The recent drop in GDP across the globe has been described as „unprecedented.“ That current events were preceded by ten years of harsh but differentiated criticism of the indicator is hardly ever mentioned at all. The ever-present use of GDP in debating the state of societies suggests that it measures societal wealth. However, numerous arguments show that it does not. By Daniel Plenge
In the 28th month of life someone asked “What is this, life?”. Although that someone lives in a tribe of atheists, the next day the little human wanted to know “Who is God?”. In this spirit of puzzlement, curiosity, honest concern and experimentation the What-the-Fcuk series asks classic and current questions at the intersection of the real world and public as well as academic thought.
Imagine a place where the total production of one country`s car industry within a year is put on one heap. In the case of Germany this would be a massive mountain. In 2011 the German industry produced 5.871.918 cars. This meant an increase relative to the year 2010 of 5,8%, and it seems to have been the best year ever in this respect. In 2019 4,7 million cars were produced and 3.5 million exported. Within its borders the country is often called a “car nation.”
This branch of the economy is also claimed to be comparably “value-adding” (“wertschöpfend” in German) or productive of value.
Now, imagine you could pile up all the commodities produced in one year, not only cars. These commodities are often called “goods.” In 2019 they were in the aggregate priced at 831 billion Euro for Germany. This is the total production of stuff, with only construction excluded (192 billion). Formerly this sector seems to have been called “industry” or “manufacturing”.
According to a common view, the mental picture of this pile shows us wealth. The wealth of a nation in one year.
However, in common parlance this view is too “materialist.”
Production makes up 24,2% of the German economy, the construction sector 5,6%. That is, roughly 30% have to do with producing stuff (including agriculture, 0,9% of GDP). But there are also these activities which don’t so much produce stuff. They are called “services.” These amount to 2381 billion Euro of market value and 69,3% of the German economy in monetary terms.
Let’s assume that, by definition, “service” means that one person, or the company (s)he works for, is doing something for another person and receives in exchange a monetary benefit for it.
If you are not an economist you may at times be surprised about their language. Nowadays they say that services are also produced and that there are service industries. Thus, if you combine manufacturing with services, you get total economic production.
Imagine now that you could freeze human actions and interactions in the service world and built a material aggregate out of it, similar to a heap of sand and our pile of material commodities.
If we now place the pile of frozen services (for example teaching, health care, counselling, prostitution, cleaning, insurance, media, researching, transport, and what have you) on the pile of produced goods, then we have it all together in one big chunk of stuff.
This heap, though an imagined and somewhat strange thing, is the most important idea of post-World-War-II politics. The unanimous aim of almost all the parties across the globe has been to make it bigger and bigger and bigger from one year to the other.
How did growth enter the world?
Envisioning this mountain of stuff you pictured mentally the gross domestic product (GDP) of Germany in one year, and as it is usually said, its wealth.
The aim was and is called “growth,” which is a metaphor. The growing organism is a nation’s economy, and the important property is not length or weight. It’s GDP. Without the idea of such a pile, there is also no idea of its growth.
Trivially, if you talk about growth, you presuppose that there is something that undergoes a growing process. Your children grow, at least for a while, as does my belly, hopefully not forever. Similarly, Aristotle argued against Plato, way before Christ saw the light, that there is no movement in itself, but only moving objects.
Historians and anthropologists will tell us that the idea is not trivial at all. For most slices of the history of human social systems there was neither an idea of an economy nor of its growth. First traces of such ideas and “national accounting” or “national income” date back to the 17th and 18th century, but they remained marginal until the second half of the 20th century.
After having been useful in managing the Great Depression, GNP – gross national product, the predecessor of GDP – has helped in planning the US warfare against the Nazis. It has even been said that it won the war as much as the nuclear bomb because it helped to organise war-production in such a way that it did not drain general consumption.
Afterwards it was introduced into Germany within post-war occupation. The Nazis had run their war economy blindly by not knowing what was going on. The United Nations invented a System of National Accounts after 1947 and spread the idea. The founding document of the Organisation for Economic Cooperation and Development (OECD) from 1961 states its goal is “to achieve the highest sustainable economic growth and employment and a rising standard of living.” It is also central to the EU in its Stability and Growth Pact and at the heart of the programs of the World Bank and the International Monetary Fund.
For short, the ideas of growth and GDP have become transculturally accepted and independent of political parties, although historically they are quite young.
A paradox of history is that in spite of this origin in central planning it became also the universal goal of neoliberals who emerged as an intellectual squad in this period (see What The Fcuk Is Neoliberalism?).
GDP fitted perfectly into this intellectual context because it was interpreted as a value free measure of the economy, its workings or outcomes. A collateral damage of the invention has been the ever-presence of economic experts in public, which was unknown before, the growth of the pile being their main or only story, and one next to all of them share.
“Before the Second World War, economists were rarely quoted in the media, but ever since the invention of GDP and its quarterly updates, economic experts of all sorts have become essential players in public debate and, more often than not, they have been viewed as the holders of some type of canonical truth.”
GDP was and still is also of great help in instigating competition among nations. If you had or have, for instance, the monetary mountain piled up of the former Soviet Union, the United States, Brazil and Germany and place them beside each other, you can compare them for their height or their annual “growth”, without having to deal with any details about those countries.
Where imperialist capitalist nations in the 19th century competed over fleet sizes and colonies, post-war 20th century nations began to compete over GDP, a heap of production.
How are you doing? Thanks, I’m growing.
A system or country that does well in both respects is said to be more successful or richer than the other, one of wealth or one of poverty, of well-being or misery, an “emerging market” or “developing” (= less than US$ 6000 GDP per capita according to the World Bank), a member of the G20 or G8:
“the growth of real GDP is the single most important benchmark measure of how an economy is doing,” writes Diane Coyle.
One of the inventors of the predecessor of GDP, Simon Kuznets, who always remained critical of it, believed that Soviet Communism and Western Capitalism shared their “secular religion” in material provision, which is only one aspect of their ideological similarity. The equation was simple: greater output = better life and better society.
There was thus an external motive to pursue policies of growth. The historical task of the newly born Soviet Union after World War I was to restage the process of industrial modernisation that had occurred elsewhere one century before and to build an industrialised economy out of nothing. Capitalist nations, after two world wars and a major economic crisis, had to show that they were better for their citizens than socialist temptations.
Within the industrialized countries GDP-growth was also a means in quieting internal pressures that result from economic, political and social inequality. If the cake is growing, there is no, or hardly any, quarrelling about inequality, redistribution or even fear of revolution or systemic change.
This story has been told ever since again and again. Diane Coyle repeated it in her book on GDP: “Without economic growth, there would not be enough jobs to keep the unemployment rate down to a tolerable level. It is not possible to redistribute incomes unless the economic pie is growing.” That the latter claim is openly false indicates that it is ideological.
However, because it seemed to work in the first post-war decades, growth became a universally shared goal. Development policies since the 1950s unite the perspective. The growth of an “developing” economy was believed to shield it from communism. Not only that, growth was believed to be identical with development and progress.
If stuff per person or GDP per capita is the measure, the growth-agenda was a huge success. If we could put our heap of GDP beside an aggregate of all humans and watch their changes in time, we would see that a few more people on earth could share a lot more of stuff, at least in principle.
The world’s population increased from 2.5 to 4 billion from 1945 to 1970, but GDP tripled. If we take the period from 1950 to 2010, the world population trebled, but the World GDP increased sevenfold. Such numbers are behind the arguments that the solution to material shortages and social problems anywhere in the world is GDP-growth.
What about GDP in our time?
In our time growth arguably still is the most important idea among those in power, those executing it, and those fighting for it. Probably there is no party in “Western” politics that dares to say that GDP-growth is not its aim, whether they are economic neoliberals or Keynesians, politically left, right or centre, green, red or brown, what have you.
Only in the field of development policy the aim of growth is at times given up, at least by intellectuals. In intellectual circles GDP has been declared dead and superfluous again and again since 2008, similar to neoliberalism (see What The Fcuk Is Neoliberalism?). Yet, there is no sign of it being buried or at least the grave being dug.
The economist Kate Raworth tells an anecdote about a meeting of the G20 in 2014 which lays bare the extent to which the growth metaphor dominates politics:
Every centimetre of the pile is a relevant gain. If there is not a 0,1% growth for one or two quarters, a recession is due (by definition, that is, convention!), instigating panic-like commentaries in the media.
Is GDP a growing volcano?
At this occasion we should notice that our guiding metaphor is misleading. Our GDP-heap is not a heap with a history, for instance a volcano, one that exists through time and virtually grows the way children, animals or plants persist while growing due to their internal mechanisms, although this is suggested by talking about GDP-growth or the growth of GDP.
The heap is created year after year anew, from the bottom up, from scratch.
GDP is no stock of stuff. The eggs produced last year were eaten and the buildings were cleaned on day one to day 365 of the year. If eggs are produced this year and buildings are cleaned, this does not add to a national stock. The cars produced and sold in that year will still be in use, but their production also doesn’t matter for GDP. Accordingly, the whole GDP-pile is more a pile of frozen services than a heap of cars.
If GDP falls, this does not eradicate past production. If this would not sound judgemental, we could also say GDP is more like a dumping ground that is completely burned at every New Year’s Eve than an organism.
This is to be kept in mind in our times of unprecedented crises. In 2020, economies worldwide did grow, but negatively. In the second quarter the German economy shrunk by 10,1%, the French by 13,8%, the Italian by 12,4 %, the Spanish by 18,5 %. At least this is what the statistics tell us. The British was claimed to have contracted by around 20%.
Most commentators found this alarming. Others admonished us to stay calm before it happened (see 75% der Berufe sind nicht systemrelevant). Some believed that normality before was the problem, others early on claimed that the normality of economic growth had to return as soon as possible (see What The Fcuk Is Normality).
Others more generally believe GDP is nothing but a fiction, similar to our imagined pile.
What the fcuk is GDP (and wealth)?
It seems so simple an idea but is so elusive.
German long-time chancellor Angela Merkel uses to say, and did so again at the start of the corona-crisis and the lockdown, that she would and “we” – she means German citizens and those living within the borders of Germany, of course not the world – should protect our past and present “wealth” (“Wohlstand”), which is not only in her parlance always associated with growth and GDP.
However, somewhat departing from this statement of the head of state, the state agency that assesses German GDP claims that the function of GDP is to measure “the economic performance of an economy,” not wealth. It also states that GDP would measure “the value of all the domestically produced commodities and services.” In her historical account of the subject the economist Diane Coyle claims that “GDP is also (…) an important measure of the freedom and human capability created by the capitalist market economy.”
If we take this at face value, either “economic performance” and “wealth” (even “freedom”) mean the same or both of them are unclear. Or the relation between GDP and wealth (and freedom) is unclear. And as it turns out: it is in any respect!
The usual tactic of politicians and the wider public has been not to ask such questions but to create a dogma around them.
Simon Kuznets warned early on that “the welfare of a nation can scarcely be inferred from a measure of national income.“ National income is what should be measured by the indicator. To him, GNP or “economic performance” and welfare are not the same.
What the fcuk is the function of an indicator such as GDP?
In philosophy of science an indicator is supposed to be an observable or measurable feature of the world that can be used to provide information about something unobservable but supposedly existent. This is the problem also in relation to GDP.
It sounds pompous but it is also an everyday problem. When you talk to another person, what you can experience via your senses are gestures and sounds. By assigning them a meaning you try to connect them with something not observable, namely thoughts. And in doing it, you can err. In our case the total economy as well as what comes out of it are unobservable. Nobody has ever experienced a nation.
Now, we have not only a heap of frozen processes in mind, but also a heap of words associated with it which we all think we understand very well in ordinary language:
Only “GDP” sounds unfamiliar and technical.
That something is unclear appears to be even more true if we make a move into the dry walls of academia.
Is GDP for real at all, as Angie seems to believe?
Diane Coyle writes, referring to a famous report by the economists Amartya Sen, Joseph Stiglitz and Jean-Paul Fitoussi:
“GDP mainly measures market production,“ according to the high-profile Sen-Stiglitz-Fitoussi commission looking at measures „Beyond GDP.“ This gets it backward: GDP defines market production, which is then measured by the official statisticians.”
Coyle wants to say that the construction of GDP determines what for economists, statisticians, politicians, and perhaps us, the word “production” means, it sets our idea of it, it constructs this meaning instead of another. Moreover,
“the ‘object’ being measured is only an idea, not something with an independent existence waiting to be discovered and counted.”
Even shorter it reads: “GDP is a made-up entity.” Our pile. GDP is not akin to thoughts we infer from speech and gestures, which we normally take to be real.
This should puzzle us deeply. Why?
Because our analogy of an organism or an aggregate of sand is not arbitrary at all as long as we stick to the prevalent idea that, as it is usually expressed by economists, the aim in measuring GDP is to diagnose the state of an economy.
Paul Samuelson and William Nordhaus claim in their bestseller-textbook that “much like a satellite in space can survey the weather across an entire continent, so can the GDP give an overall picture of the state of the economy.”
The state of a system is the totality of its properties at a given point in time. A nation’s economy or the whole society is the persistent thing that is, supposedly, in such a state.
As such, it is not measured by GDP, because this would require real-time measurement of the layers that constitute our imagined pile through time. GDP instead fakes that time does not matter and creates a numerical pile of all the economic processes that happen in a time-period as an approximation to that flow of states – in monetary terms.
If GDP would only be an idea, then it would not tell us anything about this state at all, about the reality of the past of the “organism.” For every practical purpose beyond political campaigning it would be irrelevant, just misleading.
However, usually it is taken to be the most useful number to “steer” the economy. And Angie isn’t stupid. She is a physicist. WTF?
What, if anything, does GDP measure?
Diane Coyle also disappoints our hope to understand quickly what GDP really is because it has become an esoteric subject that only a few statisticians, whose manuals are hundreds of pages thick, fully understand. And those manuals come with commentaries which are similarly thick. It has also been claimed that none of those who talk on a daily basis about GDP and claim it to be of highest importance really know how the numbers are in fact constructed.
However, the basic ideas are already reflected in our pile above, though theoretically the pile can be constructed in three ways.
Here’s the boring deal.
You can either add up the totality of economic production in market prices. You can add up all the income generated in a society. Or you can add up all the spending or demand in a society.
The third gives you the short textbook equation “GDP = C + I + G + (X-M)”, where C stands for consumer spending, I for investment spending by businesses, G for government spending, plus exports minus imports.
In the ideal, all three approaches should yield the same GDP figure (which in fact they don’t). They represent only different ways to account for the same (in theory). All the spending is spent on production, all income results from production (by definition, see below).
Our image above was, of course, constructed on the basis of the production approach. We read among the experts:
The difference between the first and the second is simple, though immensely important. It already shows that GDP is not a number free of judgements and potentially value choices.
If you have sex, say, privately, this does not add to GDP, because this is not market production. Normally it is also not counted as an economic activity (or work) at all, a service mutually provided.
If you have sex and spend or receive money for it, then it adds to GDP (as long as you pay taxes on it or the value is guessed by statistician) and the total production of the economy. At the same time this human relation is classified as an economic activity.
The difference obviously cannot be that the one produces “utility” or “value” and the other does not, because there is no such difference.
The more bourgeois and classic example to be found in any book on the issue is that when somebody – who is usually a widower in the narrative – marries his or her housekeeper, this subtracts from GDP and economic production, because the housekeeper is not paid anymore, whatever for.
The example is not far-fetched and off-topic but illustrates an ordinary problem.
In fact, many prices of supposedly economic outputs that enter into GDP are simply imputed by statisticians, although there are no market prices available, no market transaction, and no flows of money. The example also illustrates what Coyle said above in different words: it is not clear what counts as production or an economic activity.
A standard example is the imputation of a price for the (supposed) output owners of houses gain from their property while living in it without paying themselves a rent.
“There are productive activities and associated income flows (typically non-monetary) that take place outside the market sphere, and some of them have been incorporated into GDP. The single most important imputation is a consumption value for the services that home-owners derive from living in their own dwellings. There is no market transaction and no payment takes place, but the national accounts treat this situation as if home-owners paid a rent to themselves.”
Note that here a house is claimed to provide a service to its owners. This is like saying that your car (or bicycle) produces a service for you and contributes to GDP.
Although this is not yet the case, the authors think about “allowing for the household production of transportation services”, that is commuting, and to count it as economic production. Thus far, only buying gasoline or a ticket enters GDP, but not the “service” of driving oneself to work. (They also count “shopping” among “unpaid domestic work”.)
If you allow something like this to be production and economic activity, why not allow nature to also be a service provider, e.g. “nature-based services such as carbon storage by forests”? Why not impute a price in the cases of private sex, telling a joke on the streets, playing with your children, preparing meals, or anything that happens at home or on the streets without a market? It would, other things being equal, boost GDP and economic performance enormously.
Noteworthy, also something like the local government’s investment in playgrounds – which I happened to frequent frequently these days – is counted only once in GDP, but as long as nothing breaks or needs to be cleaned, it does not contribute to wealth over the years, it is not of economic value in contrast to the “service” owned property provides to its owners. To the contrary, George Monbiot calls something like this a contribution to “public luxury.”
However, initially you would think that GDP is created by actual prices and actual human relations of buying and selling of stuff that is produced for this purpose within the accounting year. But to some part it is nothing like that. According to Fitoussi, Stiglitz and Sen, such imputations account in France and Finland for 33% of household income and 20% in the USA, and thus enter GDP. According to Mariana Mazzucato above-mentioned houses alone earn 6% of US GDP – „that is, a cool $1 trillion – even though none of these dollars actually exist.“
Another example are government services. The price (or value) of government services is also imputed if it is delivered in kind (e.g. teaching children in school), which makes up around 20% of GDP. In German statistics “Public services, education and health” account for 17% of production (581 billion). Although the service is provided, it is frequently not sold and therefor no market production at all.
If you visit your unemployment agency in times of neoliberal workfare, then you will often be addressed as a costumer by a civil servant (if this is not privatized, as in Australia). But you are not so crazy as to actually buy the services. In reality, you only pay with frustration or disbelieve.
However, in the production account a price would be assigned to measure the “value” of the service via its input, namely the wages paid by the state. That means that within statistics output = input. A result is that the actual output does not matter, productivity differences don’t play a role (e.g. whether one civil servant deals with 0 or 1000 citizens per month).
Actually, the practices of accounting differ already in this respect in different countries. For instance, Germany assesses the “production” of education on the basis only of its inputs. The consequence is that nothing changed within the lockdown. To the contrary, the UK’s practice was to assess the actual output with remarkably different consequences:
This accounts for almost 2% of the 20% fall in UK-GDP that was published in the media.
More basically, it would be equally possible not to treat such state provisions in kind as economic activity at all and exclude them from GDP, similar to household activities. This was discussed frequently among academics in the 20th century discussion, where such activities were at times seen as purely consumptive.
The difference is, of course, that public servants are paid for what they do by money which is not earned in market exchanges but taxed.
Obviously, this is an ideological and political choice of some significance. If “the economy” is the only productive sector, then the state, private households (and commons) live only parasitic lives on the fruits grown, harvested and delivered by private businesses, which is the liberal/neoliberal/libertarian view, of course.
The philosophical breach is that between one area in which the activities were once called “reproduction,” which was clearly distinguished from the economy and production. Such reproductive activities may be said to contribute to welfare, be valuable or contribute to wealth. But they often or usually don’t enter GDP. Although they are necessary for the economy (if you wish, they provide inputs), they are classified as non-economic, whereas buying shares or running a casino (but not organizing illegal poker clubs) are.
What has formerly been called “reproduction” is now called “home production” or “household production.”
Noteworthy, in the economic way of viewing the world, there is probably hardly any human activity which does not count as production (and work). Accordingly, there would be no such thing as a work-life balance but only a work-work-sleep balance (which would be great if work would always be fun).
Fitoussi, Stiglitz and Sen write:
“Household production comprises time spent on housework, purchasing goods and services, caring for and helping household and non-household members, volunteer activities, telephone calls, mail and email and travel time related to all these activities. „Personal care“ consists mainly of sleeping, eating and drinking, whereas leisure was defined to include sports, religious and spiritual activities and other leisure activities.”
If this production would be valued by its cost or the hours of a household worker, then it is possible to estimate the share of GDP of such household activities:
“Household production amounts to about 35% of conventionally-measured GDP in France (average 1995-2006), about 40% in Finland and 30% in the United States over the same period.”
If something like this is production and economic activity, then GDP simply is a bad measure because it ignores it. Mariana Mazzucato notes the oddity that lies in the fact that houses contribute to GDP, but not the women and men who do something in them. If they are not, they may still be valuable and contibute to wealth and welfare. Lorenzo Fioramonti writes of “households as value creators.”
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Does it make a difference?
An effect of the first way of accounting only for market production, which is the standard way, is that the marketization of human exchanges which had once been provided within the household results in a GDP increase, for instance when children are not cared for at home any longer but by paid service providers, including state services. This is what happened in Europe and in many countries since the 70s.
However, whether this contributes to wealth and/or well-being or welfare is a totally different matter.
The easiest (though false) way of dealing with it is to say that nothing changed, only the location of “the service.” Fitoussi, Stiglitz and Sen express this problem by saying that although GDP goes up, “this gives a false impression of a change in living standards.” The growth in GDP suggests this.
In the concrete example of child care, what you say here depends again on your wider philosophy or worldview, the value you assign to employment, gender justice, what is believed to be good for children and families, etc. But this has, on the face of it, not much or nothing to do with numbers figuring in GDP.
The difference here is also one of practical politics. If your philosophy and policy is that the GDP-numbers are what counts, then marketization is always positive (which also includes changes from the informal to the formal economy). From this perspective, it would be optimal if both parents would work next to 24 hours and buy all the services for their child and all domestic chores on the market. It would only be better if the child is also working while being cared for.
In this perspective more “traditional” ways of living or whole cultures are in the way, as is everything that is publicly provided but for free.
If governments are believed not to provide anything of value or of engaging in activities that are worth being called “economic,” then privatization is the policy choice. Welcome, again, to (neo)liberalism.
The opposite, namely the de-marketisation, may result in a reduction in GDP, for instance when a community organizes child care beyond market relations or if citizens exchange second-hand goods on informal flea markets to satisfy their needs. This may increase wealth as well as well-being, but it removes human activities from the market.
Another example for the problematic around the equation “market value = wealth” is all the music you now consume for free on the internet.
Usually it is stated that the amount of music consumed increased in the last two decades or so. Perhaps this is an increase in wealth, welfare and contributes to well-being. But the change from buying expensive CDs to free (or cheap) streaming and downloading reduced GDP overall – and ruined many artists. The same holds for the effect Wikipedia had on the sales of encyclopaedias and other cases of falling prices per unit.
If you paid for any single telephone call or SMS in the early 2000s 50 Euro per month, but then switched to a flat-rate costing you 30, the GDP-share of communication shrunk (if the total number of customers didn’t compensate the loss), although you babbled more. If you now use WhatsApp and the like for free, you and the company’s contribution to GDP and official wealth is virtually zero.
All this can be taken to show that GDP does neither adequately represent economic activity nor economic output nor wealth. Of course, a simple alternative would be to count production and consumption in kind, not in monetary values. The problem is that this won’t give you a single number as a measure of “economic performance.” You simply cannot sum up apples and oranges.
Another example for the fact that GDP is a strange measure of “production” and “economic activity” are financial products. In 2008 when Lehman Brothers went bankrupt the UK “figures suggested finance was making roughly the same contribution as manufacturing to the economy.” It amounted to 10,4 % of production in 2009.
Put in different terms, objective bullshit jobs that add to nothing but the self-referential processing of the economic system make up a significant share of economic performance or supposed wealth. The criticism here is that such jobs make individuals numerically rich, not society.
Here GDP overestimates the contribution of supposedly economic activity to economic success and social welfare, whereas in the above examples it underestimates it.
Another issue is that some parts of what goes into GDP does not only reflect the market price that supposedly reflects the value of the commodity or service, but imputations about the quality of the product by the statistician.
In relation to some gadgets, especially IT-products, “hedonic prices” are constructed by the statisticians since the 1990s:
Here the price actually paid by a customer is corrected upwards if the quality increased in the view of the statistician and this is not already reflected in its market price.
Other things being equal, you may expect that a drastic increase in the performance of a computer results in higher prices. However, because other things are not equal the price stays the same or falls while, e.g., CPU power increases. The effect of introducing hedonic prices was the following:
“The result was an increase in the estimated level of U.S GDP and its growth over some years,” writes Diane Coyle.
Some scholars have tried to compute such “adjustment” and subtract them from official numbers. A result may be that the Great Recession in the USA did not start in 2008 but in 2001 (see the figure below).
Apparently and again, “hedonic prices” do neither measure some pure output, nor income, nor actual spending, but something like consumer benefit or the infamous utility. And it is rather obvious that behind this practice lies the political will to cook the books.
Another famous example putting the reliability of GDP estimates into doubt is that the recession that made the Labour Prime Minister James Callaghan, who preceded Margaret Thatcher, approach the IMF. What contributed to the latter’s victory in elections turned out to be a statistical artefact when the numbers were corrected years later and no recession could be diagnosed any longer. From this perspective, neoliberalism may have been the result of an accounting error.
Some pressing questions at this stage are: Why are “hedonic prices” included in GDP at all? If the reason is to somehow represent more adequately what was above called “economic performance,” because not only quantity but quality should be taken into account, why is this not generally measured, also in services? Think about the quality improvement in your favourite restaurant around the corner. Are the “true prices” of patented pharmaceuticals estimated, which ruin not only individuals and result in unnecessary deaths, but also inflate the cost of health insurances? Are people living in cities asked about the quality of the air they breathe as an aspect of the quality of cars sold in “the economy”?
As former inhabitants of actually existing socialism know, there really is a difference between a commodity that functions the moment it is delivered and one that does not. Quality thus makes a difference to something, whatever we call that. But is this the issue?
Whereas the above can be used to criticise the arbitrariness of what enters into GDP, other criticisms add to the picture.
The first major criticisms: GDP versus human needs
To the contrary of what the practice of imputing “hedonic prices” suggests, one central criticism of GDP has always been that it doesn’t distinguish at all between the welfare, consumer benefit or well-being of the population in relation to the goods and services that make up GDP.
Notoriously, GDP makes no difference between weapons of mass destruction and toys, outputs that pollute the planet (such as German cars) and those which preserve or repair it, bullshit products and useful things. It does also not care on its income panel about whether the jobs people receive income for make those happy or sick.
Already in the early days people such as Simon Kuznets wanted to make such differences and subtract spending on defence from national income altogether. It has been claimed that American economic growth in the period from 1948 to 1989 was mostly dependent upon military spending. In 2005 Hurricane Katrina had a short-term destructive effect which was positive for economic performance.
Why is this? Because GDP does not measure a stock of stuff or assets, a brilliant way to boost it is the destruction of the stock that results in replacements.
After World War II growth rates were not only bigger than later due to the impact of neoliberalism in the latter, but the impact of war in the former period.
In a sense, planned destruction is a common feature of entrepreneurial activity. From the standpoint of GDP, it is a wonderful social practice because it increases the turnover of all types of gadgets. Its official name is “planned obsolescence.”
With intention commodities are not designed in a way that they hold forever, as the old analogue telephone had been. They are designed to maximize profit. This contributes to GDP the moment you not just buy one smartphone in a decade but one every two years.
The GDP measure thus rewards inefficiency and waste. The constructive journalist Han Langeslag asked rhetorically about the universal aim of pushing GDP:
As is rather well known, the market-prices of commodities and services also don’t incorporate the damages that are connected with their production and consumption. As a consequence, such costs don’t show up in GDP in the accounting year, but only later.
It has also been tried to subtract from GDP figures such costs which only compensate “negative effects” for humans but arguably contribute nothing to an increase in welfare or wealth. One estimate for the German economy of 1988 of such costs amounted to almost 12% of GDP. In 2013 a UN report stated “our most environmentally intensive business sectors – cement, chemicals, energy, farming, fishing, forestry, mining, paper, steel and utilities – were costing society around $7.3 trillion a year (more than 10% of global GDP) in pollution-related health costs, natural resource degradation and climate change impacts.”
If this story is told, then the story of universal progress by piling up stuff sounds much less convincing. Imagine that you have all the goods you ever dreamed of in your little castle, but every half an hour or so you have to carry the garbage down to the road. Intuitively, this diminishes wealth as well as well-being.
Another way of putting this is that GDP and its growth are indifferent towards human needs, although within the manifest image or self-conscious of capitalist and socialist modernity it’s exactly the opposite. This frequently is the first major criticism of GDP.
Diane Coyle makes the adequate observation that from the GDP-standpoint it does not make a difference whether three knifes or a knife, a spoon and a fork are produced and sold. She argues accordingly that GDP does not reflect the variety of goods produced in an economy, but only cares for their number.
One could use this observation to argue that the variety, not the sheer number of goods and services is a better measure of economic performance because those goods may satisfy more diverse needs, and that this is an indicator of authentic social wealth. If being able to satisfy one’s needs is an aspect of freedom, varieties of stuff are good for this in relation to a whole population.
Obviously, the cultural icon of growth culture is not a heap of unorganized stuff but the shiny mall where everything is neatly placed, lighted and perfumed to enable the individual to choose what (s)he likes and can afford.
It is also not the mall as frozen block of time but a time sequence of ingenious invention, later in the last century called “innovation,” that allegedly makes the lives of people not only easier but better. Innovation contributes to GDP if totally new stuff gets sold or at least old stuff is replaced.
Diane Coyle writes about the time from 1945 to 1970, where our contemporary “Western” culture was to a large extent born:
“Dramatic new treatments for previously fatal or debilitating illnesses including smallpox and polio; famously, the contraceptive pill; affordable civilian air travel and the beginnings of the foreign holiday boom; color TV and telephones and modern domestic appliances in many homes; manmade fibers in clothes; Velcro; nylons. Even the most apparently trivial brought great increases in consumer welfare. For example, DuPont sold nearly eight hundred thousand pairs of nylon stockings on the first day they went on sale, 15 May 1940, and sixty-four million by the end of the first year. There was outrage among women when the supply dried up the following year due to the nylon yarn being diverted to war production.”
“The United States in 1998 offered 185 TV channels, 141 over-the-counter painkillers, and eighty-seven brands of soft drink. These figures all represented big increases since 1970, when there had been five TV channels, five painkillers, and twenty types of soft drink. By 1998, there were 340 kinds of breakfast cereal, up from 160, and fifty brands of bottled water on offer, compared with sixteen in 1970. The number of types of personal computer had risen from zero to four hundred in twenty-eight years, the number of websites from zero to nearly five million. … To be poor is to have little choice available, and the increase in possibility is the most important aspect of escaping poverty. … Economic development is an increase in freedom. One aspect of this is the variety of goods and services available in the economy, from the trivial to the profoundly important.”
The idea of growth, if it is at all consciously present within the wider public, will almost for sure be associated with this picture and the associations that are coming with it. Is it totally wrong?
The political threat is, of course, that this variety of stuff and freedom would get lost without constant economic growth. Although GDP does not measure the variety of stuff at all, it seems to stand for it.
However, others darken the shiny picture by saying that in some respects the effect has been the direct opposite of this picture.
There are all sorts of fruits and vegetables in our supermarkets in “the West,” but everywhere this is the same set and the variety of different sorts declined drastically. For instance, whereas there were 800 different sorts of apples sold in a German region in 1950, they have been reduced to 40. And every week one race of human livestock is extinguished. One ad hoc explanation may be that they don’t contribute that well to quantity and profit, and are therefore over time eradicated in a “growing” market economy.
The second major criticism: aggregates versus individuals
The beauty of grossly aggregated numbers for ideologues is that they hide everything at the bottom.
The second, most common criticism of the indicator goes in the same direction. The critique is that GDP is ideological because it is simply immensely misleading. Not so much the number itself but its permanent use either in “growing” absolute terms or in “growing” per capita averages suggests that the population of a country as a whole is better off in terms of its monetary living standard, the stuff every citizen is able to consume or its well-being.
As is well known but almost always forgotten, the bigger social inequality is the more this assumption is false or worse. Much and at times almost all of a year’s GDP growth goes into the pockets of 1% or less of the population. Not only the additional growth per year, but the total aggregate income is distributed highly unequally.
As a consequence, if we are shown per capita increases in GDP, as in the German case, this does tell us next to nothing about the welfare or standard of living of the population. GDP may rise while the material welfare of almost the total population stays the same are shrinks.
The question is very simple, but never asked too openly: Can a country be called “wealthy” where a tiny minority possesses almost all the wealth and receives a huge share of the yearly “national income”? Of course, almost everybody answers: WTF, no!
This is, of course, noted by economists and commentators on “the left” and downplayed everywhere else. After German per capita GDP had probably reached its peak for some time to come, Yanis Varoufakis wrote:
“A recent study has confirmed that half of Germany’s population owns just 1.5% of the country’s wealth, while the top 0.1% own 20%. And inequality is getting worse. During the last two decades, the real disposable income of the poorest 50% has been falling while that of the top 1% has been rising fast, along with house and share prices.”
A country’s GDP includes the profits made by all the individuals and firms within its borders, although they may be foreign citizens and companies. However, if the profits made within the country are not taxed away and put into a bag and flown to a different country, then they don’t contribute to the disposable income of the country that might have had a growing GDP.
Fitoussi, Stiglitz and Sen write therefore:
“For a poor developing country to be told that its GDP has gone up may be of little relevance.”
But this is not only significant in the so-called developing world, it also holds elsewhere.
Do increases in GDP contribute to health, happiness and well-being?
GDP does also not determine life expectancy on its own, which is an indicator for the overall health of a population. The United States have a higher GDP per capita than most countries, but life expectancy is lower than in countries with by far lower GDP.
For instance, the often-ridiculed Cuba, with $7888 per capita GDP, has the same life expectancy as the USA, which has a per capita GDP of $53015. The issue here is obviously not how huge the pile of stuff is a country commands, but how it uses the resources it has. In the USA the aggregate costs of health care are the highest in the world, it is inefficient, and they contribute to its high GDP, whereas the cheap but effective Cuban health services don’t so much.
Furthermore and contrary to conservative and “liberal” pronouncements this April, economic recessions and, by definition, reductions in GDP (though not long term depressions) are accompanied by reductions in overall mortality and improved health, not the expected opposite that is argued for by pointing the finger to (supposedly or actually) poor countries (see Recessions don’t kill, Covid-19 does). This also indicates that normality in growing countries is not optimal in relation to well-being.
Increases in subjective happiness have also not been a necessary byproduct of permanent economic growth. The story that GDP equals wealth and happiness is at least misleading.
While proponents of economic growth argue against degrowth activists that economic growth could be “decoupled” from ecological impact, for most “Western” countries increases in GDP were decoupled from ”subjective social welfare” (aka happiness) somewhere in the middle of the 20th century. At times happiness was also influenced negatively.
It is true that, if we start somewhere near zero, GDP-growth brings with it an improvement in quality of life,
For instance, if GDP goes up but this is due to increased exploitation of workers or simply more work, then again “wealth” might be the wrong word. Fitoussi, Sen and Stiglitz write: “Consuming the same bundle of goods and services working 1500 hours a year instead of 2000 hours a year implies an increase in one’s standard of living.”
In the era of GDP since WW2 working hours are said to have increased after all for households, at least in the US. Again, already Simon Kuznets suggested that not only the wear and tear of machines should be taken out of GDP, but also the “wearing out of people.”
Accordingly, further increases in (subjective) well-being and (objective) welfare might have all sorts of sources, from working less to engagement in communities or real political participation, more beautiful cities and an intact ecology. But if the overall criticism of GDP is correct, then improvements are not to be expected by further GDP-growth (dependent on the country).
The third major criticism
The third major issue lies in the a-historicity of GDP. As was noted before, this number incorporates neither information about either the past of the economy/society nor its expected future.
Concerning the relation of past and present, it would for instance be possible to define a threshold of stuff that is enough. Since we have already introduced the belly-analogy above, we can say that I could intentionally define a threshold for my belly-growth beyond which I would not see it as subjectively sustainable. Physicians define objective thresholds where health is predicted to be negatively affected. Nature has inscribed such a threshold of growth into the DNA of organisms. Tumor cells seems to be an exception. They don’t care about the death of their host and of themselves. GDP doesn’t either.
The ecological criticism of politics of GDP is, of course, that exponential growth is incompatible with the survival of the ecosystem of the earth and, in the end, humanity. A growth rate of 1% doubles GDP and “economic performance” in 72 years. If it is 3%, it takes 23,5 years. 4% growth result within seven generations in one thousand times the output of the original value.
The trouble is that GDP suggests the output is a pile of money or monetary value, not a pile of material things and processes that require resources and energy to be produced.
The question is about sustainability, which means whether the contemporary standard of production/consumption is such that future generations will be able to enjoy it within an intact environment.
Formulated as a question, the issue here is whether unsustainable patterns of production and consumption should perhaps not be called “wealth” but, say, “decadence.” If you vote for the second option, then GDP has nothing to do with authentic wealth within your overall philosophy.
Again: What the Fcuk is GDP (and wealth)?
In summary, GDP was originally supposed to be a measure of economic output and economic activity or economic performance. It has been criticized in this respect numerous times for technical and philosophical reasons (usually both at once), and it remains unclear what economic activity, output and performance are. If these are limited to paid market activities, then strictly speaking the questions of (social) welfare or (social) wealth are not even posed, although GDP is associated with all of this.
For this and other reasons, it has also been suggested it would be better to read GDP as an aggregate measure of pure costs, not of benefits or assets, of production. This is a great and intuitive suggestion. If you, for instance, as a family would maximize costs, you would be called insane. If you would do it as a business, you would be bankrupt. If you say “Let’s as a society maximize haircuts, gasoline and whatever, for short: GDP,” you receive warm applause by the wise.
After World War II, mainly politicians were responsible for using GDP as a measure of social welfare. It has been ridiculed in this respect numerous times, especially since 2007/8. GDP has also been stated to measure what is valuable, but obviously GDP itself and those who use it have no clear idea of what value is.
The overall stipulation is that GDP and its “growth” are associated with, or are the same as, wealth, but the word is never explicated. As a result, we are fooled into thinking that our pile, as we constructed it above, is wealth.
The economist Jeroen van den Bergh wrote devastatingly in calling for the abolition of GDP:
If it is explicitly stated what “wealth” means, then it is tacitly defined as a stock of durable and useful stuff or monetary savings. Exactly this is not GDP. If this idea of a stock is not connected with that of needs, then we get the individualized version of GDP in the Forbes ranking of billionaires. Another billion here is supposed to add to individual wealth, though arguably it only adds to economic and political power.
Uncounted other indicators as substitutes for GDP have meanwhile been proposed, although they are almost never mentioned in the media. The problem is to clarify their function, to let them help to shape reality and to describe it accurately in the first place.
For instance, it is a great idea to estimate a monetary value of household work, of playing with your children or of writing a poem and performing it on Youtube, and letting it contribute to a measure of “economic performance.” Here the problem is what the purpose of the exercise is. It won’t pay the bills of those who do this and thus may actually misrepresent what counts in society as much as GDP. It is one thing to declare that social equality is “a source” of social welfare and to measure it. Another is to realize such a society.
The hope is that new indicators will help to realize the (social) values they incorporate, even to change power relations within the world system because if other measures are given priority, other countries would constitute the G20 or G7 who lead the world. Through the lens of other indicators the state of the world and its evaluation are different.
In the end, whatever (social) wealth is supposed to be depends on answers to some of the biggest and oldest questions. Simon Kuznets is famous for the following lines because of the tragedy of having anticipated and later on witnessed himself how his brainchild was misused:
“From many viewpoints, the provision of goods to consumers is a subsidiary rather than a primary aim of economic activity. If the functioning of the economic system is judged by its contribution to social welfare at large, if some idea of good life is the touchstone, then both provision of goods to consumers and any other immediate purpose of economic activity will be subordinate, and the entire calculation of national product, if calculation is still possible, will be different. No longer an economic concept, national product will become a concept with a broader frame of reference. If the social philosophy of recent years which (…) tends to subordinate it to some idea of a good life, of national glory, or of some other nebulous criterion deemed superior, is adopted, then net contribution of economic activity will have to be measured on the basis of the new and extra-economic goal.”
Kuznets, for short, believed that economic output should be good for something, and how it is measured depends on the idea of this something. Fitoussi, Stiglitz and Sen wrote similarly rather recently: “Our economy is supposed to increase our well-being. It (…) is not an end in itself”, and the aim of their commission was “to help all of us to direct efforts to those things that really matter.”
The most central issue in these debates are not technical but philosophical. The first question is: What the fcuk is an economic activity? The second is: What the fcuk is the economy for? The third is: Is there at all an “our” economy, and who the fcuk shall run it?
The last question makes clear that they not only hide philosophical choices but also ideological standpoints. As a consequence, they cannot be debated within academic circles alone but would need to be the object of political debate and street combat.
What is new about the new ecological movements of recent years is that they want to debate and combat over such issues, without necessarily explicitly saying so. Their shocking idea to mainstream thought simply is that not everything that contributes to GDP and its philosophy of work, value and wealth shall be allowed any longer, which is interpreted by all others as an attack on their freedom. Fitoussi, Stiglitz and Sen also wrote:
“We care about how we are doing ‘in the aggregate,’ but we also care what is happening to the distribution of income. We care, moreover, not just for how well-off we are today, but for how well-off we will be in the future.”
The pressing question of the near future will be whether the group that identifies with such a “we” gets bigger than the traditional crowd that believes in something else, namely in GDP. For the time being, the normal aim of all businesses that constitute the economy is to make profits, and the current distribution of income and the ecological disaster are due to the circumstance that “we” did (and do) not care at all.
Therefore, the positive and hopeful message is that the use of social indicators can be something like a performative act, its use realizes what it supposedly only describes.
As far as I can see here, most of the ideas that figure in different conceptions of alternative indicators of “economic performance” are integrated in Kate Raworth’s idea of a Doughnut Economy.
The economic or social aim is no longer growth but “human prosperity in a flourishing web of life.” The basic idea is that any individual should be guaranteed taking part in “the basics” of social life, and that in achieving it no unsustainable ecological boundary shall be trespassed. What is called the “social foundation” is basically an explication of what “well-being” means at other places.
The success of world society is then measured by the extent to which all these individual, social and ecological goals are realized. In contrast to GDP-growth, they are rather concrete. What counts in this economics is also not some “economic goal,” isolated from anything else, but a complex societal aim.
GDP was in a sense a self-fulfilling prophecy because it focused the attention on the narrow aim of growth. The central economic question had been, within economics and politics, “How is constant GPD growth possible?”. Raworth’s substitute comes from Xenophon and reads: “How should a household best manage its resources?”
Raworth hopes that the Doughnut can play in the coming decades the role that GDP played since 1945.
May it be so.
The difference to the history of GDP is great. GDP could arguably be victorious because it perfectly fitted the spirit of capitalist economies, capitalist entrepreneurs and the emergent consumerism of capitalist mass society. Furthermore, the historical moment was the right one, after two world wars and a long economic crisis that left millions of people hungry. Because of all of that, it could become a self-fulfilling prophecy with the help of some political tinkering and massive marketing propaganda. Its embodied values were congenial to reality.
The Doughnut and other measures will have to contribute to changing values and reality, especially in a time where the negative “growth” of GDP is such that it makes a difference to millions of people, and the difference is negative from the individual perspective. Legitimately the hope of many will be GDP-“growth.” And GDP does measure something. The question is how far that is important under which societal cirumstances if the aggregate number is disaggregated.
However, if we want to talk about growth, degrowth or a-growth, we should first ask what at all shall or shall not be “growing,” because this is a metaphor.
Next episodes: value; work; planning; inequality.
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It often takes only minutes to read a text, but days or weeks to write them. If you learned something, buy me a beer or so. If you are a billionaire, enter 1 000 000 for the number of virtual items to be purchased below.