Tuesday, September 15, 2009

It Is Time To End GDP Fetishism



Most common discussions, by all kinds of media outlets all over the world, of the concept of social welfare of a particular society never fail to mention the state of the Gross Domestic Product, the GDP. This all popular macroeconomic variable has grown, despite its enormous shortcomings, to become a metric of what it was not designed to be in the first place. Very simply stated, the GDP is a money measure of the value of final goods and services that are produced by a particular society. Note that the concept does not pretend to say anything about the level of welfare but is only the summation of all what is produced without even deducting the damage that ensue from such levels of production and consumption . A simple common example might help illustrate this absurdity. If during a particular year, the number of expensive medical procedures undertaken in a state increases then the overall size of its GDP increases also. So if the GDP is such a good indicator of the social level of welfare then why not promote cigarette smoking in order to increase the incidence of lung cancer which will keep the surgeons busy and lead to a large rate of growth in the GDP? Of course such a policy would be rejected by all. But isn’t this exactly what we do when we allow firms to dump their toxic wastes into rivers and when we encourage workers to commute long distances from where they reside to their place of work. The concept is rife with problems that are too many to list and that economists and environmentalists have been pointing out for decades chief among them is the inability of GDP per capita to say anything about the all important income distribution. Wouldn’t it be more important to learn who had access to the increased output rather than to just say that output went up? It has often been the case that the all the growth in the GDP accrues to a small group of privileged economic class when ¾ of the population has in reality lost ground.
Environmentalists in general and environmental economists in particular have been in the forefront of an unremitting attack on the method of assembling national income statistics and in particular the GDP. These efforts have been helped over two decades ago by the work of Amartya Sen, the Noble laureate in Economics, through his pioneering work on how to measure poverty and social well being. His work has led, among other things, to the increasingly popular Human Development Index by the United Nations. The HDI ranks countries by creating an index that takes into consideration the level of GDP per capita but combines that with measures of literacy and life expectancy. As a result it becomes possible to rank a country with high literacy rate and a high life expectancy above one that enjoys a higher GDP per capita but lags in the other two indicators.
Two days ago Joseph Stiglitz, another Noble laureate in Economics, a Professor of Economics at Columbia University and an ex Chief Economist of the world Bank has joined ranks with the above group of advocates for a change in National Income Accounting. He called, in his capacity as a member of a group advising president Sarkozy of France, upon world economic leaders to “avoid GDP fetishism and… to stay away from that.” What a welcome message during these perilous economic times in a world that is clearly not sustainable. Bravo Dr. Stiglitz.
So what are the implications of such a change? You tell me. Is a growing GDP, accompanied by a growing poverty rate, inequitable distribution of income , larger public debt, higher unemployment, less electric power, a construction boom for the super wealthy, privatized public beaches, low minimum wage, environmental degradation in all fields and rampant corruption a sign of social justice and better social welfare?

12 comments:

Caroline Craig said...

Clearly, using GDP as a measurement of our welfare is completely bogus. The question is, if we do create/use another form of measurement, will we accomplish the change in focus that is desperately needed for any effort to restore stability to the environment. Using the HDI is clearly a step up from GDP but we need to remind ourselves to beware "growth."
For example, German engineering has long been known for its excellence. This is because they focus on DEVELOPMENT over GROWTH--- QUALITY over QUANTITY. Germany uses capitalism but in a way that is far more advanced than the US. In the US, we prize products that we can purchase cheaply and then dispose. In Germany, their products are made sturdy and meant to last, although sometimes at a higher price. However, when you internalize externalities, it is really the US's system of "cheap" products that really cost.
I understand that my argument is really generalizing a complex problem and that cheap disposable products are what keep many companies in business but there has to be a better way. There's also the issue of everyone being able to afford the higher quality products (I once asked a German prof. about this and she responded that people simply save their money because they know how much better the product is than the disposable kind) but I feel that we demoralize those with low incomes by creating products that won't last and inevitably bring them into a cycle of buying-breaking-buying, which costs them more in the end.
This is just one dimension of the argument to internalize externalities. We must remind people that there is no such thing as sustainable “growth.”

PS: Join Pace's Green House on facebook!

gk said...

Caroline,
I have joined youtr gang on Facebook.

Jose Arredondo said...

I agree with Caroline's comment. The way GDP is being measured is obviously just for the numbers. The economic growth is measured but it is misleading in regards to social welfare per capita. Unfortunately, only a minority of the population benefit from this growth in GDP. This leaves the majority of the population suffering from the externalities that result from the rich becoming richer through production. Hopefully the developed nations throughout the world realize that measuring social welfare with GDP is clearly wrong. Social welfare is not increasing as GDP increases and there has been plenty of proof of this pointed out by well-known environmental economists.

nyemamohsin said...
This comment has been removed by the author.
sm04705n said...

Adding to the last paragraph of the blog, i would say that putting it that way,it does not seem like a sign of social welfare. We need to see this problem from both sides of the spectrum. Take computers and modern technology for instance, they do take up a lot of electricity and in some countries due to this very requirement of electricity, some are not even able to afford computers. Computers did make life more pleasant(email for instance, scientific research, data storage, communication), even if they do take up electricity! For those of us who have been exposed to this sort of high technology oriented life style,it would be hard for most us to give it up and go live in a village for that matter, letting go most of our luxuries(but it is possible). To gain something, we have to give up something. So to make computers usable we have to churn out from the environment, electricity, plastic, silicon, glass,etc, everything that goes in the product computer. The best solution is using everything in moderation and sometimes reminding ourselves that life can also be lived without having all the things modern technology has brought us.

Jennifer Kozubek said...

Having just read a section from "The Ecology of Commerce: A Declaration of Sustainability" by Paul Hawken for another class, I cannot help but share the following excerpt as it has been repeating itself in my head for a couple days now:

"if we examine all or any of the businesses that deservedly earn high marks for social and environmental responsibility, we are faced with a sobering irony: If every company on the planet were to adopt the environmental and social practices of the best companies—of, say, the Body Shop, Patagonia, and Ben and Jerry’s—the world would still be moving toward environmental degradation and collapse. In other words, if we analyze environmental effects and create an input-output model of resources and energy, the results do not even approximate a tolerable or sustainable future. If a tiny fraction of the world’s most intelligent companies cannot model a sustainable world, then that tells us that being socially responsible is only one part of an overall solution, and that what we have is not a management problem but a design problem.” pg. 420

Hawken goes on further to discuss his vision where economics and environmental sustainability work with each other rather than opposing.

Anonymous said...

I am not an economist at all, but after reading this article and doing follow-up research I believe using GDP as a measurement of a countries welfare and income is a totally ridiculous idea. I feel the GDP measurement system is used to favor the extreme upper class and the government, to assure its economy illiterates (like me) that we are doing okay, even in horrible times like these. I feel that if we continue to use this standard of measurement that we may never be able to turn our economy around because the severity of our debt and the amount of poverty is never truly evident. I believe the suggested development and use of HDI is a brilliant idea that can only allow society and economy to grow. America needs to stop focusing on the short term and start to focus on long term. We need to start building businesses and products that will last and that will not go out of style in 3 months.
America needs to stop focusing on systems that only help 1/4 of its population and start using systems that will help the middle to lower classes of its society. GDP is obviously very misleading and only deals with numbers and not with the welfare of its people. HDI is the way to go!

Anonymous said...

I am not an economist at all, but after reading this article and doing follow-up research I believe using GDP as a measurement of a countries welfare and income is a totally ridiculous idea. I feel the GDP measurement system is used to favor the extreme upper class and the government, to assure its economy illiterates (like me) that we are doing okay, even in horrible times like these. I feel that if we continue to use this standard of measurement that we may never be able to turn our economy around because the severity of our debt and the amount of poverty is never truly evident. I believe the suggested development and use of HDI is a brilliant idea that can only allow society and economy to grow. America needs to stop focusing on the short term and start to focus on long term. We need to start building businesses and products that will last and that will not go out of style in 3 months.
America needs to stop focusing on systems that only help 1/4 of its population and start using systems that will help the middle to lower classes of its society. GDP is obviously very misleading and only deals with numbers and not with the welfare of its people. HDI is the way to go!


I just posted this but did not put my name at the end - Adriana Scutari.

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