GDP: The Infinite Planet Indicator

June 3, 2014

NOTE: Images in this archived article have been removed.

The faults and flaws of Gross Domestic Product (GDP) as a measure of economic wellbeing are well-known. Nearly every introductory economics text lists the problems: it measures only the monetary value of final goods and services and doesn’t include non-market benefits like volunteer work and domestic production. It miscounts some costs as benefits, as when it adds in the money spent to prevent crime or remediate damage. And it doesn’t count the environmental costs of economic activity at all. Oddly, though, after listing all the shortcomings that prevent GDP from being an accurate measure of economic wellbeing, the typical introductory text goes on to use GDP as a measure of economic wellbeing.

“GDP is not the same as economic wellbeing,” Robert H. Franke and Ben S. Bernanke warn us in the second edition of their introductory textbook, Principles of Economics (emphasis in original). After a review of what GDP miscounts, they acknowledge “you might conclude…that GDP is useless as a measure of economic welfare.” But, they say, that conclusion isn’t justified: despite the measure’s flaws, there is nevertheless a strong correlation between GDP growth and growth in our material standard of living, which makes GDP an effective proxy measure of–yes–material wellbeing.

Or take Harvard Professor Gregory Mankiw, whose introductory text is widely used. “Surely,” he asks rhetorically, “we should value things that are not measured by GDP and that contribute to the quality of life and economic well-being . . . ?” But, like Franke and Bernanke, he falls into line with the status quo: while “GDP does not directly measure those things that make life worthwhile, . . . it does measure our ability to obtain the inputs into a worthwhile life,” which makes it a useful, important measure. (See Daniel Miller’s essay on Mankiw’s treatment of GDP.)

Image Removed

The cost of cleaning up this oil spill in Galveston, Texas is miscounted as a benefit in GDP. Photo Credit: Petty Officer 2nd Stephen Lehmann.

But the most puzzling case of the economics profession ignoring its own warnings can be found in the work of William Nordhaus, the Sterling Professor of Economics at Yale. Nordhaus was the co-originator (with James Tobin) of an alternative to GDP, the Measure of Economic Welfare (MEW). If any introductory textbook was going to be organized around a different economic indicator, you’d think it would be one that Nordhaus helped produce. In 1985 he began co-authoring the magisterially titled Economics, Paul Samuelson’s influential text, first published in 1948, which once had the market to itself and, despite competition, still manages to sell upwards of a quarter million copies a year. On the matter of GDP as an indicator of wellbeing, Nordhaus and Samuleson render these judgments: GNP (GDP’s predecessor statistic)

is an imperfect measure of genuine economic welfare . . . [because it] . . . includes many components that make no obvious contribution to individual well-being, and . . . some key satisfaction-producing consumption items are omitted.

These cautions are offered as a lead-in to the book’s brief discussion of Net Economic Welfare, a measure that traces to Nordhaus’ own work on the MEW. The idea behind both alternative indicators was the same: GNP needs to be corrected by subtracting costs that it ignores (like the cost of air and water pollution, or the lost leisure time that comes from longer working hours that bring higher wages) or mistakenly counts as benefits (like the costs of repairing infrastructure and replacing property after a destructive storm), and it needs to include economic benefits that don’t move through markets (like the value created through domestic production–cooking, cleaning, child- and eldercare, and so on).

Samuelson and Nordhaus have no problem in moving from objective description to the indicated prescription:

Along with adding in ‘goods,’ GNP should be adjusted so that it subtracts out ‘bads’ or the disamenities of modern life.

And yet, and yet: their text doesn’t follow their prescription; it generally ignores the alternative indicator they’ve introduced, the one that Nordhaus himself helped invent. The book’s 900-plus pages give the undergraduate reader a detailed introduction to a body of economic thinking that takes GNP as a useful and accurate measure of economic welfare. You find GNP throughout the book, from the flyleaf (on which a full-page graph compares “Real Output,” measured in inflation-corrected GNP, to Price Level over the years) to the index (which contains just two citations for the NEW but five and a half column inches, in 5 point type, on GNP).

In economics as in other professions, it takes vision and courage to break with consensus practice. And economists can always take shelter behind the myth that economics, properly understood, is purely descriptive–a science, not a species of prescriptive advocacy. And so it is that despite GNP’s flaws, and their own advocacy for using something better, Samuelson and Nordhaus tell beginning students of economics that this well-known statistic (and by implication its successor statistic, GDP) is “the best widely available measure of the level and growth of [economic] output” and “the carefully monitored pulse of the economy.” The message: we take GNP seriously as a measure of economic wellbeing because policy makers and other economists take it seriously as a measure of wellbeing, and while we’re perfectly capable of imagining an alternative measure, we’re not going to go against the professional consensus.

Thus is a perverse, anti-intellectual conservativism modeled for students of economics.

But we can still usefully ask: why does the discipline as a whole hang on to a statistical measurement that is so deeply flawed?

I think part of the answer is that GDP embodies a hidden presumption, one that is absolutely crucial to economics as it is widely practiced today. It’s a presumption that is killing us, literally. That presumption is that the planet is infinite.

The growth societies that developed in Western Europe in the past two centuries have, by and large, always treated the planet as though it were infinite, with an infinite capacity to offer up resources and an infinite capacity to absorb the wastes that industrial production inevitably generates. This counter-factual presumption is killing us, through climate change, species loss, and ecosystem degradation.

The tradition in economic theorizing that began in those growth societies needs the planet to be infinite, because even today its theorizing remains committed to economic growth as its primary project and takes that growth to be the measure of the success or failure of its theories.

If you adopt an alternative indicator and thereby begin to admit that economic development has environmental costs in pollution, climate change, resource depletion, lost leisure time, family dissolution, and other “disamenities,” then you have to be open to the possibility that there could be uneconomic growth–economic development that costs us more in damage and disamenities than it brings in benefits. To fix the flaws in GDP, to deduct environmental and social costs from economic benefits, is to call into question the perpetual growth dogmas of the discipline.

So, even though GDP fails in terms that are completely drawn from traditional economics, that failure has larger consequences for the tradition. Rejecting GDP as a basic economic indicator and adopting an alternative subverts a much larger body of economic theory and practice, because it encourages us to ask, and to get fresh answers to, a fundamental question: What’s the economy for, anyway?

As nations, states and localities begin developing their answers to that question, they are increasingly seeking to adopt and integrate into their policy making (economic and otherwise) new indicators that offer a more comprehensive measure of wellbeing.

In my next post, I’ll elaborate on last week’s post by John de Graaf, and talk more about how the state of Vermont has begun integrating the Genuine Progress Indicator into its policy processes.

Tags: economic indicators, Gross Domestic Product