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Why GDP is a flawed and dangerous accounting system
A bizarre system of accounting
Simon Kuznets, the economist who invented Gross Domestic Product (GDP) in the 1930s, warned that it was a “potentially dangerous oversimplification that could be misleading” and subject to “resulting abuse.” However, in the aftermath of World War II, as the world was gearing up for the Great Acceleration, GDP was formally incorporated into official policy making.
The basic fault with GDP as a measure of a country’s performance is that it fails to distinguish between activities that promote welfare and those that reduce it. Anything that causes economic activity of any kind, whether good or bad, adds to GDP. An oil spill, for example, increases GDP because of the cost of cleaning it up: the bigger the spill, the better it is for GDP.
In the description of one team of analysts: “By the curious standard of the GDP, the nation's economic hero is a terminal cancer patient who is going through a costly divorce. The happiest event is an earthquake or a hurricane. The most desirable habitat is a multibillion-dollar Superfund site.”
GDP measures the rate at which our society is transforming nature and human activities into the monetary economy, regardless of the ensuing quality of life. When someone picks vegetables from their garden and cooks them for a friend, this has no impact on GDP; however, buying a similar meal from the frozen food section of a supermarket involves an exchange of money, and therefore adds to GDP.
Because of this, activities that put more burden on the environment tend to contribute more to GDP. Driving to work in a car is GDP-enhancing, whereas cycling to work has no effect; turning on the air conditioning increases GDP, whereas opening a window does nothing for it.
In this bizarre system of accounting, toxic pollution can be triply beneficial for GDP growth: once when a chemical company produces hazardous byproducts; twice when the pollutants need to be cleaned up; and a third time if they cause harm to people requiring medical treatment.
Measuring genuine progress
The measure of GDP goes from being merely bizarre to dangerous for humanity’s future because of the fact that metrics have a profound impact on what society tries to achieve. As one economist observes: “We get what we measure. The indicators we choose to define success become the things we strive for.”
Recognizing this, various groups, including the UN and the European Community, have begun to explore alternative ways to measure society’s true performance. The Himalayan state of Bhutan has broken new ground by creating a “Gross National Happiness” index, incorporating values such as spiritual wellbeing, health, and biodiversity.
These alternative measures offer a very different story of the human experience over the last fifty years than the one presented by GDP. When researchers applied a measure known as the Genuine Progress Indicator (GPI) to seventeen countries around the world, they discovered that, although GDP has continually increased since 1950, worldwide GPI reached its peak in 1978 and has been declining ever since then.
The “Easterlin paradox”
In spite of this, the mainstream media unquestionably accepts the mantra of our locked-in ideology that economic growth, measured by GDP, is the societal objective to be pursued above all else. If GDP actually measured those aspects of life that lead to greater happiness, we should expect that the richer a country is, the happier its people are.
This is true for subsistence level economies, where people who are barely surviving are not surprisingly the unhappiest. However, this correlation disappears after a country’s GDP per capita reaches a moderate level (roughly equivalent to countries such as Mexico or Turkey). Beyond that, there is no correlation between the wealth of a country and the reported happiness of its population.
In countries such as the United States, United Kingdom, and Japan, GDP per capita skyrocketed after World War II, yet the reported life satisfaction of their populations remained flat. This is called the “Easterlin paradox” after the scientist who first discovered it in 1974. More recently, researchers have analyzed East European countries following the fall of the Soviet Union, and China, which experienced two decades of the fastest rise in GDP per capita ever seen. In each case, they found the same results: overall life satisfaction failed to increase with the rise in income levels.
Easterlin’s explanation for this paradox was that, while economic growth raised people’s standard of living, it also raised their aspirations, leading to a negative effect on their happiness. This effect has become known as the “hedonic treadmill” – no matter how affluent people become, they continually compare themselves with others in their peer group, and always desire more.
In our globally interconnected world, the standards people compare themselves against are no longer exclusively those of their local peer group, but those of the global elite whose images are continually thrust into their presence, suggesting that the global “hedonic treadmill” is getting ever faster and broader.
Edward Bernays, the mastermind of modern consumerism, and his followers appear to have succeeded only too well.
Excerpted from The Patterning Instinct, Chapter 20 | Consuming the Earth In the Modern Era
Clifford Cobb, Ted Halstead, and Jonathan Rowe, "If the GDP Is Up, Why Is America Down?", Atlantic Monthly (October 1995).
Ida Kubiszewski et al., "Beyond GDP: Measuring and Achieving Global Genuine Progress," Ecological Economics 93 (2013): 57–68.
Richard A. Easterlin et al., "The Happiness-Income Paradox Revisited," PNAS 107, no. 52 (2010): 22463–68