SILICONEER | COVER STORY: The GDP Myth: The True Measure of Well-being | OCTOBER 2009

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COVER STORY
The GDP Myth: The True Measure of Well-being

In a provocative new study commissioned by the French government, Nobel prize-winning economists Amartya Sen and Joseph E. Stiglitz urge the adoption of new assessment tools that incorporate a broader concern for human welfare than just economic growth. The obsessive focus on growth stems from a disastrously mistaken assumption that economic growth by itself will maximize prosperity for all. A Siliconeer report.

For decades, U.S-backed multlateral organizations like the World Bank and the IMF led governments, policymakers into worshipping the GDP — gross domestic product — like a phallic symbol. GDP measures the market value of goods and services produced by a nation in a year. If the sum of goods and services go up, the conventional wisdom goes, all good things follow.

Not so fast, say Nobel Prize-winning economists Amartya Sen and Joseph Stiglitz.

They say in a report with fellow co-author and French economist Jean-Paul Fitoussi in The Measurement of Economic Performance and Social Progress Revisited: Reflections and Overview (www.stiglitz-sen-fitoussi.fr/documents/overview-eng.pdf):

GDP is neither a measure of income nor a measure of well-being. What we want to measure is the key question. . .

Measuring Economic and Social Progress

The Commission on the Measurement of Economic Performance and Social Progress (www.stiglitz-sen-fitoussi.fr) was set up by the French government by French President Nicholas Sarkozy in 2008.

“Increasing concerns have been raised since a long time about the adequacy of current measures of economic performance, in particular those based on GDP figures. “Moreover, there are broader concerns about the relevance of these figures as measures of societal well-being, as well as measures of economic, environmental, and social sustainability,” says the commission Web site..

“Reflecting these concerns, President Sarkozy has decided to create this Commission, to look at the entire range of issues. Its aim is to identify the limits of GDP as an indicator of economic performance and social progress, to consider additional information required for the production of a more relevant picture, to discuss how to present this information in the most appropriate way, and to check the feasibility of measurement tools proposed by the Commission. Commission’s work is not focused on France, nor on developed countries. The output of the Commission will be made public, providing a template for every interested country or group of countries.”

The commission is chaired by Professor Joseph E. Stiglitz, Columbia University. Professor Amartya Sen, Harvard University, is Chair Adviser. Professor Jean-Paul Fitoussi, Institut d’Etudes Politiques de Paris, president of the Observatoire Français des Conjonctures Economiques (OFCE), is coordinator of the Commission. Members of the Commission are renowned experts from universities, governmental and intergovernmental organisations, in several countries (USA, France, United Kingdom, India).

What is of particular concern is when narrow measures of market performance are confused with broader measures of welfare. What we measure affects what we do; and if our measurements are flawed, decisions may be distorted. Policies should be aimed at increasing societal welfare, not GDP. Choices between promoting GDP and protecting the environment may be false choices, once environmental degradation is appropriately included in our measurement of economic performance.

To be sure, as a broad measure, GDP does give a useful bird’s eye view of economic disparity between nations. The GDP difference between the United States and say, Bangladesh, reflects the economic disparity between the two nations. As a general measure, GDP growth can also give a sense of overall progress of a country. The huge flurry of development of countries like South Korea and Taiwan in the latter part of the last century, or the breathtaking pace of economic change in China in the past couple of decades, is amply reflected in their GDP figures.

The critical point, however, is what the GDP does not show. It’s quite like what they say about statistics: “Statistics is like a bikini: What it reveals is interesting, but what it does not is vital.”

Sen, Stiglitz and Fitoussi say that the current global economic crisis has made it amply clear that GDP and conventional economic indicators are not enough:

This dramatic episode is teaching us a very important lesson: Those attempting to guide the economy are like pilots steering a course without a reliable compass. The decisions we make depend on what we measure, how we do our measurements, and how we interpret them. We are almost “flying blind” when the metrics on which action is based are ill-designed. Today, there is a broad consensus that we need better metrics and that we need to understand the limitations and uses of existing metrics. . . .

We are now living through one of the worst financial, economic and social crises in history. Part of the reason why the crisis took many with such surprise is that the “measurement” systems we use to assess and monitor economic performance failed. They suggested that in the years prior to the crisis the economy was doing far better than it was. The crisis has raised questions of how to value assets – if we value the houses produced back then at current market prices, output at that time would be much lower. So too for the profits recorded by one of the seemingly most dynamic sectors of the economy, the financial sector, which were not just ephemeral, but, in many cases, based on suspect valuations. Not only have questions been raised about the assessment of the economic performance of these firms, but because GDP, our standard measure of national economic performance, reflects the sum total of the economic performance of all firms in the economy, questions are being raised about the assessment of national economic performance. . .

(Above): Nobel Prize-winning economists Amartya Sen (left) of Harvard University and Joseph Stiglitz (right) of Columbia University

No single measure, or even a limited set of measures, can provide all the information required to assess and manage an economy. But many are asking today, why did neither the private accounting system nor the public one deliver an adequate early warning? It is perhaps going too far to hope that if we had possessed a better measurement system, one that would have signaled problems ahead, government might have taken early measures to avoid or at least to mitigate the present turmoil. But perhaps had there been more awareness of the limitations of standard metrics, like GDP, there would have been less euphoria over economic performance in the years prior to the crisis; metrics that incorporated assessments of sustainability (e.g. increasing indebtedness) would have provided a more cautious view of economic performance. In effect, sustainability issues, in a broad sense, apply not only to the environment and to natural resources, but also to other types of capital.

The fact that GDP has limitations is not exactly a recent discovery. Even the person credited with inventing the measure warned about its limitations.

Simon Kuznets, while working at the National Bureau of Economic Research during the Depression, came up with the GDP when Congress directed the Commerce Department to come up with better data on the economy.

Kuznets, who went on to win a Nobel Prize in economics in 1971, warned that the statistic provided a poor index of the country’s well-being; “The welfare of a nation can…scarcely be inferred from a measurement of national income,” he wrote in a 1934 report.

In a nutshell, you could say the GDP has a critical Bill-Gates-in-a-bar flaw: If Bill Gates entered a bar, the average net worth of everybody in the bar would shoot up to many hundreds of millions of dollars, right? In reality, though, it doesn’t change a thing.

The Sen-Stiglitz-Fitoussi report tactfully avoids mentioning what could also be a powerful underlying reason for the love affair of GDP figures—it may not give an honest picture of the well-being of society, but perhaps it fits the needs of the powerful, affluent and privileged quite well? Overall GDP growth benefits the wealthy even more if income and wealth distribution gets more skewed, so for the powers that be GDP works just fine. And if they set the rules of the game, everybody else tends to follow. As U.S. author Upton Sinclair had remarked: “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”

Be that as it may, Sen, Stiglitz and Fitoussi at least make an important beginning by broadening the definition of measuring the well-being of society:

We are convinced that what we measure and how we measure it makes a difference – for policy, for judgments about what works and what doesn’t. Measurement of “present” economic performance also includes an assessment of “quality of life.” Quality of life includes the full range of factors that make life worth living, including those that are not traded in markets and not captured by monetary measures. While many of our measures are directed at ascertaining short-run movements in the level of market activity, the Commission considers that the time has come to make a clear move from measuring production to measuring welfare, to try to close the gap between our measures of economic performance and widespread perceptions of well-being.

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