potential value, to society (as opposed to a big tech company) be estimated?
Recent workThe UK’s telecommunications service prices have shown that the sector’s output growth has been anywhere from 2% to 5% since 2010. about 0 per cent to 90 per centDepending on how the price index converts market prices to real (inflation adjusted) prices, it takes into account the economic value of our rapidly expanding use of data. Similarly, it is not obvious how to incorporate advertising-funded ‘free’ search, crypto currencies and NFTs in the measurement framework.
One of the key limitations of GDP, especially in terms of its use to indicate social progress, is the fact that it does not provide a systematic account of income distribution. It is possible for average or total GDP to rise, even though a significant portion of the population is less fortunate.
In the last decade, ordinary incomes have fallen or stagnated while those in the top 1% of society have become richer. For example, the US has a staggering 12% increase in its average annual income. Thomas Piketty and his colleaguesStudies have shown that the incomes of the top 0.001% of society increased by an average of 6 percent per year between 1980 and 2016. Real terms, income for the lowest 5 percent of society fell.
Many visions exist that can replace GDP growth as a dominant definition of progress and better living.
Given these many issues, it might seem surprising that the debate about ‘beyond GDP’ is only now – possibly – turning into actions to change the official statistical framework. However, paradoxically, the proliferation of alternative progress metrics has been a major obstacle.
These indices may be single indices that combine multiple indicators or dashboards that showcase a wide variety of metrics. However, they were created ad hoc and are not consistent enough to create consensus around a new global measure of progress. Few of them provide an economic framework that allows for trade-offs between different indicators, or guidance about how to interpret indicators moving along different directions. Although there is a lot of information, it cannot compete with a single GDP statistic for clarity.
Statistical measurement is like a technical standard such as voltage in electricity networks or the Highway Code’s rules of the road: a shared standard or definition is essential. While an overwhelming majority might agree on the need to go beyond GDP, there also needs to be enough agreement about what ‘beyond’ actually involves before meaningful progress on how we measure progress can be made.
Change behavior, not just what you measure
There are many visions that could replace GDP growth as the dominant concept of progress and better living. It has been reported that most people want a more equitable and sustainable future in the wake of the Covid pandemic.
It can sound simple to politicians. Writing in 2009, the then-French president Nicolas Sarkozy explained he had convened a commission – led by internationally acclaimed economists Amartya Sen, Joseph Stiglitz and Jean-Paul Fitoussi – on the measurement of economic performance and social progress on the basis of a firm belief: that we will not change our behaviour “unless we change the ways we measure our economic performance”.
Sarkozy also promised to encourage other countries, international organisations, and to follow France’s example in implementing the program. his commission’s recommendationsFor a range of measures beyond GDP. The ultimate goal was to build a new global economic and social order.
In 2010, the recently-elected UK prime minister, David Cameron, launched a programme to implement the Sarkozy commission’s recommendations in the UK. He described this as starting to measure progress as a country “not just by how our economy is growing, but by how our lives are improving – not just by our standard of living, but by our quality of life”.
Once again, the emphasis was placed on measurement (how far we have come). Instead of behaviour change (what can people do differently), the emphasis was on measuring. The implication is that changing what we measure necessarily leads to different behaviours – but the relationship is not that simple. Measures and measurement exist in the political, social and economic spheres. They are not considered absolute facts or neutral agents and should be accepted by all.
This should not dissuade statisticians from developing new measures, but it should prompt them to engage with all who might be affected – not just those in public policy, commerce or industry. The goal is to change behavior, not just the measures.
Complex systems thinking is increasingly being adopted by economists. This includes both psychological as well as social understandings of human behaviour. For example, Jonathan MichieHe has cited ethical and cultural values, along with the market economy, to be the main influences on behaviour. Katharina Lima di Miranda and Dennis Snower have highlighted social solidarity, individual agency and concern for the environment alongside the ‘traditional’ economic incentives captured by GDP.
Alternatives to GDP in practice
Since Kennedy’s 1968 critique, there have been numerous initiatives to replace, augment or complement GDP over the years. Many indicators have been created and implemented at all levels of the economy, including national and international.
Some aim to account more directly for subjective wellbeing, for example by measuring self-reported life satisfaction or ‘happiness’. Some hope to reflect more accurately the state of our natural or social assets by developing adjusted monetary and non-monetary measures of ‘inclusive wealth’ (including a team at the University of Cambridge led by this article’s co-author Diane Coyle). This approach to measuring has been accepted by the UK government in several policy documents, including its Levelling Up white paper.
Other initiatives aim to capture the multi-dimensional nature of social progress by compiling a dashboard of indicators – often measured in non-monetary terms – each of which attempts to track some aspect of what matters to society.
New Zealand’s Living Standards FrameworkThis dashboard approach is best known for its simplicity. This framework is a result of a 1988 Royal Commission on Social Policy. It was developed over a decade in the New Zealand Treasury. It was created to address the gap between what GDP can reflect, and the ultimate goal of the Treasury: To make New Zealanders’ lives better.
It is now used to allocate fiscal budgets by the NZ Treasury in a way that is consistent with the country’s needs in relation of social and environmental progress. It is clear that this is important in combating climate change. If government spending and investment is focused on narrow measures, it is possible for the country to not make the necessary transition to a net zero-carbon economy. Equally, by identifying areas of society with declining wellbeing, such as children’s mental health, it becomes possible to allocate Treasury resources directly to alleviate the problem.
The UK’s Measuring National WellbeingPaul Allin, a co-author of this article, launched the (MNW), programme in November 2010. It was part of a government-led drive for greater emphasis on wellbeing in business and national life. The focus was largely on subjective aspects. personal wellbeing measures that the UK’s Office for National Statistics (ONS) continues to collect and publish, and which appear to be increasingly taken up as policy goals (driven in part by the What Works Centre for Wellbeing).
The MNW team was also charged with addressing the full ‘beyond GDP’ agenda, and undertook a large consultation and engagement exercise to find out what matters to people in the UK. This provided the foundation for a set of indicatorsThe ONS updates these indicators from time to time. These indicators can be used to help you identify areas that are changing frequently. continue to be published, there is no evidence that they are being used to supplement GDP as the UK’s measure of progress.
It is difficult to account for inequality in a single aggregate index. There are many solutions to this problem. One of them, advocated by the Sen-Stiglitz-Fitoussi commission, is to report median rather than mean (or average) values when calculating GDP per head.
Another intriguing possibility is to adjust aggregate measures using a welfare based index of inequality, such as that created by Tony Atkinson. An exercise using the Atkinson indexTim Jackson, a coauthor of this article, calculated the following: welfare loss associated with inequality in the UK in 2016 amounted to almost £240bn – around twice the annual budget of the NHS at that time.
One of the most ambitious attempts to create an alternative to GDP is the one that has been called the Genuine Progress Indicator (GPI). Proposed initially by economist Herman Daly and theologian John Cobb, GPI attempts to adjust GDP for a range of factors – environmental, social and financial – which are not sufficiently well reflected in GDP itself.
Since 2015, GPI has been used in Maryland as a progress indicator. In fact, it is a bill introduced to US Congress in July 2021 would, if enacted, require the Department of Commerce to publish a US GPI, and to “use both the indicator and GDP for budgetary reporting and economic forecasting”.
A potential gamechanger?
In 2021, the UN secretary-general António Guterres concluded his Our Common Agenda reportWith a call to action. “We must urgently find measures of progress that complement GDP, as we were tasked to do by 2030 in target 17.19 of the sustainable development goals.” He repeated this demand in his priorities for 2022Speech to the UN General Assembly
Guterres called for a process “to bring together member states, international financial institutions and statistical, science and policy experts to identify a complement or complements to GDP that will measure inclusive and sustainable growth and prosperity, building on the work of the Statistical Commission”.
The first manual explaining the UN’s system of national accounts was published in 1953. It has been through five revisions, the last in 2008. These were designed to keep up with financial market developments and to provide information to more people around the world.
We need to urgently find progress measures that will complement GDP
The next SNA revisionThe UN Statistics Division is currently leading the development of this system, which mainly involves national statistical office. other statistical expertsinstitution stakeholders, such as the IMF World Bank and Eurostat.
But unlike the UN’s COP processes relating to climate change and, to a lesser extent, biodiversity, there has, to date, been little wider engagement with interested parties – from business leaders and political parties to civil society, non-governmental organisations and the general public.
As the British science writer Ehsan MasoodAs the author has observed, this revision process happens below the radar for most people who don’t use national accounts. This means that many valuable ideas that could be brought in are not being heard by those who will ultimately decide how nations measure their progress in future.
The 1987 Declaration of Sustainable Development captures the essence and spirit of sustainable development. Brundtland Report: “To contribute to the welfare and wellbeing of the current generation, without compromising the potential of future generations for a better quality of life.” Yet it remains unclear how the next SNA revision will provide such an intergenerational lens, despite a new focus on ‘missing’ capitals including natural capital.
Similarly, while the revision programme is addressing globalisation issues, these are only about global production and trade – not, for example, the impacts of national economies on the environment and wellbeing of other countries and populations.
Ambitious deadlines have been set further into the future: achieving the UN’s Sustainable Development Goals by 2030, and reducing global net emissions of greenhouse gases to zero before 2050. The SNA revision process – which will see a new system of national accounts agreed in 2023 and enacted from 2025 – is a key step in achieving these longer-term goals. This is why it is important to open up the revision process for wider debate and scrutiny.
It’s time to abandon this ‘GDP fetish’
One lesson to learn from the history of indicators, such as those about poverty and social exclusion, is that their impact and effectiveness depends not only on their technical robustness and their fitness for purpose, but also on the political and social context – what are the needs of the time, and the prevailing climate of ideas?
The current SNA revision should be as much about the usefulness and use of new measures as it is about their methodological rigour. Indeed, we might go as far as Gus O’Donnell, the former UK cabinet secretary, who said in 2020: “Of course measurement is hard. But roughly measuring the right concepts is a better way to make policy choices than using more precise measures of the wrong concepts.”
In short, there is an inherent tension involved in constructing an alternative to GDP – namely achieving a balance between technical robustness and social resonance. The complexity of a dashboard of indicators such as New Zealand’s Living Standards Framework is both an advantage in terms of meaningfulness, and a disadvantage in terms of communicability. In contrast, the simplicity of a single measure of progress such as the Genuine Progress Indicator – or, indeed, GDP – is both an advantage in terms of communication, and a disadvantage in terms of its inability to provide a more nuanced picture of progress.
In the end, a variety of indicators is likely to be essential for navigating a path to sustainable prosperity that takes full consideration of individual and collective wellbeing. A wider range of indicators should allow for more diverse narratives about progress.
Some momentum in the current SNA revisions process and ongoing statistical research is directed toward measurement of inclusive wealth – building on the economics of sustainability brought together in Partha Dasgupta’s recent review of the economics of biodiversity. This framework could gain consensus among statisticians as well as economists. It is currently being implemented by UN, starting with natural and environmental capital.
While including wellbeing measures in the mix would indicate that wellbeing matters, at minimum to some people, it also acknowledges that many things can affect wellbeing. There is no evidence that placing wellbeing measures in different parts of the data ecosystem will result in them being overlooked or ignored. While wellbeing measures are not a panacea for all problems, they can help us recognize the potential economic, social, and environmental benefits of a wellbeing-focused approach.
It is not an easy task to update the statistical framework in order to better measure economic progress. It took years to develop the SNA and spread it to other countries. New data collection methodologies should be able to speed things up now – but the first step in getting political buy-in to a better framework for the measurement of progress is an agreement about what to move to.
National accounting needs what the name suggests: an internally-consistent, exhaustive and mutually exclusive set of definitions and classifications. The new framework will require the collection of different source data and the modification of processes in national statistical offices. It will need to include recent changes in the economy as a result of digitalization, as well long-standing issues such a poor measurement of environmental impact.
Ultimately, this ‘beyond GDP’ process needs to grapple not only with measurement problems but also with the various uses and abuses to which GDP has been put. Kennedy’s neat summary that it measures “everything except that which makes life worthwhile” points as much to the misuse of GDP as to its statistical limitations. Its beauty in measuring income, expenditure, and output simultaneously means that it will likely remain a valid tool in macroeconomic analysis in some form. However, its use as an unambiguous arbiter of social advancement was not appropriate and probably will never be.
Clearly, the desire to know if society is moving in the right direction remains a legitimate and important goal – perhaps more so now than ever. But in their search for a reliable guide towards social wellbeing, governments, businesses, statisticians, climate scientists and all other interested parties must abandon once and for all what the Nobel Laureate Stiglitz called a “GDP fetish”, and work with civil society, the media and the public to establish a more effective framework for measuring progress.
Paul Allin is visiting professor in statistics at Imperial College London; Diane Coyle is professor of public policy at the University of Cambridge, England; and Tim Jackson is professor of sustainable development and director of the Centre for the Understanding of Sustainable Prosperity (CUSP) at the University of Surrey, England.
This article is republished under Creative Commons license from The Conversation. You can read the original article.
Main image: Jack Finnigan
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