My thanks to Tony Vickers for usefully setting out his take on the subject of GDP in last Friday’s Lib Dem Voice, Global Capitalist Economics: time to unmask GDP?. Here in response is my own take, which isn’t far from his.
I see the fundamental aim of any progressive movement to be the enhancement of human well-being, including that of future generations. A progressive government needs to recognise four preconditions for sustainable and enhanced well-being: a supportive physical environment, such as a stable climate, clean water and fertile soils; a healthy economy free from such scourges as poverty, squalid public services, uncontrolled inflation and high unemployment; security against a range of threats, including fire hazards, health hazards, storm hazards, empire-building tyrants abroad, criminals and psychopaths at home; and public support for what needs to be done to achieve what we want to achieve.
Growth in GDP shouldn’t be regarded as an end in itself, but it can help our well-being in some important ways, along with the money it puts into some people’s pockets. Firstly, it helps us achieve and maintain a healthy economy by enhancing our creditworthiness as a nation. Lenders and currency traders tend to look at our indebtedness as a percentage of our GDP. Growth reduces the cost of our borrowing.
Secondly, GDP growth enables additional spending on poverty relief and public services without more borrowing or higher tax rates, so boosting public support for the spending we think important for well-being.
Against that, increased GDP tends to increase greenhouse gas emissions. It’s sometimes possible to reduce the carbon intensity of GDP faster than we increase GDP itself. Can we do this fast enough to bequeath to our descendents a world that doesn’t render their lives nasty, brutish and short, yet at the same time grow our rich-world economies fast? Perhaps not.
I’m reminded of the maiden speech of one of our 72 MPs, Bobby Dean (Carshalton and Wallington). He said:
When talking about growth, let us remember that it has not only a rate but a direction, and that necessarily involves political choices and cannot be left to expert analysis alone. While the OBR can rightly describe what actions will increase growth and by how much, we in this House still have a crucial role to play in selecting what actions will meet all of society’s goals.
Investment in clean energy and energy conservation can be a driver of GDP growth. But we need to look beyond that driver to what gets driven. Think of the highly skilled installer of wind turbines who uses some well-deserved earnings to fly the family off for a week in Thailand. Can that family be offered attractive but cleaner ways of boosting its well-being?
We need to look at what strands of growth contribute most to well-being for the least damage to our environmental sustainability and security. How much of our economy is, to use Adair Turner’s term, zero-sum activity? Think of those who earn tidy sums helping wealthy clients to shift taxation away from themselves and on to everyone else.
Lastly, there is the issue of how much economic growth is possible, given our ageing population and the necessary growth of those parts of the economy, such as social care, where serious growth in productivity is difficult to imagine. We need to think of measures that can promote well-being whether or not our GDP grows.
* John Medway has been a Liberal Democrat member since the merger in 1988 and was an SDP councillor in Lambeth before that. He has an active interest in the economics of sustainability.
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My disagreement with this line of reasoning is that my experience tells me that most people aspire to be financially better off next year than they are this year, to be able to afford to have foreign holidays (or, if they already do, to have more expensive foreign holidays in more diverse locations), and to see their children enjoy a more prosperous lifestyle than they could afford in their lives. This aspiration requires, not just growth in GDP, but growth in GDP per head.
If our vision is to make people happier and more content with life without being financially better off, we are going to have a much harder sell than those parties offering greater prosperity (even if it turns out to be an illusion)
See this Monbiot article
https://www.theguardian.com/commentisfree/2025/jun/24/lower-thames-crossing-britain-addicted-infrastructure-projects
One thing we should be doing to get growth is considering the opportunity cost of doing whatever. In any economic situationto get the space to do the things that really matter, you have to not do things which might be appealing, but aren’t as good.
We do have a method for calculating which projects are worth doing, but it doesn’t semm to be properly applied to things like HS2 or Monbiot’s example, the Lower Thames Crossing.
@Jenny Barnes: Thanks for the link – I missed the article yesterday but I’ve now read it. What you say about looking at opportunity cost seems very sensible to me. Unfortunately I don’t feel I know enough about how decisions are actually made in government but I suspect, particularly with the previous government, that it’s more like what Monbiot suggests than any rational process.
@Mike Peters: I hope you’re wrong but I fear you may be right. I’m encouraged by William Wallace’s piece in today’s LDV – “Whatever happened to political leadership?”
Interesting discussion of the pros and cons and feasibility of economic growth. I feel economic growth is driven by technological innovation making goods and services cheaper to produce but nowadays that means the requirement of ever smaller workforce in the activity affected. There has to be some sort of government sponsored worker intensive activity such as the Health Service and care services for displaced people to be absorbed into and this should be seen as an investment rather than a current cost for the time being.
@Christopher Haigh: You are quite right when you say “I feel economic growth is driven by technological innovation making goods and services cheaper to produce but nowadays that means the requirement of ever smaller workforce in the activity affected” but that has been true since the industrial revolution, and we have never had mass unemployment caused by technology. On the contrary, when people have more money (because some things are cheaper) they spend it – and that creates jobs. Because we are richer, far fewer office workers make their own lunch and that creates jobs in sandwich shops. Because we are richer, people spend more on sorting out back pain, and that creates jobs in physios, etc etc
@Christopher Haigh and @Tim Leunig: Thank you both for your constructive engagement with my ramblings. Tim – good to hear from you again (apart from on the radio) and a big retrospective thank-you – it was you who encouraged me to do my MSc about 25 years ago and set me right on a few things thereafter.
Could the current GDP measurement set up be improved?
Why do we borrow as a nation when we have a sovereign currency and so can and do create our own currency?
Is any gap between government expenditure and tax receipts counted as borrowing?
If so, why?
Might we make socio-economic conditions more favourable to increase the birth rate?
Ditto immigration attitudes and management to accommodate “an aging population”?
@Mike Peters is right that most people aspire to be financially better off – so a no-growth message is not going to fly. But I think people would be receptive to a message that growth should be linked to quality of life and we want to focus on those forms of growth that actually help quality of life. That requires some leadership though to make that case (William Wallace’s article about leadership may be relevant here 😉 )
@Jenny Barnes: The problem with considering opportunity cost is that there are literally thousands of ways that you might spend a few £billion. So if before – say – building a new school, you had to look at all the possible alternative projects you could spend the money on, decisions would become totally paralysed. You can’t avoid that at some point, someone has to say, based on politics/gut feeling/our priorities/the information we have from business cases etc., I’m making a decision that we will build X instead of spending the money on A (or B, or C, or D…)
@Simon R: I agree that at the present time a no-growth message isn’t going to fly. However, suppose we find that what can be achieved through technology alone isn’t enough to prevent a climate catastrophe. Does that mean that catastrophe is unavoidable because people will always prefer a future catastrophe to anything that interferes with near-term rising material living standards? I’m wanting to get some serious risk management into our economic thinking and hope that we can offer the sort of leadership that will at least reduce the risk of catastrophe. Whatever we put to the electorate, as potentially powerful players I think we need to prepare in advance for the sort of issues that might face us perhaps sooner than we would like.
@Jenny Barnes: Yes, project appraisal can never be entirely rational. I’ve done a fair amount of it in my time, but on a small scale, for housing associations. Sometimes an opportunity cost approach made sense and sometimes not. I’ve never looked in detail of an appraisal of a multi-billion project like the Lower Thames Crossing but I would imagine that it wouldn’t be hard to find projects that offer a better ratio of benefits to costs.
Steve Trevethen: I’m better at asking questions than answering them so for now I’ll have to be selective on which of your questions I comment on.
On money creation (your second question) I’m now more cautious than I was when I first read about “Modern Monetary Theory” (MMT). That’s because our situation in the the UK is very different from that in the USA and Australia, where its main proponents seemed to hale from. The USA and Australia are rich in land and natural resources. We aren’t – except in the case of offshore wind and tidal power. Though we can create our own money, we have to use much of that money to pay for the things we have to buy from abroad. That means we have to buy foreign currency except where the places we buy from are keen to increase their reserves in sterling or buy lots of goods and services from us. So we are vulnerable to fluctuations in currency markets. Furthermore, the USA had, before Trump’s second term, the advantage of having the world’s main reserve currency. Commodities such as oil are priced in dollars. As a result, there was a huge demand for US dollars that was independent of the performance of the US economy. We don’t have that sort of advantage in the UK.
That said, I think there may be some scope for creativity in the way we manage money creation – the sort of creativity that got us through WW2 and its aftermath, when we brought in the NHS and the rest of the welfare state.
That, for what it’s worth with my present state of knowledge, is my take on the money creation issue. I hope that, as a party, we have access to people far more knowledgeable than me to address that and the other important issues you’ve raised.
On encouraging an increase in the birthrate, I was reminded recently that children are a cost to the Exchequer for the first twenty or so years of their lives, whereas adult immigrants tend to be productive from almost the word go.
@John: Yes, in principle if technology couldn’t avoid climate catastrophe then we should be honest (as the other parties should also be but probably wouldn’t) about what that means for growth. But I simply don’t buy that. The total energy consumed by the World’s population is not much more than one 10-thousandth of the energy the Earth gets from the sun, so there’s easily enough solar energy to provide much, much more than our current needs, even before you consider contributions from nuclear, geothermal, and improved energy efficiency.
Having said that, a sustainable future and good quality of life does require lifestyle changes, even with continuing economic growth: We need to recycle more, drive less (because cars are ruining our cities), exercise more (to avoid more and more of the economy being diverted to health and social care), and fly less (because we are no where near having any technology to allow long haul flights to go carbon-neutral). That’s something that requires careful messaging AND strong leadership to get people on board.
Many thanks to John Medway for his thoughtful response!
Might a root problem with the current G. D. P. set up be:
1) It does not include wealth distribution (How can a child starvation proportion of some 30% etc. not be relevant to representing our economic situation?)
2) It combines/ muddles the productive part of our economy i.e. practical input goods and services (Industrial Capitalism) with the extractive part of our economy (Rentiers, debt charges/payments etc. (Financial Capitalism)
Alas, since Margaret Thatcher our nation has moved away from the “Mixed Market Economy” which resulted in nil food banks and minimal starving children and beggars to the socio–economic mess of today.
P. S. The R. A. F. does not own the aircraft recently damaged at Brize Norton but only rents them.
https://www.craigmurray.org.uk/
@ Steve,
“Why do we borrow as a nation when we have a sovereign currency and so can and do create our own currency?”
If we consider fiat currency to be an IOU of government then writing out IOUs, the creation of currency, is effectively borrowing too. You can’t write out IOUs without creating debt. A different question is why Govt pays out interest. It does this to set interest rates in the market and encourage people to save with Government. If it wants to further increase its debt it should raise interest rates.
All this has a bearing on GDP and growth but only in the sense that Government has to fiscally and monetarily strike the right balance between having no growth and too much inflation. This is easier said than done.
@Steve: Not including wealth distribution is not at all a problem for GDP: Measuring distribution is simply not the purpose of GDP – it’s there to measure economic activity, and is a very useful measure of that. There are plenty of other measures of wealth distribution (GINI index for example, or proportion of people in relative poverty). If you want a measure of wealth distribution, then you should use one of those.
It would be good to have something that measures how ‘productive’ our economy is. I don’t think we have any obvious measure of that. Maybe trying to establish some new measure (to use alongside GDP) would be worthwhile?
We can’t just create money because the problem usually isn’t lack of money – it’s lack of resources (housing, energy, etc.). Creating money would just mean you have more money chasing the same lack of resources, which will usually just result in inflation, destabilising the economy without making anyone better off.
Simon R “The problem with considering opportunity cost is that [if] you had to look at all the possible alternative projects you could spend the money on, decisions would become totally paralysed”
My argument is that we should NOT do poor return projects, not that every possible alternative be considered. For example the current HS2 project from Old Oak Common to somewhere in Birmingham (£25bn) has an ROI of around £1.30/£, the original full HS2 project was around £2.5/£. The Lower Thames Crossing has and ROI of 50p/£ For Alternative example transport projects: Cycle schemes £4-£13/£
However
“I’m making a decision that we will build X”
because I get the opportunity to pose by it in a hard hat
seems to override these sort of considerations
@Peter Martin: As always, your contribution has the feel of a nail being hit squarely on the head.
I think there are interesting questions around the possibility of avoiding interest being paid by the government or the BoE – eg interest on BoE reserves paid only on a top slice of deposits by commercial banks, interest on bonds of a national investment bank bought by the BoE being paid to the Treasury as its agreed share of BoE profits, but I lack the detailed knowledge to appraise them properly. The latter issue might be relevant when there’s spare capacity in the real economy or if bond purchases bought by the BoE were balanced by an increase in the bank rate. I still sense that if we avoid the issue of raising taxes to remove excess liquidity from the economy, we can do little more than tinker round the edges of the problem of financing much-needed public expenditure, but I may be wrong on that.
@Simon R: I agree with your response to Steve on GDP as a measure. That’s not to denigrate Steve’s useful thinking that he’s put under the heading of GDP.
“But I simply don’t buy that. The total energy consumed by the World’s population is not much more than one 10-thousandth of the energy the Earth gets from the sun, so there’s easily enough solar energy to provide much, much more than our current needs, even before you consider contributions from nuclear, geothermal, and improved energy efficiency.”
My fear is that the will to make the necessary investments in good time may be lacking. For instance, I have the impression that the growth of renewable energy provision in China is enough to balance economic growth there but not enough for a rapid phase-out of its coal-fired power generation. It’s not just a question of cutting our emissions to zero. I’m expecting a big overshoot in emissions, necessitating enormous investment, and ongoing energy consumption, in removing CO2 from the atmosphere. The apparent priorities of Messrs Xi, Trump, Putin and Farage and Mrs Badenoch don’t offer me much comfort.
@ John,
It all makes more sense if we consider that the BoE is a part of the government. Then it really doesn’t matter whether or not the Treasury is paying interest to the BoE. It’s just the same as you or I moving money from one pocket to another.
Much of the difficulty, IMO, hinges on the way Govt debt is actually defined as opposed to the way it should be defined. The government buying or selling bonds is just the transfer of one type of govt IOU to another type of govt IOU. One with interest and one without. The debt should be, but isn’t, be calculated from the time the money is first created.
I would say taxes should be levied, and/or spending reduced, to reduce aggregate demand and so reduce inflationary pressures rather than due to any need to ‘balance the books’ or reduce liquidity.
@Peter
Thanks – yes – I agree.
@ Simon,
“……. the problem usually isn’t lack of money – it’s lack of resources (housing, energy, etc.”
This is exactly how I would put it. There’s nothing particularly wrong with MMT, per se, but many of its followers don’t seem to have got very far at all into the theory. They constantly make the points that governments can never run out of money and taxes don’t fund spending etc. There is a bit more to it than that!
That said, it would be good if politicians did consider the real resources which are available rather than always talking about projects being fully costed etc. There are obviously more spare resources in the areas of the UK which are economically depressed. On the other hand there is more money but fewer spare resources in areas which are doing well. So instead of constantly spending ever more money on infrastructure developments in the South East of England it would make more sense to spend it in other less well off parts of the UK.
All we are doing at the moment is encouraging a constant drift of the population into one corner of the country.
It’s a lesson the EU needs to take on board too. There are plenty of unused spare resources in the peripheral countries but the economics of the euro encourages everyone to move to Germany and the Netherlands!
I’m away now till late on 4th July and largely unable to post but thanks all for your comments so far.
@ John,
“That means we have to buy foreign currency except where the places we buy from are keen to increase their reserves in sterling or buy lots of goods and services from us”
The sellers have a problem if they want to continue a trading surplus with us. They don’t want to buy lots of goods and services because that would reduce or remove the surplus. They don’t want our currency to fall because that would reduce our ability to pay for their exports which would also affect their surplus.
They can’t have it both ways so they have to do what it takes to keep our currency afloat.
” So we are vulnerable to fluctuations in currency markets.”
All countries are. Though, the bigger the economy the less the vulnerability. The USA isn’t invulnerable but because they have a bigger economy…….
“Commodities such as oil are priced in dollars. As a result, there was a huge demand for US dollars that was independent of the performance of the US economy. ”
I would argue that it doesn’t make any difference what currency oil is priced in . The number is just a numeraire. For example a buyer in Germany, with euros, can easily arrange a sale with a seller in Norway, who would like krone. All they need is a calculator. No real dollars are required.
“I would argue that it doesn’t make any difference what currency oil is priced in . The number is just a numeraire. For example a buyer in Germany, with euros, can easily arrange a sale with a seller in Norway, who would like krone. All they need is a calculator. No real dollars are required.”
OPEC exclusively prices its oil in US$. Norway isn’t a member of OPEC, and so your hypothetical German buyer might well not need dollars, but the fact remains that the pricing of most oil in dollars is, as John says, very helpful to the US.
@ Daniel,
I know what you are saying is the ‘conventional wisdom’ but it still could be, and probably is, IMO, wrong. I would also argue that Norway’s non membership of OPEC is immaterial.
I have, though, to admit there is a small advantage. Americans don’t need calculators!
This video shows Warren Mosler making the same argument. He’s a lot smarter than me if his total wealth is anything to go by. 🙂
Although I would say that he could perhaps used Vietnamese Dongs rather than paperclips. Paperclips are not actually a currency.
“I know what you are saying is the ‘conventional wisdom’ but it still could be, and probably is, IMO, wrong. I would also argue that Norway’s non membership of OPEC is immaterial.”
In that video, Mosler says what matters is “the currency they want to save in”. Most countries keep quite large US$ reserves because they need it to buy oil. It is ~59% of global currency reserves, and OPEC’s dollar pricing is part of the reason for that (not the whole reason, but a good chunk)
Warren Mosler is right in saying that it matters what currency anyone chooses to save in but he isn’t saying that anyone needs $$ to buy oil. Right at the start he says OPEC countries will take anything. Of course they will. Just like you’ll take any currency if you sell anything internationally.
You’ll just need to know that you can swap the euros or yen, or whatever, for ££ if this is the currency you want to end up with.
@Peter and @Daniel – I confess that when I mentioned the pricing of oil, I was merely parroting what I assumed to be the conventional wisdom and, Peter, you rightly picked me up on this. But thanks, Daniel, for your link to the article about petrodollars. What I take away from all this is that petrodollars aren’t just about the pricing of oil but about insistance by some oil-producing countries, beginning with Saudi Arabia, that they be paid in dollars and not in other currencies. It’s that insistence, rather than just the pricing, that supports the dollar. So I’m inclined to agree with Peter that using the dollar merely as a unit of account (numeraire) probably has no direct economic impact. But I’m glad I now have some knowledge of what a petrodollar is.