The Measure of Things

The GDP might me an imperfect indicator for growth – but its alternatives are even worse. They replace objectively measurable numbers with subjective preferences. We must not deny the importance of growth by changing the definitions.

We generally use per-capita income to measure prosperity. In Germany, per-capita income has increased by the factor twenty between 1950 and 2001, and it has increased fivefold if corrected for inflation. But has our wealth increased as well? This question touches two overlapping problems: The meaning of material growth for prosperity and its measurement. They can only be discussed together.

GDP is a poor indicator of prosperity

Few people dispute that the GDP indicator exhibits considerable flaws. Many economic activities – such as volunteer work, household work or illicit employment – are not included in the calculations. GDP also pays no attention to questions of wealth distribution or to institutional arrangement that might restrict individual freedom of choice. And finally it does not recognize that economic activities might have unintended and unwanted consequences such as environmental damage. Their subsequent correction requires expenditures that increase the GDP without having any effect on wealth acquisition. For all these reasons, GDP is a poor indicator of prosperity.

A few alternative concepts deliberately attempt to avoid monetary measures and instead focus on real well-being. In most cases, this means the aggregation of several indicators such as environmental protection, the quality of public infrastructure, funding of the education system, or the number of doctors and athletic clubs in a given neighborhood. Some people also propose to incorporate recent findings from psychology that focus on happiness and its impact on collective productivity. All these indicators are measured in different units and combined into a single index. Proponents of this approach argue that prosperity can be measured more accurately by moving away from an overtly materialistic approach to economic growth. They say that money might increase our wealth but not necessarily contribute to a sense of wellbeing.

Both statements are not conclusive: Non-monetary concepts are even less suitable than GDP to measure prosperity. The main problem is that the level of objectivity is extremely low. People disagree on the indicators that are most relevant in describing a quality of life. Thus any index would be directly influenced by the value judgments of decision-makers, who would inevitably be tasked with narrowing down an extensive list of potential indicators to a manageable few. The index would not be representative of the preferences of the population, and individual ideas about the quality of life are not taken into consideration. GDP is the least problematic indicator because its advantages and disadvantages are well-known and can be taken into account when analyzing the economic situation. And GDP is the only indicator that does not impose a set of preferences on measurements of economic data.

Rejecting the idea of growth altogether is no viable alternative either. Growth is necessary to deal with structural changes. It does not imply that we need “more of the same” but opens the possibility for innovation and development. And for many people in developing countries growth is a question of survival. They have quite literally grown out of poverty. We cannot solve the question of poverty simply by changing the indicators we use to measure it.

Sustainability must become a focus of economic policy

We are nevertheless tasked with solving the problems of GDP growth. Sustainability must become a focus of economic policy. This requires us to take into account the costs and consequences of each step of the production and transport process, particularly if the production chain is affecting the environment though direct destruction or indirectly through greenhouse gas emissions. Today, production and transportation are excluded from carbon dioxide certificates.

If we can describe the costs of each step of the economic process more accurately – and enforce the principle of accountability for those costs – the traditional monetary index of GDP growth can describe prosperity better than ever before. It is certainly superior to non-monetary alternatives.

Read more in this debate: Paul Allin, Ross von Burg.

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