It’s time to reconsider how we measure our economy’s success
Rochester Business Journal by Abigail McHugh-Grifa
December 15, 2022
I’ve never formally studied economics, so until fairly recently, I assumed (like most people?) that rising GDP was an inherently good thing. After all, that’s how it’s typically characterized by business leaders and nearly every politician and pundit whose voice I grew up hearing in the news. Conservatives and progressives seem to be equally enamored with the prospect of rising GDP. So when I finally learned what GDP really measures, I was thoroughly appalled to realize that our entire economic system is based on a metric of success that doesn’t consistently align with human wellbeing.
To be fair, GDP does reveal quite a bit about economic growth, and that growth has historically raised living standards around the world. However, GDP does not differentiate between the positive and negative effects of the production and development that fuel growth. This shouldn’t come as a surprise, considering that the concept of GDP has its origins in (1) the Great Depression - when it was developed to understand the extent of the economic downturn, and (2) World War II - when it was refined to assess wartime production capabilities. Though the economist who invented GDP warned Congress that it was a poor tool for policy making, GDP is now used as the basis for all kinds of policy decisions and we assume that policies are beneficial if GDP rises as a result.
So what is GDP anyhow? Simply put (for novices like me), Gross Domestic Product (GDP) refers to “the total economic output achieved by a country over a period of time,” “the broadest financial measurement of a nation’s total economic activity,” or “the speed with which money and stuff pass through the economy.” When GDP goes up, that means the economy is growing. When GDP goes down, the economy is shrinking. Though there are different ways of calculating GDP, the results are basically the same. It’s important to note that GDP does not include the value of items that are resold, borrowed, or passed along as hand-me-downs.
Some things that directly or indirectly make GDP go up are clearly bad for people and/or the planet. These include war, chronic illnesses, prisons, natural disasters (in countries that can afford to rebuild), car accidents, deforestation, and the production of toxic chemicals that poison our bodies and plastic junk that clutters up our homes before getting trucked off to a landfill.
On the flip side, many activities that make our lives enjoyable and fulfilling don’t contribute to GDP. These include reading to a child, making dinner for family, helping a neighbor, talking with a friend, walking your dog, going for a run, volunteering for a community organization, dancing around the house, growing your own food, nursing a baby, having sex, and sleeping.
I became concerned about GDP and our collective fixation on economic growth when I learned about the nine planetary boundaries defined by the Stockholm Resilience Center and the concept of ecological overshoot. As defined by Wikipedia, “Ecological overshoot occurs when the demands made by humanity exceed what the biosphere of Earth can provide through its capacity for renewal.” Different societies are overshooting the Earth’s capacity at different rates. Sadly, the United States is leading the pack. According to overshootday.org, if everyone on Earth lived like Americans do, we’d need 5.1 planet Earths to sustain ourselves.
Of course it’s reasonable for people in developing countries to want more comfortable lifestyles. At a minimum, everyone should have access to reliable, affordable electricity, quality housing, nutrient-rich food, and other basic requirements for a healthy, happy life. In many countries around the world, this will require economic growth.
That said, the assumption that growth is always desirable ignores the realities of life on a finite planet. So we need more nuanced conversations about growth. For example, we might ask ourselves, “Growth of what?” “Growth for whom?” or “Growth in what areas?”
We also need better tools for measuring progress. GDP is not the Holy Grail. We can use other strategies for evaluating the health and strength of our economy. These tools already exist. Examples include (1) Bhutan’s Gross National Happiness Index, which considers equitable socio-economic development, environmental conservation, culture, and good governance, (2) the UNDP’s Human Development Index, which includes measures of health, education, and income, and (3) the Genuine Progress Indicator, which has been used to assess economic, environmental, and social conditions in many countries and U.S. states.
Lastly, it is important to note that although economic growth and job creation used to go hand in hand, that is no longer the case. These days, economic growth can actually be a threat to employment, because it encourages companies to invest in automation and robotization. So it’s time to reject the narrative that economic growth is essential for creating jobs.
Of course I fully support the goal of growing human happiness, health, education, and wellbeing. Achieving that goal will require specific, strategic forms of economic growth and specific, strategic forms of degrowth. From my perspective, economic activities that are harmful to humans shouldn’t be allowed to continue, even if they are very profitable. This includes most activities that harm the planet, because human wellbeing is inextricably linked to the planet’s wellbeing.
As Ken Boulding famously said (many decades ago), “Anyone who believes exponential growth can go on forever on a finite planet is either a madman or an economist.” Fortunately the field of economics is evolving and economists are increasingly acknowledging the limitations of GDP and the need for other measures. I’m hopeful that non-economists with a better understanding of what GDP is and why it’s problematic can speed this transition along by demanding other metrics of success, because aiming for infinite and indiscriminate growth on a finite planet is a recipe for disaster.