GDP does not accurately measure economic success

CAMBRIDGE: How should we measure economic success? Criticisms of conventional indicators, particularly gross domestic product (GDP), have abounded for years, if not decades. Environmentalists have long pointed out that GDP omits the depletion of natural assets, as well as negative externalities such as global warming. And its failure to capture unpaid but undoubtedly valuable work in the home is another glaring omission. But better alternatives may soon be at hand.

In 2009, a commission led by Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi spurred efforts to find alternative ways to gauge economic progress by recommending a “dashboard” of indicators. Since then, economists and statisticians, working alongside natural scientists, have put considerable effort into developing rigorous wealth-based prosperity metrics, particularly concerning natural assets. The core idea is to create a comprehensive national balance sheet to demonstrate that economic progress today is illusory when it comes at the expense of future living standards.

In an important milestone in March this year, the United Nations approved a statistical standard relating to the services that nature provides to the economy. That followed the UK Treasury’s publication of a review by the University of Cambridge’s Partha Dasgupta setting out how to integrate nature in general, and biodiversity in particular, into economic analysis. With the consequences of climate change starting to become all too apparent, any meaningful concept of economic success in the future will surely include sustainability.

The next steps in this statistical endeavour will be to incorporate measures of social capital, reflecting the ability of communities or countries to act collectively and to extend the measurement of the household sector. The COVID-19 pandemic has highlighted how crucial this unpaid work is to a country’s economic health. For example, the US Bureau of Labor Statistics intends to develop a more comprehensive concept of living standards that includes the value of such activity.

Aggregate measures such as these can be useful for guiding important policy decisions in a manner consistent with familiar economic concepts. This approach also helps the conversation with finance ministry officials and business executives, whose support for a longer-term perspective regarding prosperity will be essential to bring about change.

But many advocate thinking about economic success and failure in terms of well-being, a broader and fuzzier concept. The idea that policy decisions should focus on what ultimately matters in people’s lives is intuitively appealing. And several governments, from New Zealand to Scotland, have recently adopted explicit well-being policy frameworks.

This approach, however, raises even more difficult measurement questions. Well-being depends on many aspects of individuals’ life circumstances. To be sure, there is a large body of research in psychology and economics concerning how to measure well-being and analyse the factors that influence it. Often, the measurement involves surveying people’s satisfaction with their lives or their level of anxiety. For example, the United Kingdom’s Office for National Statistics has been tracking anxiety and depression throughout the pandemic.

But while policymakers need some top-down, aggregate statistics to facilitate their decision-making, such indicators have limitations. For example, whereas the links between well-being and factors identified by econometric analysis – such as being employed or in good mental health – are intuitive, the causal connections are not well understood. A depressed person may benefit from therapy, as well-being advocates often urge, but decent housing might be even more effective. Public policy based on well-being thus still lacks a theoretical underpinning.

Moreover, some policymaking contexts will require a more granular level of detail. Qualitative research – rather than large-scale surveys with predefined questions – points to a wider range of considerations affecting well-being. For example, one recent UK study, co-produced by researchers and people experiencing poverty, found that while basic material needs including health were important to well-being, autonomy and a sense of purpose mattered just as much. The top-down aggregate indicators devised by social scientists and statisticians cannot capture such findings.

While time-intensive ground-level research will not always be practical, it is important to keep in mind that the concept of well-being is much richer than most other economic indicators. Importantly, the comprehensive wealth and well-being approaches outlined here are complementary: the assets measured by the former provide the means to achieve the latter. Indeed, New Zealand’s policy framework makes this link explicit.

What is exciting about these alternative approaches to assessing and measuring the economic success of a community or country is the amount of practical progress already made in defining concepts, creating metrics, and building expert consensus about the direction policymaking should take. Ditching GDP as the main gauge of prosperity was always impossible in the absence of broad agreement about what the alternative might be. And it will take many more years of work at the statistical coalface to develop a framework as sophisticated and well-embedded as GDP and related economic indicators. But the direction of change is clear, and the impetus to bring it about is powerful.

Diane Coyle, professor of Public Policy at the University of Cambridge, is the author, most recently, of Cogs and Monsters: What Economics Is, and What It Should Be (Princeton University Press, 2021).

Copyright: Project Syndicate, 2021.

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