"GDP (Gross Domestic Product) Ö is an inappropriate single measure of national welfare". 1
"The nations brightest economists maintain our national accounting system with a calculator that has a plus key but no minus key"2
Many economists, politicians and journalists act as if GDP is a rigorous indicator of economic growth, and by explicit implication, an indicator of a nationís progress.
However, even back in the 1930ís Simon Kuznets, one of the developers of the US national accounting system, was warning Congress not to use GDP as an indication of national prosperity.
GDP measures the total throughput of goods and services over a period of time. Whilst we desperately need to have indicators which gauge national well-being and progress, GDP cannot help.
Firstly, GDP attempts to remove value judgments on spending. All transactions are neutral; neither good nor bad. The costs of a major natural or ecological disaster cause an increase in GDP. So do the costs involved in a car accident or aggravated burglary Ė health bills; cost of replacing property; police work; counselling. Both of these examples are obviously bad for our well-being, but GDP counts the results of them as positives. GDP also counts the shorter life span of products as a positive, since more would be sold.
Secondly, many items are left out of the accounting that makes up GDP, mostly because they are hard to put values on. But leaving out domestic work, voluntary work, the underground economy, etc means that they are ignored in much government policy. For instance if a major campaign to plant fruit trees in cities using community groups were suggested, Treasury would probably have trouble giving accurate advice since the only monetary figure they would see would be the cost of the trees.
Resource depletion and environmental damage also do not appear within GDP except with the costs of clean-ups. So policy to control over-exploitation of resources never adds in the damage of over-use. Similarly, ignoring the creation of pollution now just means that future generations will have to meet the costs of cleaning up (and those costs will increase their GDP). Treating the use of non-renewable resources as income is akin to congratulating ourselves on burning the household furniture to cook with.
While most economists seem to be perfectly happy with their value-free "science" others are working at solving the inadequacies of GDP.
Britainís environment minister Michael Meacher wants to create indicators of environmental and social performance to sit alongside economic statistics. Britain is developing a set of 8 to 10 "sustainability indicators".
Another indicator getting attention is the Genuine Progress Indicator which starts off similarly to GDP but then is modified by both additions and subtractions. Subtractions include those for poor income distribution, defensive expenditures (locks, burglar alarms etc), costs of air and water pollution, and depreciation of natural capital (rundown of natural resources). When GPI is graphed against GDP, the former flattens off over the last 15 years while GDP generally keeps rising.
With new indicators such as these we may be better placed to formulate social and environmental policy.
1: Hilary Hillier, head of environmental statistics, Department of Environment, Transport and Regions, Britain
2: Lincoln Anderson on US GDP in The Fortune Encyclopedia of Economics
Rachelís Health and Environment Weekly No. 516 - GDPwww.rachel.org
Redefining Progress - GPIwww.rprogress.org
UK Govt. Headline indicators http://www.environment.detr.gov.uk/sustainable/consult/index.htm