It should come as no shock that real economic progress should consider social welfare rather than just the quantitative value of goods and services alone. But the debate amongst economists about the significance economic growth metrics, in this case GDP, still remains as hot as ever. This begs the question:

Where should the line be drawn between over-reliance and underutilization of growth indicators?

GDP was born out of the economic success for the USA in 1937 - which intended recovering from the scars of the preceding Great Depression. This was to be achieved through increasing industrial production and subsequently diminishing unemployment levels, which had hit the unprecedented immensity of 20% just two years prior. Hence for this time it would, of course, seem convenient to have such a quantifiable metric for economic growth.

However, it’s not 1937 anymore, nor are we the US. Even at the time, American economist Kuznets, often described as the founding father of GDP, argued that GDP isn’t a great measure of social progress or economic welfare. So, it’s necessary to consider if the government’s incomparable obsession with growth metrics should take such precedence over urgent social and environmental concerns. But first and foremost, it’s important to establish how we actually measure economic prosperity.

In simple terms, GDP measures the market value of goods and services produced within an economy, ignoring any positive or negative externalities created in the production and development. 

If a high GDP is what we think as economic success, then people will strive for GDP; policies that result in economic growth and a rise in GDP are immediately thought to be beneficial for society. But what’s become clear over the years is that policymakers often treat GDP as a unitary measure to signify all aspects of a nation’s development, meshing together ideals of a healthy society and economy, which may not necessarily follow through even with a strong GDP. As former governor of the Bank of England put it, we have moved from moral worth to ‘market worth’ – all too often we use GDP growth as the single justification for our course of action.

Take for example the Deepwater Horizon disaster - the largest offshore oil spill in history. The accident killed thousands of marine mammals and sea turtles, severely contaminating their habitats and posed a direct threat to biodiversity in the ocean. However, it actually added a bit of growth to the U.S economy due to the cost of cleaning it up; approximately 4,000 unemployed people were hired for the clean-up efforts – worth between $3 and $6 billion. So, the bigger the spill, the better it’ll look for the country’s GDP. 

And the same’s clear for when GDP accounts for the number of cars produced in a country: no consideration is given for the emissions generated or the financial capital used to back such an investment. Thus, such a metric that is terrible at quantifying financial services or environmental externalities, but incredible at measuring with steel and bricks looks rather out of place in today’s economy. 

Take the Buffet indicator, the ratio of a countries GDP to the size of the county’s stock market. Since financial transactions are not included in GDP, this currently sits at 1 : 2.26 in the US. There is a growing consensus that GDP simply doesn’t reflect the change structural dynamics of dynamic economies – adding financial services to UK GDP would increase GDP by over 104%.

To measure development solely on the value of goods produced seems a bit counter-intuitive. When we talk about prosperity for a nation, we don’t just mean successes for the economy, but also benefits for the environment and the equity of the market, subjects on which GDP has no authority..

The essence of GDP speaks on a greater conundrum in modern society: What is the true meaning economic success in the 21st Century?

30 years ago, it’d would have been relatively easy to say that economic success could be achieved through loosening the government controls placed on firms, and by freeing up private economic activity. Thatcher and New Labour pedalled this very ideology for both the left and right. But recent years have led to considerable thinking about creating a more equitable and responsible society, rather than the old teaching that economic growth will almost always lead to prosperity - old thinking on which GDP is based.

David Pilling, author of ‘The Growth Delusion’ brings forward an interesting analogy:

‘Breast milk’s value is nothing and yet powdered milk (…) can be quite damaging – but has an economic value. Now does that set these invisible economic incentives? It’s quite hard to prove, but intuitively you might think yes. It does.’

Pilling is completely right in saying that the way we calculate economic growth mainly considers the monetary aspect of things, such that firms are putting profits before science, and personal gain ahead of people’s health. In his case, formula milk companies evidently using clandestine methods to target and exploit the poorest of mothers; Firms will profit, therefore contributing to a growth in GDP.

Thus, we’re chasing after economic value, regardless of whether it may be good or bad for society.

But what effect will the rise of the Digital Age have on GDP?

Technology has advanced to broaden the scope of consumer convenience. Today, the modern generation faces a new economy driven by technology and on-demand culture, access to media and services available at the undemanding push of a button. 

Then, with the innovation of the internet, people have access to a fast track of endless resources from the comfort of their own bedroom. Last year, retail sales saw their biggest monthly fall since records began over 30 years ago. Similarly, the decline of high street stores, such as independent bookshops can be accounted to online services, such as Amazon and e-books providing cheaper and more convenient alternatives for customers. As a consequence, these physical stores are pushed out of the market and a clear growth in utilisation of online services can be seen. 

Tech giant Google, for example, is provided with no direct monetary cost to the consumer and is therefore assigned a value of zero for the economy in regard to GDP. For most consumers, price plays an influential role in decision making – not every online retailer charges the appropriate sales tax or other local taxes as they would have paid through the same purchase in a regular brick-and-mortar store. 

Therefore, online services are able to use this advantage as a means to provide cheaper, thus more desirable, alternatives for the consumer, yet GDP fails to recognise any of these benefits. The leading loss of income, job loss in high street stores and lessened amounts of disposable income for individuals restricts the local economy.

You might say – well, wouldn’t this decrease GDP? 

It’s clear that GDP struggles to account for these intangible assets; technology manages to shrink the time and cost required to deliver goods and services. Hence, we’re  seeing a rise in consumer surplus. Instead of purchasing DVDs or cassettes (which may require paying for a bus fare to get to the shop), you can listen to your favourite song through Spotify, YouTube or the endless myriad of streaming services – a consumer benefit which GDP fails to encompass, and hence fails to incentivise in the long term.

So, maybe the problem is that we shouldn’t be measuring progress solely based on physical capital and focus our efforts on the modern-day drivers of economic growth: technology, innovation and intangible services. Rather than solving the problems with GDP, the digital age has instead weakened the rational foundation that GDP balances upon.

Yet, the all-encompassing question remains, how can we bring together this sustainability, wellbeing and economic prosperity trio? 

Luckily, we’re provided with a bit of hope. Campaigners and politicians have urged that measures of the UK’s quality of life should ‘replace the publication of purely economic indicators (namely, GDP)’. Not only this, but a sense of urgency has risen to the surface; eight out of ten would prefer the government to prioritise health and well-being over economic growth.

The most known attempt to prioritise social wellbeing has been made through the development of the Genuine Progress Indicator (GPI). Contrasting to GDP, GPI includes elements of social work. Estimates for unpaid activity such as volunteering and housework, as well as the benefit of higher education are accounted for in GPI. And unlike its rival, GPI has been further developed with the intention to assess prosperity of a country, linking both ecological and social variables to assess the economy’s well-being. So, in a sense, the introduction of GPI may just reinforce the notion that GDP is a proportion of financial development – not having a direct correlation with the standard of living within a country.

Most importantly, GPI factors in estimated costs of ecological negatives, such as carbon dioxide emissions, unemployment, crime, loss of biodiversity and habitats. This means that a country that emits less pollution (but has a moderate economy) will have a better GPI index overall.

Despite the shortfalls of GDP, economists are going in the right direction. Some view social and environmental welfare as ‘a more ambitious and laudable policy objective’. 

Simultaneously, GDP faces the criticisms relating to its significance when evaluating economic welfare. GDP has always been a measure of output, and although a component of welfare, is not a measure of human welfare. 

However, in no way am I suggesting that striving for tangible economic growth is a complete waste of our time – it’s clear that economic growth has raised living standards around the world. But beyond a certain point, increasing economic inequalities arising from economic growth can inadvertently undermine a nation’s welfare, hence undermining the nations trust in the economy as a whole. 

The issue remains that the quantitative measure fails to live up to the very values that govern modern society. With everything from environmental externalities to domestic housework left out of the calculation, one is left questioning how much further both the female and environmental liberation movements would have progressed had we had an indicator that reflected their value. Not only this, but the pandemic has shown us the intrinsic worth of social care and the natural world; it’s time for GDP to recognise this too. 

The fundamental economic problem boils down to the allocation of scarce resources, and when the very economic incentive that has governed post-war policy fails to align incentives with equitable outcomes, it becomes clear that something needs to change. Genuine Progress Indicators are the answer, it’s just a question of the world waking up and smelling the coffee.

Nikita Karri