How did GDP came into being, what does GDP actually measure and what’s wrong with that?
Let’s revise: what is GDP and what was it originally supposed to measure?
Sum total of market value of economic goods and services produced in a nation within a given time period. It was supposed to measure:
- How fast economy is growing?
- Pattern of spending on goods and service.
- What percent increase in production is due to inflation?
- How much income produced is used for consumption vs investments/savings?
How GDP Came into Existence:
“In god we trust, all others must bring data”
In the 1930s, when the world was reeling from two global wars and the great depression, in the US, Roosevelt’s government used statistics to justify policies and budgets at that time. GDP estimates were used to show that:
- The economy could provide enough supplies for fighting the world war 2
- As well as, maintain an adequate production of consumer goods and services
For the first time ever, in 1934, economist Simon Kuznet presented GDP to the US Congress, as an estimate, a specialized tool to measure a very narrow segment of the activities that happen in a society. At that time in US, an objective measure such as this got heavily adopted in policy-making.
At the same time, reeling from the war’s effects and the Great Depression, the world leaders realized the uselessness of war and gathered together at the Bretton woods conference of 1944 for peacemaking—
- 44 country leaders decided to mutually decide a process for international cooperation and peace
- International trade was thought to be the panacea.
Think about it: More trade -> more income -> more food, housing and medical care -> economic well-being!
- IMF was created for stabilization of exchange rates and IBRD (now World Bank) to provide for loans to fund infrastructure and development projects in war torn areas
- US dominated both these institutions and the conference and naturally US Dollar and all its economic policies came to be a standard.
Consequently, GDP was heavily propagated for use among the member nations to measure ‘economic progress’ and by the world bank to make choices — which projects to fund, how much and GDP was used as a dependable tool!
GDP: What the hell is wrong anyway and the Goddess TINA
In plain words, GDP excludes everything that makes a life worthwhile.
“the current national accounting system treats the earth as a business in liquidation” (Cobb, Halstead et al. 1995)
- It measures economic growth but not economic well being for the latter is characterized by an equitable distribution, not just increments but development.
- It externalizes the environmental and social costs from an economic activity and as usual, the common man bears the cost.
- Doesn’t account for activities in the disorganized sector
- No place for volunteering activities
GDP Growth — Does it really tell us how far we have come to actualize our own potential or how well have we bridged the gap between the rich and the poor?
Then why is this indicator so ingrained in the policies that governments world over make? Why are we lying to ourselves when we use it as a proxy to measure economic well-being of the majority that comprises our nations? When in fact, it caters to the interests to the ones sitting at the top of pyramid.
The most common answer: Goddess TINA — There Is No Alternative.
Talking of GDP Alternatives..
Human Development Index: Major components used as proxies to people’s ability to live a prosperous life-
- Longevity: life expectancy at birth
- Knowledge: literacy rate and school enrollment
- Decent living standards: Purchasing power parity and threshold effect
Ecological footprint: Resource Management Tool that measures the extent to which an individual, city, or nation is using available ecological assets faster than what can be regenerated
Living planet report: A measure of world’s forests, freshwater and marine ecosystems on the extent and severity of biodiversity loss. Includes:
- State of world’s natural environment
- Burden placed on natural environment by humanity
Happy planet index: country’s ecological efficiency in delivering human well-being. Major components:
- Life expectancy at birth
- Life satisfaction
- Ecological footprint
These indicators are:
- difficult to measure and,
- Difficult to compare across time and space for notions of well-being evolve,
And yet, there’s no reason why not to switch over to a different set of metrics — something that re-appropriates real value.
…in the next blog, I will summarize the implications of the statement given by Economist Milton Friedman,“Business of Business is Business”.
The blog is the part of series ‘Lessons in Sustainability’ and comprises of class discussions and key insights from readings, at IIML.
Sources and Credits:
- BSEM Elective class discussions led by Prof Sushil
- Paper: Beyond GDP: The Need for New Measures of Progress Robert Costanza Maureen Hart Stephen Posner John Talberth