The next time you hear that the “economy” grew last quarter, you need not necessarily celebrate. Since World War II, most governments around the world have utilized the Gross Domestic Product metric as their primary benchmark for how the “economy” is doing. We celebrate when GDP “grows” and we collectively frown when it shrinks. But GDP is not a measure of the well-being of a society, it was never intended to be, and it’s time that we understood its limitations

The Problem With GDP

The United States GDP is up 42% from 2010. Do you feel 42% happier or 42% wealthier? Probably not. GDP is merely a measure of the approximate value of the goods and services produced within a country in a given period of time. While it gives us an idea of broad economic activity, GDP fails to capture the nuances that come with such activity, and these nuances can be quite important.

Imagine that a new steel factory is built in the fictional town of Brookshire. This plant provides jobs and opportunities for local townspeople. The GDP grows! But that same steel plant pollutes the town’s water supply, causing hundreds of people to develop cancer. The GDP grows even more! Medical bills and funerals are expensive, and they too add to the goods and services counted as “growth.” The GDP grows regardless if the driver of that “growth” is positive or negative.

The GDP metric also misses large swaths of the economy, leaving them uncounted even though their “production” is a net good. When a father or mother stays home to take care of his/her child instead of sending that child to daycare, the GDP falls because the value of parental supervision in the home is uncounted labor.

In fact, much of what we call “growth” is merely the shifting of previously uncounted non-market transactions into market ones. Paying $1500 a month to send a child to daycare, then having to work a second job to pay for it, is great for the GDP even if real “growth” didn’t necessarily take place.

The blind pursuit of GDP growth results in economic, social, and political distortions that impact human civilization in very negative ways. Collectively, we already know this and feel this intuitively. Studies show that beyond a certain level required to satisfy basic human needs, additional GDP growth does not result in any improved happiness among the population.

What’s the Alternative?

There are plenty of alternatives that already exist. Two notable metrics are the Genuine Progress Indicator (GPI) and Human Development Index (HDI). These alternatives attempt to account for facets of life that exist outside the bounds of pure economic production, including education, life expectancy, wealth inequality…etc. They also do their best to parse out the economic activity that provides genuinely positive growth, while subtracting negative growth that causes societal harm.

If you look at the estimated GPI of the United States, for example, American society and standards of living have not progressed at all since the late 1970s. This might account for the zeitgeist of disenfranchisement that has engulfed American politics on the right and left in the present day. Policymakers may be chasing the wrong metric.

True Wealth

There is also the World Bank’s new metric of National Wealth, which serves as a complementary indicator to GDP and measures a broad portfolio of assets produced, including human and natural capital. This metric builds a national “balance sheet” akin to one used in corporate accounting.

GDP growth is a snapshot in time that accounts only for national income and production, it fails to measure changes in the underlying asset base. It says nothing about liabilities, depreciation, or the sustainability of that income long term.

Nobel Laureate Joseph Stiglitz noted that businesses and households are evaluated by both their income and their balance sheet. A potential homeowner can only get a mortgage by confirming both his household’s income and net assets. Income can always be manipulated to look good by selling off assets, but this undermines the ability to generate future income. The genuine picture of economic health requires evaluating income and wealth.

Critics of GPI, HDI, and National Wealth measures will argue that such metrics are subjective and open to manipulation. They also will argue that it is too difficult to calculate negative externalities. The critics are all correct, but such criticism neglects that GDP itself also places subjective value judgments on growth (that only market production matters), and it too miscalculates economic activity by missing large portions of total production.

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Conclusion

There is never going to be a perfect indicator of human development, societal well-being, and progress. That does not mean, however, that there is no value in utilizing other metrics alongside GDP. Certainly, GDP alone is insufficient, and it’s time to start thinking differently about growth and human progress.

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