What you see and what you don’t see. Time to ditch GDP and measure our progress differently

The yardstick for the success of an economy is the measure of its Gross Domestic Product or GDP. It is essentially the sum of all goods and services that a country produces, corrected for seasonal fluctuations and inflation.

The modern concept of GDP was developed by Simon Kuznets for a U.S congress report in 1934. President Herbert Hoover had the challenge of tackling the Great Depression with only a mixed bag of numbers that were extremely ineffectual when trying to answer the question, “how is the economy doing?”

Over the next 80 years the GDP not only became the way in which politicians, journalists and the public measure the economy, it actually defined what the modern economy is.

So what’s the problem?

The problem with the GDP is that it pretty good at measuring the things that you can see but is terrible at measuring things that you can’t see. Therefore things that are easily measured like manufacturing and monetary transactions push the number up whilst advancement of knowledge, community service, clean air, are all pretty much ignored. Even worse, the social damage caused by an activity is not factored in negatively, in fact the transactions that relate to poor health, depression, pollution, societal breakdown like divorce lawyers etc. actually push the GDP up.

In his book Utopia For Realists, Rutger Bregman highlights this point humourously but with a large dose of dark truth.

“If you were the GDP, your ideal citizen would be a compulsive gambler with cancer who’s going through a drawn-out divorce that he copes with by popping fistfuls of Prozac and going berserk on Black Friday.”

The fact that a huge chunk of government policy is formed on the drive for growth at all costs based on a measure that rewards things like carbon polluting manufacturing, deforestation, over-fishing etc. goes a long way to explaining why we live in such an unequal society.

So what’s the answer?

Well, we don’t have to measure our economy and growth in the same way. We have to look deeply at what is valuable to our society and include these things in a reformed measure or set of measures.

The question President Hoover had to answer was “how is the economy doing?”, I propose the Liberal Democrats ask a new question, “How is the economy doing for its people?”.

There are already other measures that exist like the Genuine Progress Indicator (GPI) and the Index of Sustainable Economic Welfare (ISEW) which incorporate things like pollution, crime, inequality and volunteer work in their equations.

It is crucial to remember that just like the GDP, these alternatives are pick & mix bags of figures that can be taken out or added, and so it is a fantastic opportunity to ask voters what they find valuable and seek to create a measure that can inform our economic policy for the future.

* Darren Martin is the Press and Communications Officer for the Hackney Lib Dems.

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  • I agree with this.

  • nigel hunter 25th Sep '17 - 10:41am

    It is certainly good to cooperate with the voter by listing the measures in a questionnaire to indicate what they think.If this can be done nationally it could formulate an economic revolution for the next centuries development. As the GDP worked for last century we are now moving into a new era with new ideas.

  • Charlie Conlon 25th Sep '17 - 12:33pm

    Now to find a way to express it simply.

  • So? We have GDP and we have some measures which you approve of, so what’s the problem?

    You can judge things by these other measures and make the case that this is better, job done. But you seem to be advocating not collecting data so we have less information, never a good idea.

    For the example of divorce lawyers it doesn’t hold up to scrutiny. Divorce Lawyers are not the cause of divorce they are facilitating the dissolving of the legal structure of the relationship. The lawyers are involved due to there being a pre-existing problem a relationship that is unhappy and they are providing the facilitation to bring it to an end.

    If you think that the existence of divorce lawyers are a major problem there is one easy solution, ban divorce. Force people to stay in unhappy marriages till death. Not so keen on that?
    So now you see why a mechanism for enabling the dissolution is valuable to society. Now perhaps the way the divorce system is operating is bad for society and perhaps the incentives for layers are misaligned (having never worked in or studied it I have no idea of either). But the existence of this sector is not an externality, like pollution. It is like the existence of a recycling industry, one that looks to reduce the existence of an externality (dumped rubbish/bad marriages).

  • Steve Trevethan 25th Sep '17 - 2:57pm

    Thanks for an interesting and important article!
    Here are some suggestions:
    *Data presented using averages supplemented with modal data
    *Disposable Income data
    *Household debt data
    * Debt cost data
    *Food bank usage data
    *National wealth distribution data
    *The expression of incomes as proportions of essential job incomes [How many A & E nurses could we get for a BBC newsreader?]

  • David Evershed 25th Sep '17 - 3:10pm

    You can double the GDP by doubling the population – but on average the population is not more wealthy.

    GDP is better presented as GDP per head (productivity). Whilst we congratualte ourselves that UK GDP has grown over the past decade, GDP per head is no greater because productivity has not been increased.

    Wealth is only increased through higher productivity.

  • Why no mention of the happiness index http://worldhappiness.report/ed/2017/. The index is based on social foundations – caring, freedom, generosity, honesty, health, income and good governance
    Norway tops the poll for happiest country this year, closely followed by Denmark, Iceland and Switzerland and then Finland, the Netherlands, Canada, New Zealand, Australia and Sweden.
    The Chinese are, it seems, no happier than they were 25 years ago despite the enormous growth in their GDP; and American happiness has fallen precipitously in the last decade.

  • Andrew McCaig 25th Sep '17 - 6:03pm

    David Evershed
    I have no figures on this but surely a great deal of “wealth” in this country has been created by house price inflation?

    Which is why we need to make sure it is taxed, with some degree of redistribution to those not fortunate enough to inherit property…

  • @ Andrew McCaig

    We don’t need to tax homes; we should tax large amounts of wealth; we should not be against inheritance.

    Liberals should be concerned about power, if someone inherits their parent’s home this does not give them a large amount of power which liberals should be concerned about. If someone inherits the family business then perhaps a case can be made that their power has increased and we as liberals need to change the inheritance tax allowances to tax this inheritance.

    If we assume that every individual should be free to own their home, then they should be free to leave it to whoever they wish. A case could be made that everyone should earn the same amount of income and own their own home, but as liberals we do not advocate such total economic inequality but believe there should be some economic inequality. The question for us liberals is how much economic inequality is good and how to reduce inequalities but not abolish them completely.

  • Denis Mollison 26th Sep '17 - 8:44am

    @Psi – ref. divorce

    You’re mistaking the argument. The article’s point is that something that is a negative for society (a marriage breaking down) causes an increase in GDP (money paid to divorce lawyers). It’s not a criticism of divorce lawyers. Similarly, the imaginary person having cancer causes an increase in GDP through money paid to medical staff – which is equally not intended as a criticism of doctors.

  • Denis Mollison

    My point is the argument is utopian.

    Relationships breakdown, people become ill. The higher rates of cancer and Alzheimer’s are a result of, in part, our increased life expectancy. The massive strain on the NHS is because more of us live longer and have more effective (and more expensive) treatments to give us higher quality longer lives. These may be seen as a sign of bad things to someone who is complaining about the cost of treating cancer or administering divorce being in the measure of GDP. They are good problems to have, I prefer that we have to work out how to keep pensioners having high quality lives rather then not have the problem due to their premature death. The same with Divorce lawyers I prefer that we have the cost settling these things included rather than people stuck in relationships they can’t escape.

    If you want a measure of positive things, like how long we live; how many people live with satisfying relationships with partners, children and other relatives; how engaged with local community people are; how happy children are; etc. these are all worth considering but that is not a substitute to having a measure of economic activity.
    Those who focus on the criticism of GDP seem to be too obsessed with economic matters. I think many of the mechanisms to improve the mattes above will probably not be purely economic so why try and force everything in to one metric? You need multiple measures as you need multiple solutions to problems.

  • Geoffrey Payne
    “it would be good if divorce lawyers have less work because we have an education system that help men and women understand each other better and get on with each other more easily?”
    The solution to failing relationships is almost certainly going to be non-economic but I’m not sure the education system has the capacity to handle the myriad of solutions that are demanded of it by people. It’s easy to dump it at their door not so easy to say what an effective approach they can take is.
    Men and women understanding each other better may be a nice aim but personally I would start with helping people understand themselves properly first, then move on to other people. Experience suggests that those tasks are going to take a little longer than their time in the education system.
    “Changes like this […] are hard to monitor through economic statistics.”
    But why does anyone suggest that they should be measured this way? People live the idea of a single metric that shows how things are, but this is not how the world is, not least as we all have different priorities and therefore different weightings to different factors in any single metric. That is not to mention that an individual’s preferences are highly variable as well.

  • Those who focus on the criticism of GDP seem to be too obsessed with economic matters. Psi

    As GDP measures economic matters, it naturally focuses attention on economic matters. Additionally, people seem to have an inbuilt propensity to want to see lines on the chart always moving upwards; this year better than last year.

    I think governments treat GDP (and inflation indexes) as some form of success – just as businesses use revenues and profitability as measures of success.

    You can double the GDP by doubling the population David Evershed
    From calculations on the data presented in various pro-immigration reports, by simply importing circa 300,000 people net a year the UK economy/GDP grows by circa 0.5%. when you look back at the UKs GDP over the last 20 years, you start to appreciate why successive governments have been keen to maintain an open door policy whilst talking about clamping down on immigration; no one wants to admit that zero or even slightly negative rates of GDP don’t mean the economy is dying.

    Given the level of economic inactivity, we could probably lose circa 6m people and not see an appreciable change in our per capita GDP – however government would complain as its revenues would decline. Aside: given the Conservatives, pre-Brexit, were for a small state, you wonder why they were so keen on policies that provided monies for the enlargement of the state…

  • Chris Burden 26th Sep '17 - 2:43pm

    Excellent. Maybe you should also look at another way of thinking about economics, ‘Doughnut Economics’ by Kate Raworth (2017)?
    [This is a bit of a plug but for a really fresh and important way of looking at things. Forgive me.]
    Humanity’s 21st century challenge is to meet the needs of all within the means of the planet. In other words, to ensure that no one falls short on life’s essentials (from food and housing to healthcare and political voice), while ensuring that collectively we do not overshoot our pressure on Earth’s life-supporting systems, on which we fundamentally depend – such as a stable climate, fertile soils, and a protective ozone layer. The Doughnut of social and planetary boundaries is a playfully serious approach to framing that challenge, and it acts as a compass for human progress this century.

  • Chris Burden 26th Sep '17 - 2:46pm

    For ‘Doughnut Economics’ see https://www.kateraworth.com/

  • Peter Hirst 26th Sep '17 - 3:28pm

    We should ditch GDP and replace it with 2 or 3 other indices including productive gdp, happiness index and quality of life indexes. These should be decided by the electorate and we should also have regional indices. It is importance once we choose them we stick to them. Perhaps they should also tally with questions asked each census.

  • Roland
    “just as businesses use revenues and profitability as measures of success”

    Businesses do use these but most large businesses have quite complex dashboards that measure many variables that matter for their business (depending on industry). This year’s revenue or profit can be very misleading hence when they are looking at factors (depending on the industry) such as staff metrics, assets employed, investment rates, demographic shifts in the industry and the firm’s own customer base, public perception of the business and its brands, among many others.

    It is important to understand all the factors that are facing you if you are not just the easiest to calculate. I don’t think anyone would suggest that businesses should stop tracking revenue and profit because they don’t factor other metrics that would be measured differently.

  • Peter Martin 26th Sep '17 - 6:16pm

    “If you were the GDP, your ideal citizen would be a compulsive gambler with cancer who’s going through a drawn-out divorce that he copes with by popping fistfuls of Prozac and going berserk on Black Friday.”

    Whatever the right and wrongs of GDP as a measure of economic well being, the author of this quote is well wide of the mark.

    A compulsive gambler doesn’t contribute more to GDP. If he wins more and spends more someone else has to spend less and vice versa.

    A person who is sick is likely to contribute less to the national economy than a healthy person.

    Similarly if they have a drug problem or have violent tendencies to criminal behavior.

  • Darren Martin 26th Sep '17 - 9:25pm

    @Peter Martin
    The gambling industry generates tens of Billions a year in the UK economy which moves the GDP, a compulsive gambler is more likely to buy financial services like loans which move the GDP.
    Buying and selling medicines for sick people move the GDP.
    If somebody commits a crime, say breaking a window, somebody is then paid to fix the window which moves the GDP.
    I would say the quote from Rutger Bregman highlights the point of the article very well.

  • Psi – No problem, I’ve specified and built business dashboards and use one myself. I was merely reflecting how things get reported by the media – although in recent times it seems the media is more concerned about the amount of corporation tax paid than anything else… I’m sure someone with Whitehall experience could enlarge on the metrics that populate the governments dashboard – although I’m probably assuming too much expecting that the “board of UK plc” are that professional and organised…

    I don’t think anyone would suggest that businesses should stop tracking revenue and profit because they don’t factor other metrics that would be measured differently.
    Agree, however, what has been a big feature in recent years has been both the creation of new metrics and the public reporting on these metrics, on the basis that unless something is measured and reported upon, people don’t really pay it much attention.
    I think we are in agreement, ‘tracking’ GDP as part of a dashboard is important, being obsessed by it isn’t.

  • Darren Martin 26th Sep '17 - 9:31pm

    @Peter Hirst
    A set of measures is the way to go, but I have a feeling it would be impossible to stop the obsession with the singular measure of success people feel the GDP represents.
    Reforming the pick and mix bag that is the GDP allows us to begin that journey while still keeping the measure, as the conversation becomes more mainstream then it would be possible to move away from a single measure towards more of a dashboard of progress.

  • Peter Martin 26th Sep '17 - 10:10pm

    @ Darren Martin

    “If somebody commits a crime, say breaking a window, somebody is then paid to fix the window which moves the GDP.”

    If someone breaks your window, yes you’d have to pay to get it fixed. So you’ve less money to spend on something else. So if your spending ends up the same then breaking the window hasn’t increased GDP.

    If the damage is even greater than a broken window and say someone burns down your workplace then people lose their jobs and production falls. GDP falls too.

    The same argument applies to your other examples.

  • Darren Martin 26th Sep '17 - 11:24pm

    @Peter Martin
    I don’t want to spend too long talking about a window but I made the point to highlight the problem with your statement about crime. Essentially the points you are making confirm my argument, it may be the loss of money from paying for the damage of a crime outweighs the monetary gain from the persons employed to fix the damage, but there is still a positive movement from the crime taking place regardless of whether it is outweighed in the GDP measure or not, a sort of add and subtract and it depends on monetary value of the damage. Consider the insurance industry etc.
    That is the argument behind ‘the things you don’t see’ I refer to in the title.
    Consider the growth following the Japanese earthquake, a huge disaster is actually the best thing that can happen to the GDP as the huge investment and effort to repair the damage has a massive positive impact on growth that outweighs the negative impact caused by the deaths of tens of thousands of people.

  • Peter Martin 27th Sep '17 - 10:36am

    @ Darren,

    The best example you could quote is a major war. Then GDP rises very quickly as the Government intervenes in the economy to provide armaments for the war effort. The same thing happens in the other examples you quote. So no-one is saying that Governments can’t increase GDP, and just about eliminate unemployment – when they want to! I’d just argue that we don’t need to wait for a war to break out or for a natural disaster to occur for Govts to do that. There’s really nothing good or beneficial about wars or nuclear disasters. Or, at least there shouldn’t be, but the circumstances of the emergency force Govts to abandon their usually less than enlightened thinking about the ways economies work.

    There are problems with GDP. It’s better to use GDP per capita. Or GDP per capita based on purchasing power parity. (PPP). It also doesn’t capture everything in the economy. It doesn’t say anything about how the wealth is shared out. It doesn’t include non-monetary transactions. Like if you do someone a favour by looking after their child one day and they return the favour another day. If you each paid the other then theoretically that would add to add to GDP. If you were to include that in your tax return!

    So there are shortcomings, but so there are with everything. GDP is still a useful economic indicator.

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