Opinion: Are we valuing the right kind of growth?

Our economic system is built around the indicator of Gross Domestic Product (GDP). It measures how much we have produced as a country over a period of time. It does this by adding together the market value of what we have produced. As a result, an increase in the market value of what we have produced signifies that our economy is growing. But should it?

In the grand scheme of human history, GDP is relatively new. It was created to allow the US to better understand how to develop schemes to tackle the Great Depression and to measure the overall effectiveness of these schemes. It was never intended to be the dominant feature of economic policy, indeed on page 6 of the final report presented to the US Congress on national income, it’s inventor stated:

…no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.

GDP ‘values’ an incredibly narrow set of things. Crucially, GDP rates volunteering as irrelevant, if we all got together to build a house our efforts would contribute nothing to the value of the nation, but if we paid a company to do it, it would be valued. Consider the recent trends toward open source development of (among other things) computer software and we can see how irrelevant this notion has become.

Another downside is that GDP does not account for resource depletion; China created a ‘green GDP’ index in 2006. Under this index, growth in China would have been 3% lower in 2004 than it actually was. GDP as an indicator encourages unsustainable growth.

This needs to change, an economy simply built around how much we produce and consume (as long as we pay for it) is an economy built on a false premise. However, moving away from GDP will be difficult; indeed people have been calling for it for decades. Just two days after announcing his intention to run for President in 1968, Bobby Kennedy said on GDP:

…it measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans.

Several international institutions such as the United Nations, European Union and OECD have developed projects to look at alternatives. Of all the options I would argue for GDP to be adjusted. (The Wuppertal Institute has done a good study assessing the alternatives so far).

As the global financial system developed, GDP became the key indicator to compare countries and their economic wellbeing and growth against each other, peeling away from what has become the spine of our economic system will be difficult. However this difficulty shouldn’t dissuade us from attempting it – nor should we be frightened of the likely uproar for even suggesting it. Kuznets (the creator of GDP) reminds us:

Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.

We need to focus our efforts on defining the growth we want to see and why, rather than continue this deference to GDP. It is incredibly British to underestimate our worth, both individually and as a nation. But Britain can and should lead the debate in finally moving us away from GDP ‘growth’ as a target of our economic policy. As a party the Lib Dems should play a key part in this, to seek to end the conformity which has developed by pushing for change at all possible opportunities.

We should seek to value more than just the market value of what we produce.schemes to tackle the Great Depression and to measure the overall effectiveness of these schemes. It was never intended to be the dominant feature of economic policy, indeed on page 6 of the final report presented to the US Congress on national income, it’s inventor stated:

“…no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.”

GDP ‘values’ an incredibly narrow set of things. Crucially, GDP rates volunteering as irrelevant, if we all got together to build a house our efforts would contribute nothing to the value of the nation, but if we paid a company to do it, it would be valued. Consider the recent trends toward open source development of (among other things) computer software and we can see how irrelevant this notion has become.

Another downside is that GDP does not account for resource depletion; China created a ‘green GDP’ index in 2006. Under this index, growth in China would have been 3% lower in 2004 than it actually was. GDP as an indicator encourages unsustainable growth.

This needs to change, an economy simply built around how much we produce and consume (as long as we pay for it) is an economy built on a false premise. However, moving away from GDP will be difficult; indeed people have been calling for it for decades. Just two days after announcing his intention to run for President in 1968, Bobby Kennedy said on GDP:

…it measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans.

Several international institutions such as the United Nations, European Union and OECD have developed projects to look at alternatives. Of all the options I would argue for GDP to be adjusted. (The Wuppertal Institute has done a good study assessing the alternatives so far).

As the global financial system developed, GDP became the key indicator to compare countries and their economic wellbeing and growth against each other, peeling away from what has become the spine of our economic system will be difficult. However this difficulty shouldn’t dissuade us from attempting it – nor should we be frightened of the likely uproar for even suggesting it. Kuznets (the creator of GDP) reminds us:

Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.

We need to focus our efforts on defining the growth we want to see and why, rather than continue this deference to GDP. It is incredibly British to underestimate our worth, both individually and as a nation. But Britain can and should lead the debate in finally moving us away from GDP ‘growth’ as a target of our economic policy. As a party the Lib Dems should play a key part in this, to seek to end the conformity which has developed by pushing for change at all possible opportunities.

We should seek to value more than just the market value of what we produce.

* Chris Richards was a candidate for the London Assembly in May 2012 and is a Lib Dem activist in London. He blogs at www.chrisrichards.org.uk

Read more by or more about .
This entry was posted in Op-eds.
Bookmark the web address for this page or use the short url http://ldv.org.uk/32161 for Twitter and emails.

15 Comments

  • Andrew Suffield 14th Dec '12 - 2:27pm

    Agreed – that’s what I say every time the spectre of GDP comes up

  • Liberal Eye 14th Dec '12 - 4:53pm

    An excellent post – and yet another example of how the pursuit of targets perverts and distorts outcomes because targets are always (or almost always) based on very imperfect measures.

    However, we shouldn’t let this divert into a campaign for a different and somewhat better measure although I’ve no doubt that one could be found. The public is never going to have much time for a party programme built around the promise of “better statistics”. What we can and should do is identify the biggest failures and adjust policy accordingly. For instance, if A sues B at a cost of £1 million and B countersues A, also at a cost of £1 million that adds £2m to GDP statistically but it’s really a waste of resources (although very profitable for the lawyers involved).

    At the end of the day there have to be value judgements and we shouldn’t be afraid to step outside the straightjacket of the numbers to make them.

  • Good analysis and outline, on why GDP, as a measure of production, within society, is deeply flawed. And you are right in that we need to find a new measure that better represents the benefits to human wellbeing.
    By the way I’m getting a (404 Not Found ), on the Wuppertal Institute,.. a good study ,.. link.

  • Phil Wainewright 14th Dec '12 - 6:24pm

    Thanks Chris, a very well argued piece (although at present some of the text seems to be duplicated – cut and paste error?).

    I have never thought of it this way until your article prompted it, but measuring success on GDP alone is as absurd as measuring a business on total revenues without any consideration of profitability or other metrics such as customer acquisition cost as a proportion of lifetime customer value.

    People are not going to easily give up their attachment to GDP, but we should start looking at what other metrics to give greater weight to measuring alongside it.

  • Kirsten de Keyser 14th Dec '12 - 8:54pm

    very good piece and a difficult debate that’s so long overdue.

    While you’re at it Chris, why not look at how it can be that unemployment is going down, more people are employed in the UK than ever, yet output is static?

    Our practically non-existent investment in plant and machinery may provide a clue.

    The sooner we start majoring on Behavioural Economics rather than simply fitting convenient numbers into a grid, the sooner we can put “lies, damned lies and statistics” out of its misery.

  • “While you’re at it Chris, why not look at how it can be that unemployment is going down, more people are employed in the UK than ever, yet output is static?
    Our practically non-existent investment in plant and machinery may provide a clue.”
    Kirsten de Kayser has hit on a trend here with his observation on the link between employment, plant and machinery.
    When energy was cheap, distance and transportation didn’t matter, and upgrading your business with new more automated technology, was easier and cheap ( relatively ). Those energy costs are now increasing, and making manual handling, by a low wage workforce (here in the UK), the better option, rather than a vast capital outlay for the further automation of an existing business, or building expensive new facilities half way around the world.
    It appears the business model trend, of moving away from manual labour to more automation, is maybe, beginning to reverse. Production increase (GDP), has in the last few decades, been invariably a result, of new improved technology, and the aim at fully automating your business where possible.
    If this reverse trend is correct, it tells us that GDP in its present guise, will be in a low to flat line situation, for decades to come, because manual work is less productive than machine, on a per person basis. It also suggests that low skill, casual or part time, low pay work, (with all of its implications), is becoming the new normal, here in the UK.

  • ” Alternatively, badgered by economists, you take your fruit to market, sell it and buy someone else’s fruit instead. Good for GDP.”

    In fact, one of the key reasons for higher GDP in say, Northern European countries versus southern European countries is the marketisation of women’s (previously unpaid) labour in the home. So instead of previously home cooked food, for time reasons we now buy ready meals from the supermarket. Just one example.

    What the Liberal Democrats need to focus on are the things that make life more comfortable for everybody. Affordable high quality public transport, decent basic wages, safe and clean public spaces, easy availability of good quality, healthy food (plus the knowledge of how to cook it), good quality housing. These are the basic building blocks of a good quality of life.

    We need to think radically in order to secure them. What about, for example, diverting the massive housing benefit bill into high quality public housing schemes? How about finally breaking the taboo over rail renationalisation to make fares affordable again like they were before privatisation? We also need higher quality building standards and better regulation of the rented housing sector to ensure tenants get a better deal.
    There are plenty of other things we could be doing. How about free healthy cooking (and shopping) classes in areas with high obesity plus a chain of not-for-profit fruit and veg stores for poorer areas?

  • “It is of course better that people do find ways to avoid receiving benefits but it is not the prosperous economy that is keeping unemployment down.”

    Except that retail sales are rising, car sales are up 11% and retailers specialising in bigger ticket items like DFS and Carpetright are now seeing their trading improving, which is always the first sign of a cyclical upturn. Behind the jobs market improvement, there is also a solid trend of rising average hours worked, up 2.6% on last year, which is very healthy growth, even compared with pre-2008.

    I’m not saying everything’s rosy, but there are definitely some firm signs that UK households’ finances are slowly beginning to mend, despite all the pressures.

  • Nigel Jones 15th Dec '12 - 9:02pm

    I think this is a brilliant piece that needs to be developed as the basis for some radical long-term policymaking in our party. It could be put together with the piece by Geoff Crocker (LDV 10th Dec) who highlighted the gap between disposable income growth and GDP.
    The other major issue is the distrbution of the benefits of economic growth which seem to become less and less fair. For the sake of the planet, people’s happiness and real quality of life we should consider slower ‘economic growth’ as measured at the moment, but more of it benefitting the less well off and those currently marginalised by society. This would also encourage them to play a bigger part in economic activity, thus helping us all.
    Cllr. Nigel Jones

  • The goal should be economic freedom, not economic growth. People (particularly on the right of politics) who use GDP growth as an expedience-based justification for freedom rather than recognising economic freedom as an end in itself actually make very poor advocates for people who want to be free. When some issue like early retirement or part-time working comes up which doesn’t suit the GDP growth motive then they end up as opponents of freedom.

    The biggest enemy of freedom is politicians who want people to want things. For example if I want you to want to be teetotal, then I may have a tendency to try to restrict your freedom to drink. The use of GDP statistics pre-supposes particular priorities on the part of the population which is not the business of a politician – basically they are suitable for politicians who want you to want to be a consumerist. An interesting alternative to the current employment statistics would be to ask people how many hours of paid work they would like to be doing per week. We could then also measure the level of overemployement (people who would rather be working part-time but can’t find anything like their full-time job).

  • Michael Parsons 16th Dec '12 - 11:57am

    I( agree – GDP ignores unpaid services which could be included as an imputed income flow. Among other things this discriminates against women who are “unproductive” when providing home services worth £hundreds per week, but suddenly counted if they scrub the local bank’s steps! Also the retired, who may well be highly productive once liberated from management.

Post a Comment

Lib Dem Voice welcomes comments from everyone but we ask you to be polite, to be on topic and to be who you say you are. You can read our comments policy in full here. Please respect it and all readers of the site.

If you are a member of the party, you can have the Lib Dem Logo appear next to your comments to show this. You must be registered for our forum and can then login on this public site with the same username and password.

Your email is never published. Required fields are marked *

*
*
Please complete the name of this site, Liberal Democrat ...?




Recent Comments

  • User Avatarjohnmc 25th Oct - 12:29am
    Well if Liane Wood is to be believed there will be an SNP/Green/Plaid bloc next time and they will likely hold the balance of power....
  • User AvatarEddie Sammon 25th Oct - 12:27am
    I just want to make a quick point that if you try to set up a business in some sectors then it really doesn't feel...
  • User AvatarMatthew Huntbach 25th Oct - 12:26am
    daft h'p'orth Yet all I see is loads of people playing politics. Who cares about politics, ultimately? Russell Brand is the dilettante’s dilettante. Brand is...
  • User AvatarMatthew Huntbach 25th Oct - 12:19am
    daft ha'p'orth I would like somebody to stop spinning for long enough to admit that there is a problem and to reach out for a...
  • User AvatarMatthew Huntbach 25th Oct - 12:16am
    Graham Evans For instance, the the differential between the average CEO and the shop-floor workers may have an impact on people’s sense of fairness, but...
  • User AvatarMatthew Huntbach 25th Oct - 12:06am
    daft ha'p'orth Said solution does not have to involve giving large loans to mature students. Maybe it involves mail-order courses. Maybe it involves MOOCS. Maybe...