Ending The Era of the Myopic Pursuit of GDP Growth
We use GDP as the singular measure of our economy’s success, and that has only served to lead our society away from sustainability.
How do we measure the growth and performance of humans? Is it by how much we eat? Is it by how much we poop? Is it by how fast we run or how much weight we can lift? Is it by how well we perform on a cognitive test? The growth and performance of a human has thousands of different dimensions, everything from size to health to maturity and intelligence to speed and strength. The growth and performance of humans is also contextual and dynamic. A human could grow in size while declining in athletic performance and improving in cognitive ability. We don’t measure the growth and performance of humans using a singular measure, so why would we use a singular measure to articulate the growth and performance of our economy?
You’ve probably heard politicians and pundits talk about growing the economy. They might say something like “the economy grew by two percent last year.” What does that mean? They are referring only to the Gross Domestic Product (GDP). They are not referring to anything else. GDP is the market value of all the final goods and services produced in a specific time period by a country. And the formula is the sum of consumption, investment, government expenditures, and net exports.
GDP = C + I + G + NE
It is important to note that all of these inputs have limits. In other words, in any given year, all of the elements of GDP have maximums. Consumption can’t exceed certain levels based on income and debt tolerances. Investment can’t exceed certain levels of available capital. Government expenditures can’t exceed tax revenue and deficit tolerances. Net exports can’t exceed total international demand for products and services. So, the notion of GDP increasing forever is limited by the maximum levels of the elements that make up GDP.
GDP is also not all good to begin with. Imagine all of the goods and services you pay for in a given year. Are they all goods and services that you are excited to pay for? For example, replacing broken windows, fixing broken bones, car maintenance, and medicine. In at least those examples, we know that decreasing the need for those goods and services would be good for society. In other words, if cars required less maintenance, because they were made better to last longer, society would be better off. Likewise, if a population is healthier and requires less medicine, society is better off, but wouldn’t contribute as much to GDP. GDP also doesn’t speak to negative externalities.
Consider the words of Simon Kuznets (father of GDP), one of the most influential economists of the 20th century. His work developing some of the first measures of national income eventually resulted in a Nobel Prize. Kuznets knew that any simplified measure of an economy could be abused and misused. As he put it:
There is this narrative that because GDP has historically grown at the same time as increases to quality of life, it is therefore the single most important measure of a country’s economic health. Just because countries produced more goods and services while simultaneously improving the quality of life, does not mean that simply producing more goods and services will improve quality of life in the future. And in fact, this mindset has undoubtedly misguided policymakers and caused entire legislatures to put GDP on a pedestal and tout it as the purest distillation of economic performance. But nothing could be further from the truth.
People often describe a growth in GDP as a growth in the size of the economy, but that is perpetuating the wrong units. GDP can’t be a measure of a size, because it doesn’t have the appropriate units. The units of GDP are dollars per year, which indicates that it is a rate of activity. Therefore, a “rise” or “growth” in GDP is actually acceleration or a rate increase. This should make everyone wonder what we are accelerating toward. Are we accelerating toward a better tomorrow? An iceberg? A cliff?
Another way to think about GDP is to consider what would happen if the economy were to do the exact same thing from one time period to the next. Imagine that the economy goes through two time periods where it produces the exact same set of goods and services. If the market value (GDP) remains the same for the exact same set of goods and services, then this is a signal that the economy has not innovated or created any efficiencies over that time period. If the economy were to innovate and create efficiencies, then producing the exact same set of goods and services would have a lower market value (GDP) than the year before. If we hold everything else equal (ceteris paribus), then we should expect that the market value of everything we produce (GDP) — associated with all of the goods and services that make up a quality life — will decline. Moving forward, a maturing economy will be defined by a declining GDP as quality of life continues to improve for a population.
In an increasingly complex society, we are using a single measure of economic success that was developed before we landed on the moon, before we understood our environment, before we built our interstate highway system, and before the Information Age. GDP doesn’t measure anything related to the health of a population, the national debt, access to clean water, the poverty rate, environmental degradation, or access to high-quality education. And, we are seeing that GDP can grow while more and more people get left behind.
So, what is the solution?
A Sustainability Scorecard. This solution would capture the multidimensional nature of societal and planetary wellbeing. This is not the first time someone has suggested something like this. Some might say this is the UN Sustainable Development Goals (UNSDGs). But have the UNSDGs really replaced GDP in the minds of our elected leaders across the globe? Listen to your local, state, and national elected leaders. Are they touting their economy’s growth according to GDP or are they celebrating progress on a multitude of indicators that measure societal and planetary wellbeing?
If we prioritize and measure these things, then we will be more likely to see real progress on multiple fronts. GDP has been dominating our global society’s attention for decades. The era of the myopic pursuit of GDP growth must end. What does your community’s Sustainability Scorecard look like?
