Has the king of economic indicators reached the end of its reign?
Can't you just feel the happiness? Germany pulled out of recession last quarter with a 0.3% increase in GDP, and Britain may do the same this quarter. OK, it is genuinely good news, but it's not exactly a reason to party.
The relevance of GDP to our wellbeing is the topic of much debate at the moment. Once the preserve of environmentalists and the left, GDP scepticism can now be found across the political spectrum, as more people start to question whether continually increasing the amount we consume is a reasonable indicator of our prosperity.
A report this week from a team led by Nobel Prize winner Joseph Stiglitz, and commissioned by French President Nicholas Sarkozy, urges us to de-emphasise GDP and focus instead on measures such as household income, median consumption, and leisure time.
To quote Stiglitz: "GDP statistics were introduced to measure market economic activity. But they are increasingly thought of as a measure of societal well-being, which they are not."
Anomalies
And that's the problem with measuring economic activity: Just measuring the amount of activity tells us nothing about whether that activity leaves us better off. Consider the following:
- smoking is an economic activity that contributes to GDP, as does increased spending on lung cancer treatment;
- if an oil tanker runs aground and we spend huge sums to clean up the spillage, that too adds to GDP;
- scrapping roadworthy cars and replacing them with new ones has been credited with the recent recovery;
- using more and more of our finite resources such as oil each year means we deplete them more rapidly, which wouldn't appear to be in our best interests; and
- advertising is an economic activity that arguably causes dissatisfaction, since one of its functions is to increase our desire for what we haven't got.
That's just a taste of the sort of criticisms that have been leveled against GDP over the years, but it has still held its position as the single most important statistic in every economy.
Alternatives
Other measures such as median income levels, income distribution, average hours worked, and so on, can all have a place in addition to GDP in terms of getting a feel for the state of the economy. And they have the advantage of being reasonably quantifiable, in the way that GDP is.
More subjective measures such as Bhutan's 'Gross National Happiness' are far more woolly, as are measures that attempt to evaluate the work we do for ourselves -- cooking, cleaning, mowing the lawn -- rather than just the work we buy and sell.
Scepticism
According to Angel Gurria, Secretary General of the Organisation for Economic Cooperation and Development, "we need better measures of people's expectations and levels of satisfaction, of how they spend their time, of their relations with other people in their community".
But as sceptical as I am of the accuracy and usefulness of GDP data, I am even more sceptical of attempts to measure and control these more subjective aspects of our lives.
Is it correct, for example, to assume that people prefer a shorter working week? Surely many people enjoy their work, and I'm sure there are some who prefer it to spending time with their families. Should the state have an opinion about this, or attempt to control how people balance their time?
And even measures based on hard data can send us off in the wrong direction. Wealth disparity could be eliminated by simply taking it from those who have it and giving it to those who don't, but where would be the justice in that?
As well as placing an excessive value on what we can measure, be it GDP or some alternative, it can be very hard to measure what we really value, such as happiness and liberty.
GDP is undoubtedly very important, but I have to agree with the thrust of the report, that we shouldn't obsess about it. As Stiglitz said: "Most governments make a fetish out of it. If you take one message out of our report, make it avoid GDP fetishism."
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