The Gross Domestic Problem

Measuring activity better than GDP does is good but is no panacea
Lorenzo Fioramonti
31 May 2010

The financial crisis has been crunching our economies. Plummeting exports, job losses, falling investment, home foreclosures and skyrocketing deficits (and public debt) are but a few of the most widely reported disastrous effects of the current downturn. Yet, although media attention is all focused on the treacherous road to recovery, the financial rollercoaster seems to have triggered an important global debate questioning the sustainability of the current economic system based on infinite economic growth. Such a critique is not only based on the inherent instability of market-based dynamics, but also on the more long-term impact that these processes exert on the planet’s limited natural resources and societal wellbeing at large. Does our quality of life improve when our economy grows by 2 or 3%? Can we sacrifice our ecosystems to safeguard an economic framework marred by internal inconsistencies and imbalances?


GDP as a ‘problem’

For the first time since it was invented in the 1940s, the so-called gross domestic product (GDP), which is the popular icon of economic growth, has become a ‘problem’. Even a defender of economic conservatism such as The Economist recently hosted an online debate on the issue concluding that “GDP is a poor measure of improving living standards”. The Organization for Economic Cooperation and Development (OECD), another bastion of economic traditionalism, has also been casting doubts on the dogma of economic growth. On their website, they recognize that “for a good portion of the 20th century there was an implicit assumption that economic growth was synonymous with progress: an assumption that a growing GDP meant life must be getting better. But now the world recognizes that it isn’t quite as simple as that. Despite high levels of economic growth in many countries, we are no more satisfied with our life (or happier) than we were 50 years ago”.

This debate has also been influencing the European political arena. In November 2007, the EU hosted a high-level conference titled ‘Beyond GDP’ and, two years later, the Commission released a communication on ‘GDP and Beyond: Measuring progress in a changing world’, where it argued that GDP has been unduly “regarded as a proxy indicator for overall societal development and progress in general” and, since it does not measure environmental sustainability or social inclusion, “its limitations need to be taken into account when using it in policy analysis and debates.” The special commission on social progress set up by French President Nicholas Sarkozy and chaired by Nobel laureates Joseph Stiglitz and Amartya Sen has also highlighted the profound inadequacy of GDP as a measure of societal wellbeing. Its 2009 report identifies a number of alternative indicators to replace GDP and reminds us that “GDP is a measure of mainly market production, though it has often been treated as if it were a measure of economic well-being. Doing so can lead to misleading indications about how well-off people are and entail the wrong policy decisions”.

These recent developments build on an important branch of economic research, which has long shown that quality of life and social progress is increasingly de-coupled from economic growth, especially in industrialized countries. Of course, the global financial crisis has been aiding this new wave of revisionism given that most industrialized countries have been experiencing a prolonged downward trend in terms of GDP figures.  Europe is in the eye of the storm, ravaged by international speculators and apparently unable to get back on its feet and run the race of ‘growth at all costs’ against the formidable competition of China, India and a bunch of other fast-growing economies. Quite unexpectedly, this situation has turned the ‘old continent’ into a fertile terrain for revisionist approaches to GDP. Indeed, some political leaders feel increasingly uneasy and fear that such unidimensional approach to the measurement of economic performance might weaken their popular support in the short term. This may have been the main motive behind President Sarkozy’s decision to institute its commission last year.


Alternative indicators are not enough

This is not the first time GDP comes under fire. For many years, progressive economists, think tanks and NGOs have been producing alternative indicators to measure social well-being.

Take for instance Social Watch, an international NGO head-quartered in Montevideo, Uruguay. Since 1995, they have been producing a Basic Capabilities Index (BCI, previously called Quality of Life Index), based on non-monetary indicators such as the percentage of children reaching fifth grade, survival until the age of 5, and the percentage of births attended by skilled personnel. As remarked by the organization, the “BCI does not use income as an indicator. It defines poverty not in terms of money, but in different aspects of people’s actual condition and their greater or lesser possibility of having their human rights fulfilled”. Arguably, the BCI is far more accurate than the Human Development Index (HDI, which is the UN-backed measurement of well-being) given that the latter still includes GDP per capita within its formula, although complemented by measures of literacy and life expectancy.

Indicators comparing economic performance and environmental resources have also been available for quite some time, inspired by the theories of “genuine progress” stressing the need to account for the human and environmental costs of economic growth. The New Economic Foundation, a progressive think-tank based in London, has been calculating a number of alternative measurements to GDP over the years, including the Happy Planet Index, a metric combining the environmental impact of our economies with the human well-being of citizens in order “to measure the environmental efficiency with which, country by country, people live long and happy lives”. The WWF and the UN Environmental Programme have been promoting a Living Planet Index, while the Global Footprint Network has been advancing the use of their Ecological Footprint, “a resource accounting tool that measures how much nature we have, how much we use, and who uses what”.    

In 2004, China announced that a “green” GDP would become the country’s main economic indicator in order to account for the financial impact of environmental degradation, pollution and other externalities. For the past two decades, the government of Bhutan has rejected GDP and has instead adopted a “gross national happiness” index, which serves as the main guiding parameter for the country’s development policy.

The prolonged existence of alternative indicators and their relative lack of success at dethroning GDP point to an important element, which is grossly missing in the current debate: the transition to a different economic model cannot be achieved simply through statistical innovations. In fact, this ‘Copernican revolution’ is a chiefly cultural endeavour. Societies that reward overconsumption and thrive on social inequalities will not be rescued by a new numerical device, no matter how useful and long-overdue its invention might be. Thus the task at hand will be to move from mainstream economic thinking to a more sociological/philosophical re-thinking of how we have organized our lives and structured our societies. 

In a recent issue of the New York Times magazine, Jon Gertner draws an interesting comparison between the lifestyles of two individuals, which he calls High GDP Man and Low GDP Man:

Consider, for example, the lives of two people — let’s call them High-G.D.P. Man and Low-G.D.P. Man. High-G.D.P. Man has a long commute to work and drives an automobile that gets poor gas mileage, forcing him to spend a lot on fuel. The morning traffic and its stresses aren’t too good for his car (which he replaces every few years) or his cardiovascular health (which he treats with expensive pharmaceuticals and medical procedures). High-G.D.P. Man works hard, spends hard. He loves going to bars and restaurants, likes his flat-screen televisions and adores his big house, which he keeps at 71 degrees year round and protects with a state-of-the-art security system. High-G.D.P. Man and his wife pay for a sitter (for their kids) and a nursing home (for their aging parents). They don’t have time for housework, so they employ a full-time housekeeper. They don’t have time to cook much, so they usually order in. They’re too busy to take long vacations. As it happens, all those things — cooking, cleaning, home care, three-week vacations and so forth — are the kind of activity that keep Low-G.D.P. Man and his wife busy. High-G.D.P. Man likes his washer and dryer; Low-G.D.P. Man doesn’t mind hanging his laundry on the clothesline. High-G.D.P. Man buys bags of prewashed salad at the grocery store; Low-G.D.P. Man grows vegetables in his garden. When High-G.D.P. Man wants a book, he buys it; Low-G.D.P. Man checks it out of the library. When High-G.D.P. Man wants to get in shape, he joins a gym; Low-G.D.P. Man digs out an old pair of Nikes and runs through the neighborhood. On his morning commute, High-G.D.P. Man drives past Low-G.D.P. Man, who is walking to work in wrinkled khakis.

According to the paradigm of economic growth, High GDP Man is a successful individual while Low GDP Man is a poor devil. When presented with this apparent paradox, most economists would respond that the problem can be easily corrected by monetizing Low GDP Man’s non-monetary activities. As simple as that: put a price on walking to work or growing and cooking your own food and you will have a more balanced measure of economic productivity.

Economists’ obsession with prices is notorious, but its contagious effects are less well known.  Nowadays even environmentalists have endorsed this ‘price tagging’ philosophy, which has animated a number of international projects aiming at calculating the economic value (read price) of nearly everything, from political participation to ecological resources. The term “ecosystem services”, which inherently portrays Mother Nature as a provider of goods and services to our economies, has become rather popular these days and research funding is available to find creative ways to calculate how much ‘money’ the Earth is giving our economies for free.

Granted, most of these initiatives are well-intentioned in so far as they attempt to draw policy makers’ attention to the importance of natural resources for the sustainability not only of the biosphere, but also of our societies (including our economies). At the same time, this approach risks reinforcing the mainstream view that goods without a price are worthless. Most of these research initiatives do not think outside the box and usually adopt the same categories, concepts and tools of mainstream economic thinking. For instance, they strive to calculate the opportunity cost of preserving the local stream of water vis-à-vis building a school. Or they attempt to identify the citizens' willingness to pay for the ecosystem services in order to monetize the entire planet’s natural functions, from pollination to natural fertilization. But how reasonable is to argue that the amount of money we would be willing to pay to preserve these ecosystems is a good approximation of their real value? Can we, in good faith, put a price on the atmosphere? If everything has got a price, then there must a level beyond which it is ‘economically’ convenient to dispose of it. But can we dispose of air?  

Unfortunately, this way of reasoning has infiltrated a number of research sectors and has also influenced the climate change discourse, paving the way for the introduction of dubious concepts such as natural capital, green growth, clean development and, above all, carbon offsets: dangerous devices aiming to transform common goods into market commodities, while preserving the economic growth philosophy which underpins our societies. It is because of this deeply embedded paradigm that governmental institutions, such as the European Union, can claim – as they recently did – that a 30% emission cut might be too expensive to carry out. But what do concepts as ‘expensive’ or ‘cheap’ mean at all when we talk about our climate?

By adopting the economic ‘lens’ to value our ecosystems, we have unconsciously endorsed the technocratic hubris of mainstream economic rationality. Therefore, even when we make honest attempts at resolving the climate conundrum (as most environmentalists do), we confine ourselves to a language of numbers, formulae and thresholds, which give us a false idea of scientific precision. We forget that these are not realities, but constructs. Concepts such as prices and externalities, which we have largely internalized in our way of thinking, are not neutral: they carry a very particular view of the reality and inevitably affect the way in which we relate to the outside world. If we are to resolve the challenges we are currently facing, this language must be deconstructed, reinterpreted and mediated both at the social and political level.


A cultural revolution

These are just some examples of why it is essential to move beyond the current economic framework and embrace a more commonsensical (not to say philosophical) approach. In this regard, the real question is not: How do we account for Low GDP Man's non-financial activities and put a correct price on them? But rather: Which of the two men’s lives would we like to live? What model of life do we aspire to?

GDP is not just a number, it is a language, the reflection of a model of society. In industrialized countries and many so-called developing countries, citizens have been reduced to consumers and the idea of market has long superseded that of community. The language of consumerism has become the main lens through which we relate to the outside world. Things must be consumed through buying and disposing. Concepts like mending, fixing, reusing are stigmatized as relics of the post-war period. In our cities, we find thousands of retailers of the most diverse cutting-edge technologies, but hardly a repair shop. Gadgets are not sought after because of their use value, but because of the social status attached to it. Owning a state-of-the-art flashy Blackberry makes you a successful person, no matter what the actual use you make of it. Not owning a car turns you into a loser, even if you work only two blocs away from your apartment.

When consumers’ demand plunges, our countries enter a state of national grief. When the stock exchange spikes up, we cheer as if our lives were miraculously rescued. Every day, we are bombarded with powerful messages celebrating overconsumption as the only way to a good life. Even civic organizations have internalized this new philosophy by transforming themselves into consumers’ organizations.

Against the complexities of such a society, the introduction of a new statistical metric – albeit fundamental and necessary – will achieve very little. Progressive academics and like-minded policy makers need to understand that the introduction of statistical alternatives must go hand in hand with the pursuit of a cultural transformation. For starters, instead of being restricted to a small circle of experts, this critique of GDP should be extended to civil society and the media in order to spur an open debate on the perils of economic growth and, perhaps more importantly, on its desirability. Time might be ripe for a cultural revolution.


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