GDP: A Flawed Measure of Progress

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Gross Domestic Product (GDP) has many deficiencies as a measure of economic well-being. Most often noted is the fact that it can only add, which means it makes no distinction between beneficial and harmful economic activity. Gun sales to children, divorce, and oil spills all generate new economic activity and all count as additions to GDP. Accelerating the depletion of precious nonrenewable resources like oil and coal accelerates GDP growth even as it destroys the essential resource on which that growth depends.

Others note that beneficial activities based on caring relationships rather than on financial transactions count for nothing. Parents who care for their own children contribute nothing to GDP. Those who hire a nanny or place their children in day care do. In substantial measure, GDP growth measures the rate at which home production and relationships of mutual caring are being eroded and replaced by market relationships.

Then there is also the fact that GDP takes no account of how income is distributed. There could be complete income equality with everyone's purchasing power growing equally. Or the society may be divided between a small minority of the extremely affluent and a majority of the extremely destitute---or anything in between. GDP gives no clue one way or the other. Growth in the incomes of a few billionaires can produce impressive growth in GDP even as a majority of people starve.

Underlying all these deficiencies is the simple fact that GDP is based on market transactions, which means GDP is a measure of the rate at which money is flowing through the economy. Anything that increases the flow is therefore treated as a positive, even if it is clearly a negative for the society. Furthermore, because money metrics make no distinction between phantom wealth and real wealth, activities that generate profits from purely financial transactions unrelated to the creation of anything of real value count as additions to GDP and presumably to national well-being.

That is why restructuring the economy to shrink the manufacturing sector and grow the financial sector could appear to make us richer as a nation, when in fact it reduced our capacity to produce real things in favor of giving priority to generating profits from the exchange of worthless financial assets. It is why the World Bank can celebrate moving people from subsistence farming communities in which they have no need for money to urban slums in which they struggle to survive on minuscule incomes of a dollar a day as progress even though it means people are giving up lives of marginal sufficiency for lives of desperation and violence.

Any financial measure has the potential to introduce serious distortions into our assessments of economic performance, which is why there is a strong case to be made for using indicators of human, social, and natural system health to assess economic performance makes more sense than using financial indicators like GDP. A reduction in GDP may be a positive indicator that caring relationships are being restored, fewer toxins are being emitted into our air, land, and water, and the resource depletion is slowing---all of which contribute to real well being.

So in summation, because we get what we measure, let us measure what we really want.