By Nida Jafri
The most common measure of economic output is the Gross Domestic Product (GDP). It takes into account consumption, investment, government spending and net exports. If you want to measure gross output, real GDP is excellent. But there is a misconception that GDP is an accurate index for a country’s wealth or national income, and even worse, a proper indicator of growth. Why do central bankers place so much importance on GDP? It starts with how economics is taught and finishes with the development of other indices.
My economics journey was primarily defined by the subprime mortgage crisis, which led to the 2008 recession. Every undergraduate reading this article at Surrey is more or less a ‘recession teen’. Being well-read on the economy and its role in current affairs and living in a moment characterised by a movement towards consumer protection and accountability of financial institutions trickled down to my love for economics. Currently being in my final year of pursuing this very subject, I can say it has taught me at least one thing: the core beliefs that are at the heart of economic knowledge and practice are all rooted in notions of self-interest and maximisation of individual needs. A rational person maximises their utility, a rational firm maximises profits and as such, a rational economy maximises output.
Speaking of output, GDP does not take into account whether economic growth is environmentally sustainable, whether the existing and growing capital is well distributed or whether the population is healthy and safe. Statisticians focus instead on the utility the consumer derives from goods and services produced. What does that say about societal priorities? To quote a former senior economist at the World Bank, Herman Daly, nations now are in a period of “uneconomic growth”; GDP increases, and so do social losses.
To analyse growth in terms of GDP is not only one-dimensional in what it doesn’t quantify, but also in what it does quantify, in what it interprets as a measure of growth. For example, if there was a hurricane in location X, the GDP growth of X would increase and become higher than before because of the amount of investment in infrastructure dedicated to revive X’s economy.
To properly, meaningfully examine economic growth and sustainable wealth, we therefore must take into account various dimensions to growth. Imagine how well a voter could evaluate electoral candidates and their respective manifestos if they were correctly educated on a variety of indices, not merely on GDP. In a perfect world, I would like to believe this would lead to the demise of prejudicial populists and demagogues, among which we can find a certain orange-hued man. Here are the multiple dimensions of growth we ought to consider.
Concentration of wealth: this is the most commonly developed index out of every other I will discuss, as it captures something easy to quantify statistically. This measure considers national income per head and looks at the cumulative distribution of wealth from lower percentiles to higher percentiles, which highlights patterns of wealth concentration.
Human capital: this index regards investment in education and job training, which was empirically proven to lead to greater returns than investment in infrastructure. It should be extended to the creation of a tracker operating within a legal framework that measures how well minorities in society are protected and how mobile social classes are. Statistically capturing stress and morale in the workplace is extremely difficult, so statistical work in occupational psychology could help. A focus on human capital may be a first step towards understanding the issues with the current economic policies.
Health: Taking into account ‘avoidable deaths’ and focusing on notions of clinical effectiveness and responsive governance in hospitals could provide an avenue for analysing the quality of healthcare. The cost of common and necessary medication and treatment, such as insulin, compared to its manufacturing and developing cost should be considered. Another important factor to take into account would be the availability and quality of mental health services.
Environment: When epidemiologists mathematically model populations in ecologies, they find ‘steady-state’, which is the point in time when the population is at its maximum carrying capacity. This concept is also studied in the context of economics where we can model stable consumption based on the carrying capacity of our natural resources. This concept should be more systematically implemented, and every policy proposed by a political leader, central bank governor or an administration should be considered with regards to its impact on such ‘steady-states’.
We could also speak about crime rates, even though it is the subject matter of law rather than economics. Indeed, crime is a social loss and it can be analysed with reference to the quality of schooling, the employment landscape, and high wealth concentration, which may all provide potential incentives for crime.
More comprehensive indices that take into account all those dimensions are currently being developed by the United Nations, a few progressive governmental groups, and multiple think tanks.
The Human Development Index is a composite index that provides the basis for development initiatives and ranks countries into tiers of human development. It includes lifespan, education level and gross national income per head. Every year, the United Nations Development Programme (UNDP) releases a revised measure of the index and an updated ranking of nations.
The Genuine Progress Index was created to replace GDP. While GDP captures the “net-profits” of a country, this index instead treats negative progress as its “costs”. It takes into account a variety of economic factors, such as personal income, weighted consumption, income inequality and cost of underemployment. It also considers the cost of environmental losses, such as water pollution, ozone depletion, and loss of farmland. It includes societal components such as the value of household production, the loss of leisure time and the cost of commuting. The one aspect of this index I truly admire is its efforts to account for the shadow workers of every economy, those who balance paid, visible work in the office or factory and unpaid, invisible household labour. Taking into account this often-forgotten dimension of economic production could help us adjust policies towards more inclusivity. Many US states, such as Vermont and Maryland, report their GPI annually. There are similar indices to the GPI, such as the Index of Sustainable Economic Welfare, which adjusts GDP with income distribution and unsustainable costs.
Reflecting upon my earlier comment on the study of undergraduate economics, there are subsets of the discipline that tend towards challenging the neoclassical beliefs. There are economists that dedicate their research to income inequality, climate change and its disproportionate effects, development and poverty. But those concepts are not taught to the same degree as other core ideas, such as “productivity” which is usually narrowly associated with output. Notions of externalities or social losses are not prioritised in the curriculum, and that is surely one of the reasons why graduates end up perpetuating this obsession with GDP.
Moreover, there is a significant lack of consideration of cultures and subcultures that do not have individualistic traditions. The Organisation for Economic Co-operation and Development (OECD) is currently working on including measures of research and development into its framework for the study of growth. Although a good initiative, not accounting for all the other aspects listed above effectively puts Western countries on a pedestal, as developing countries tend to not invest so much in research and development. Arguably, economics is a subject that reflects the assumptions and interests of a Western male, an outlook which I have absorbed over my three years of education.
If we stop only focusing on GDP and start embracing a variety of metrics for growth, economics as a discipline will acquire more intellectual appeal and authority. It is important to create data visualisation and indices that are easily comprehensible to everyone, and that do not focus solely on unsustainable measures of high outputs and productivity. Now that we have analysed alternative ways of understanding and measuring growth beyond the flawed concept of GDP, I will leave you with this question: in this climate of environmental destruction and striking inequality, should we even keep focusing on growth or should we aim instead for the improvement of the quality of life within the limits of Earth’s carrying capacity?
Nida Jafri is a final year Economics and Mathematics student at the University of Surrey.