GDP E-Book

Ehsan Masood

• Herausgeber: Icon Books
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 374

Veröffentlichungsjahr: 2021

Beschreibung

'[A] tale of cloak and dagger intrigue, intense rivalries and political machinations you'd expect in a spy thriller.' Engineering & Technology Gross Domestic Product is failing. For decades it has rewarded environmental destruction and obscured inequality. Its formula can be-and has been-gamed to the detriment of developing countries. In this powerfully argued book, now updated with a new chapter, science writer Ehsan Masood shows how GDP fell from the path envisaged by its architects, and how its long-term misapplication has kept large parts of the world in poverty, while helping accelerate global warming and biodiversity loss. As the world rebuilds after the coronavirus pandemic and the accompanying global recession, our need for a more sustainable and inclusive measure of economic growth has never been greater. Change must come if we are to break the cycle. With clarity and passion, Masood shows how we can update GDP for a better future. [previously published as The Great Invention in North America]

Leseprobe

Praise for the first edition

“If you ever thought that economic policy could never make for gripping drama, try reading this book.”

— Khurram Husain, Dawn

“Masood covers decades of challenges to GDP conventions that make for a fascinating institutional and human story.”

— Diane Coyle, Nature

“Masood’s highly readable book is a useful reminder of what GDP is and what it isn’t.”

— N. Gregory Mankiw, Science

“Ehsan Masood unveils the genesis of GDP and how it shaped the modern economic paradigm. It comes at a time when a growing number of people are questioning this flawed metric.”

— Down to Earth

“Fascinating. Whether happiness should be embedded into decisions on the economy is an important one, and whether GDP should be abandoned in favor of something better is too. Masood’s book helps raise those questions and others in a thought provoking manner. That’s much needed in every endeavor these days, and needed in few places more than in the economics profession.”

— Simon Constable, Forbes

“In lively prose, Masood argues that GDP is flawed because it ignores volunteering, housework, environmental degradation, job satisfaction, and income inequality.”

— Kirkus Reviews

ii“An interesting book. Masood doesn’t merely criticize the overreliance on GDP: he also explores ongoing efforts to develop a satisfactory substitute or supplement that would yield a more accurate picture of economic activity and its effects.”

— Foreign Affairs

“Masood contends that GDP is a bill of goods the developed world foisted on emerging nations. It is flawed, he argues, because the monetary value of all goods and services produced in a country makes no reference to social well-being or inequality. Masood is also troubled by GDP’s failure to consider the environmental damage that is, at times, a byproduct of growth. Many of Masood’s criticisms have merit. He presents some interesting alternatives. He favors revolutionary change.”

— Roger Lowenstein, Wall Street Journal

“After reading it you’ll never be able to treat GDP seriously again.”

— Nicholas Stuart, Sydney Morning Herald

“An important and interesting book that shows how trapped we have become by the idea of Gross Domestic Product—and reveals how important it is to develop alternatives that will help us reduce inequality and respond to climate change.”

— Kate E. Pickett, PhD, Professor of Epidemiology at the University of York and co-author of The Spirit Level: Why Equality is Better for Everyone

“The writing is effortless and intriguing. Like a novel, it weaves personal stories and the significance of individuals into a narrative about tectonic shifts in world politics.”

— Maria Ivanova, Associate Professor of Global Governance at the University of Massachusetts Boston, and author of The Untold Story of the World’s Leading Environmental Institution: UNEP at Fifty

iii

v

In memory of Mahbub ul Haq (1934–1998)

Contents

Title PageDedicationPreface to the Second EditionPreface Prologue:Lost HistoryIntroduction:The Great InventionOne:GDP and Its DiscontentsTwo:The Fight for the FormulaThree:Made in CambridgeFour:The Karachi Economic MiracleFive:Red Star Over Central SquareSix:The Talented Mr. StrongSeven:“As Vulgar as GDP”Eight:Exporting Shangri-LaNine:$33 Trillion ManTen:Stern LessonsEleven:“Nothing Is More Destructive of Democracy”Epilogue:Unfinished Revolution A Note on SymbolsAcknowledgmentsBibliographyIndexAbout the AuthorCopyright

ix

PREFACE TO THE SECOND EDITION

The world of 2021 seems barely recognizable from 2016 when the first edition of this book (under its original title The Great Invention), was published in the United States.

As I write this (at the start of 2021), the coronavirus pandemic has taken close to 2 million lives and infected nearly 100 million people, and continues to decimate economies. Most of the world, with the exception of East Asia, is in some form of lockdown. Hundreds of millions, especially the lowest-paid workers in service industries, have become jobless. City-center offices lie empty. Hospitals are struggling to cope. Children are forced to stay at home while schools remain closed.

Although vaccines have arrived, it will take at least two years to vaccinate the world. In the meantime, the International Monetary Fund estimates a fall in global Gross Domestic Product (GDP) of more than 4 percent during 2020,1 a level of drop not xseen for at least a century. So many of the gains that have been made in lifting the poorest out of poverty stand at risk of being wiped out.

GDP is a count of a nation’s economic activity. It is calculated by a country’s national statistical office and includes what consumers spend in the shops, and what businesses and governments invest. GDP is a highly technical process, but eagerly anticipated and followed by a much wider group of non-specialists, including politicians and the public, along with economists, financial analysts, fund managers, and the media. The quarterly announcement of the latest data ranks as one of the great rituals of modern economic and political life. If GDP is more than in the previous three months, governments breathe a sigh of relief, but if GDP drops, or if even if it stays the same, the result can, potentially, be terminal for whoever is in power.

With economies in freefall, that is the pressure every government is now under. To boost economic activity—and therefore GDP—many countries’ leaders have turned to the 1940s playbook of the English economist John Maynard Keynes (see Chapter 2). Business investment tends to be low during an economic downturn, so Keynes recommended a boost to government investment in such times to take up some of the slack. The ambition was to protect existing jobs where possible, and invest in big capital-intensive projects to create new ones. That is what countries are doing, in the expectation that doing so will create higher growth as measured by GDP.2

But there are important differences between today’s world and that of Keynes. Today’s industrial development must be weighed against environmental costs. The industrialization of the past few centuries has pumped enough carbon dioxide into the atmosphere to put the world on track to dangerous global warming. At xithe same time, a sixth mass extinction3 is becoming more likely as humans continue to encroach into nature to build more homes, new railways, and entire new cities—simultaneously increasing the risks of zoonotic diseases such as COVID-19.4

All of this means that economic recovery needs to be greener if climate change, biodiversity loss and future pandemics are to be avoided. But the problem with measuring economic activity using GDP is that it rewards traditional, fossil fuel-powered economic development. In contrast, greener development takes longer and cannot be achieved in the time it takes for governments to sanction what are called ‘shovel-ready’ projects that can deliver faster growth. Faced with this choice, most governments are opting for the more traditional route: roads, housing developments, airports are all being green-lighted, regardless of whether the means to achieve development are credible, or sustainable.

Researchers increasingly are questioning whether GDP is fit for purpose: if the world is at risk of ecological grief, why are we still following its formula, they rightly ask.

In The Value of Everything, Mariana Mazzucato of University College London illustrates how GDP incentivizes those economic sectors that will push the index ever higher, regardless of whether they are causing planetary harm, or widening inequality.

Meanwhile, Diane Coyle of the University of Cambridge and Benjamin Mitra-Kahn of Australia’s Intellectual Property Office have a two-step proposal. Firstly, to amend GDP by incorporating what it currently undervalues5 and then to move away from using GDP and instead valuing different kinds of “capital,” including human capital and natural capital as well as financial capital.6

A joint US–China team of researchers—Zhiyun Ouyang of the Chinese Academy of Sciences, Gretchen Daily of Stanford xiiUniversity, and Jack Liu of Michigan State University—have been involved in implementing a concept they call Gross Ecosystem Product,7 in which the value of the natural world is quantified in dollars and cents, so that the world knows what it is losing each time something like a forest or a wetland is cleared to make way for industrial activity. Even the venerable Financial Times of London recently weighed in with an editorial calling for a new approach to growth.8

The critiques will continue, and in time it is possible that the idea of running an economy from a single number will be replaced. But this is unlikely to happen soon. An important reason for that is the ascent of China as a world power; a second reason is that change needs international agreement.

China’s peoples are ready to reclaim their place as members of a respected world civilization—escaping the yoke of what they have long called their “century of humiliation” at the hands of the Western powers through wars and colonization. When judged by GDP, China is currently second only to the United States, and researchers are projecting that the country will take the top spot and become the world’s richest economy inside the present decade.9 China’s statisticians are unlikely to agree a wholesale change of the rules before that happens.

The paradox here is that China’s people and its policy makers have a depth of awareness of GDP’s limitations that is not matched in the developed countries of the northern hemisphere, as I’ve seen during my visits to China to give talks and in meetings with government officials, academic researchers and think tanks. China’s dash to industrial growth has had severe environmental consequences, which have been impossible to ignore, and the finger of blame has been pointed in the direction of GDP. In that time, GDP has also seeped into mainstream popular xiiiculture—Li Dakang is the growth-target-obsessed local Communist Party official in a popular TV soap, In the Name of the People.10

A decade ago, China’s government even came close to implementing a ‘Green GDP’—a version of the index that takes account of the environmental impacts of economic activity.11 But the central government held back, partly because such an action would have put China out of step with global national accounting conventions, just as it was poised to become the world’s GDP-topping country.

The arguments for GDP to be replaced, or for it to stop being used, are powerful and compelling, but if that happened it would also mean losing GDP’s strengths alongside its weaknesses—and GDP does have important strengths that need preserving. One of these is that it is set according to internationally agreed rules.

GDP’s rules are set through the United Nations System of National Accounts (SNA). The rule-setters have not been oblivious to the critiques, or to developments in China. They can see that evidence is accumulating, and one of the biggest developments since this book’s first edition is that they are preparing to take action. It’s hard to overemphasize the importance of this.

Historically, the rules of GDP have been weighted in favour of the priorities of the richer countries, as economists Jacob Assa and Ingrid Kvangraven show in a paper just published.12 The rules were set at a time when experts and policy makers from Europe and the United States were in a stronger position to set terms for the rest of the world. But GDP’s rules are reviewed xivperiodically and a process exists in which researchers from all UN member states have a voice to propose how GDP can change.

Discussions on the next revision to GDP have just started and are due to be finalized in 2025. Researchers and delegates from the developing countries are now much more involved than was previously the case. Moreover, for the first time, the rule-setters will consider how GDP could best take account of the environment.13 Including the environment in GDP will compel governments to think twice before implementing environmentally harmful policies. And that will be no small achievement.

Of course, it isn’t right that the world’s economies are run like a car with one instrument, as Amartya Sen famously observed (see page xxviii). And it is far preferable for top policy makers to be able to recite more than one number. But change needs to be inclusive, and those advocating for change must find a way to ensure accountability for what comes next, ideally by working through a multilateral process. It cannot again be a case of expertise from the richer countries dominating over that from less developed ones. Expertise resides everywhere. As we’ve seen in the current pandemic, best practice in eliminating the virus has mostly been found in the countries of the southern hemisphere. The SNA process provides a route for all countries, rich and poor, to have an equal stake in deciding how the world’s economies should measure what matters. Change, whether evolutionary or revolutionary, must be inclusive and accountable, too.

I am grateful to Duncan Heath and colleagues at Icon Books for publishing this second edition, which also includes a new chapter on GDP and the Cold War (Chapter 5: “Red Star Over xvCentral Square”). I would also like to acknowledge Deborah Blum, Bettina Urcuioli and Victor McElheny of the Knight Science Journalism Program at the Massachusetts Institute of Technology in Cambridge; MIT’s inspirational archivist Nora Murphy; and John Durant, Deborah Douglas and colleagues at the MIT Museum. I was a Knight Fellow during 2017/18, spending a memorable year researching this chapter and making a BBC Radio 4 documentary, Surviving McCarthy, on the scientists who found themselves caught in the net of McCarthyism.

This second edition is dedicated to the late, great David Corcoran, long-time science editor at The New York Times, who was my project adviser at MIT.

Readers are encouraged to get in touch using any of the following ways: I tweet from @EhsanMasood; I’m on LinkedIn at www.linkedin.com/in/ehsan-masood/; or if you prefer 20th-century email, you can find me at [email protected].

207NOTES

1. IMF World Economic Outlook, October 2020: https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020#Full%20Report%20and%20Executive%20Summary (accessed 21 December 2020).

2. Working paper from Martin de Ridder of the University of Cambridge: http://covid.econ.cam.ac.uk/de-ridder-government-expenditures-during-coronavirus-pandemic (accessed 17 December 2020.

3. G. Ceballos, P. R. Ehrlich, P.H. Raven, “Vertebrates on the brink as indicators of biological annihilation and the sixth mass extinction,” Proceedings of the National Academy of Sciences, June 2020, 117 (24) 13596–13602; DOI: 10.1073/pnas.1922686117 (accessed 4 January 2021).208

4. For an assessment of the relationship between biodiversity and pandemics, see this review from the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (accessed 4 January 2021): https://ipbes.net/sites/default/files/2020-12/IPBES%20Workshop%20on%20Biodiversity%20and%20Pandemics%20Report_0.pdf.

5. Jonathan Haskel and Stian Westlake explain how economic growth metrics undervalue the tech giants’ contributions to growth in their book Capitalism Without Capital (Princeton, NJ: Princeton University Press, 2018).

6. D. Coyle, B. Mitra-Kahn, Making the Future Count, Indigo Prize-winning essay, 2017: http://global-perspectives.org.uk/wp-content/uploads/2017/10/making-the-future-count.pdf (accessed 12 December 2020).

7. G. Daily, J. Liu, Z. Ouyang et al, “Using Gross Ecosystem Product to Value Nature in Decision-Making,” Proceedings of the National Academy of Sciences, June 23, 2020, 117 (25), 14593–14601: https://doi.org/10.1073/pnas.1911439117 (accessed 12 December 2020).

8.The Financial Times, December 23, 2020, “Time for a New Approach to Growth”: https://www.ft.com/content/a790e713-d942-438d-885c-6b393e97e0e4 (accessed 1 January 2021).

9. See for example World Economic League Table from the Centre for Economic and Business Research: https://cebr.com/service/macroeconomic-forecasting/ (accessed 1 January 2021).

10.The Economist, May 13, 2017, “In the Name of GDP: In China, a TV soap on corruption attracts a mass following.”

11. Wang Jinnan, “Revive China’s Green GDP Programme,” Nature, 534, 37 (2016): https://www.nature.com/articles/534037b (accessed 12 December 2020).

12. Jacob Assa and Ingrid Harvold Kvangraven, “Imputing Away the Ladder: Implications of Changes in GDP Measurement for Convergence Debates and the Political Economy 209of Development,” New Political Economy, 2021; DOI: 10.1080/13563467.2020.1865899 (accessed 10 January 2021).

13. United Nations Statistical Commission Report on the 51st session (March 3–6, 2020), Economic and Social Council, Official Records, 2020, Supplement No. 4: https://unstats.un.org/unsd/statcom/51st-session/documents/2020-37-FinalReport-E.pdf (accessed 12 December 2020). If, for example, a housing developer has cleared a forest to build homes, the government will need to do two things when including this in GDP. Firstly, as expected, it will add up the economic value of the new homes, which usually leads to GDP going up. But, for the first time, it will also need to subtract the value of all those previously free services that the forest would have provided to humans, such as the value of water purification, carbon capture, and the value of the forest as a place of recreation. This second calculation is likely to reduce GDP.

xvii

PREFACE

This book tells the story of how a little-known formula emerged from the embers of the Great Depression and World War II to become the global standard for how to run an economy.

The story is told through the remarkable people who made it happen and those, equally remarkable, who foresaw trouble ahead. They were, in each case, the children of war and poverty, but they had a single-minded determination to create a better, more prosperous, more equitable, and more peaceful world than the one they had been born into. They had radically different ideas on how to go about it. And by and large, the ideas of only one group, those who wished to keep the status quo, prevailed.

My interest in the topic was sparked more than thirty years ago in a school economics class in Karachi where our teacher1 introduced GDP by scribbling six symbols with white chalk on xviiia slate blackboard. A few months later, in another economics class, this time in London, a different teacher scribbled the same symbols.

I remember wondering why the economy of one of the world’s poorest countries, which at the time was also run by a military dictatorship, could be judged in the same way as one of the richest. I resolved to one day find out, and this book is the result of that quest.

Although this book draws on economics, history, politics, and science, it is not principally a work of history or of science; nor is it a textbook of macroeconomics. There are many and better accounts of what GDP is and how it is compiled.2 There are also more comprehensive studies of economics and the environment—many referenced in the notes at the end of this book. GDP instead presents a narrative account, though one that is based mostly on authentic and sometimes neglected source materials, together with the results of hundreds of interviews. These have been conducted over nearly two decades during the course of my working life as a journalist navigating the boundary between science and policy.

GDP is an idea that began with good intentions but has undoubtedly outlived its usefulness. The answer, however, is not to abandon it, as some are advocating. More than anything, I want to show that GDP can change—and change so it can measure the things that matter. Indeed, it must if we are to begin to reverse many of the problems that have beset our societies, including rising inequality and possible environmental collapse.

What began as a useful measure to assess a country’s prosperity and then measure it against its peers has trapped our societies and our leaders into a system from which we are unable to free ourselves. We must, and this book shows how we can.

NOTES

1. My Pakistan economics lessons took place in a small, newly opened independent college called the Centre for Advanced Studies, established by the radical education reformer Sami Mustafa. Mustafa had come back to Pakistan after a spell studying and teaching in the United States, determined to make a difference in an otherwise lackluster education system. His college is still going strong.

2. In GDP: A Brief but Affectionate History (Princeton, NJ: Princeton University Press, 2013), Diane Coyle, professor of economics at the University of Manchester, says that GDP can be measured in three ways. The first is by adding up everything that an economy produces. The second is by adding together spending (or expenditures). The third method is to calculate incomes. Offices for national statistics in most 210countries will report on the results of all three methods. In the 1930s, Colin Clark and Simon Kuznets favoured an incomes approach. Much of the global media at the time of writing concentrates on the expenditures approach. This book will do the same, that is to define GDP as the sum of all that is spent in the domestic economy, unless specified otherwise. Occasionally, readers may see the letters GNP, or Gross National Product. The difference between GDP and GNP is that the latter also includes economic activities of national entities overseas. In many countries, including the United States, the difference between the two can be significant.

xix

Prologue

Lost History

This is your heritage. Original documents are now in your hands. If they are damaged or lost, they cannot be replaced and a piece of history will be lost.

—Notice in the research room, National Archives and Records Administration, Washington, DC

It is late spring 2014 in Washington, DC, a couple of days before the National Cherry Blossom Festival and I’m standing on a windy Pennsylvania Avenue outside the offices of the US xxNational Archives. This giant of a building, a colossus of concrete and Corinthian columns, holds America’s founding documents. Visitors from all over the world come here to catch a glimpse of the Declaration of Independence and the Gettysburg Address.

In the course of writing and researching this book, manuscript tourism has become something of a passion of mine, too. But I was here to look for a much less famous, indeed forgotten, piece of American history. I say “forgotten” because when I inquired from London some months earlier, the archivists weren’t certain that they had the document I was looking for.

The paper in question is the first comprehensive listing of America’s national income. It is called National Income, 1929–32; published at the end of January 1934, it was commissioned by a committee of the US Senate a year earlier. The task was handed to a talented young economist who had emigrated from Russia. For Simon Kuznets, National Income would be the job that would define the rest of his career. But it would also eventually estrange him from later US administrations. He would become an outsider to a process he helped create, in spite of later securing the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, commonly known as the economics Nobel prize.

There are copies of Kuznets’s document circulating online, but I wanted to view the original.

A solitary policeman greeted me at the front of the building. “Hello, I’m visiting from London, and I’ve come to view the first edition of the US national income,” I explained, a little tentatively. He took a quick look at my bag and waved me through to the reception area, a cavernous space devoid of much natural light where I waited by a desk occupied by two of his colleagues.

I repeated my request, and after several phone calls to staff in different parts of the building, I was sent to a fourth officer. At xxithis point I was beginning to wonder if they would let me through, when the police officer loudly said, “Belt.” Nervously, I started to remove my belt. The officer broke into a smile and pointed to a small conveyor belt where I was to place my jacket and laptop. I had been cleared by security and was allowed to proceed.

With the security ritual over, I passed through a set of giant metal double doors, into an elevator that took me to the fifth-floor Research Room. There in a box file I hoped to find Kuznets’s original document.

There was a six-page summary typed in the familiar Courier font of the time, double-spaced on paper only slightly yellow with age. The box also contained memos from the office of Senator Robert M. La Follette, who had commissioned the report, as well as letters from organizations asking the report’s publishers for copies.

But the original document was missing. To this day no one knows where it has gone.

xxiii

Introduction

The Great Invention

Washington, DC, December 7, 1999: members of President Bill Clinton’s economics team were assembled for a press conference to announce the US government’s achievement of the century. The once invincible Federal Reserve Board chairman Alan Greenspan was there, as was Clinton’s top economics adviser, Martin Baily; Commerce Secretary William Daley and Undersecretary Robert Shapiro were in the audience too. As the identity of “one of the great inventions of the 20th century”1 was revealed, the only notable absentee was Clinton himself.

As US government agencies go, the relatively small Commerce Department is responsible for a collection of critical xxivgovernment-run services, every one of which could have been a contender for the top prize. It is responsible for patents: the department issued 6 million of them in the 20th century (compared with 600,000 in the previous two centuries combined). It also developed the census and introduced the US National Weather Service. “We built the first atomic clock and we had a hand in creating the 911 emergency phone number,” Daley said. “We are the smallest of the cabinet agencies, but we have accomplished the most—in my unbiased opinion,” he added, injecting some humor into what could have been a very dry affair.2

But the Commerce Department’s achievement of the century would be something else, something that one might ordinarily struggle to describe as an invention. The department’s achievement of the century was a simple formula consisting of six letters: the formula for gross domestic product, or GDP.

“Think of it this way,” Daley added. “A doctor can only make a diagnosis and prescribe a treatment after first sitting down and piecing together all the test results that have been taken. And economic policy makers are very much like doctors. So what the GDP accounts have done is to give us the tools to make those critical decisions.” GDP, Shapiro would add, is “a living, growing monument to the ability of American economic genius.”

Governments from the earliest times have wanted to count and measure that which falls in their domain of influence. They have sought to map the distances between towns and cities; they have looked for ways of quantifying the nation’s stock of natural resources, such as water and fossil fuels. Governments also like xxvto know how much their citizens earn, so that they can levy the appropriate amount of tax.

But before Simon Kuznets’s 1932 report on national income, governments in the Western Hemisphere had a weaker grip on this kind of knowledge. Unlike the more centrally planned states in the Soviet sphere of influence, countries such as America and Britain knew less about what their citizens earned, or the state of their economic production and consumption. At the same time, there was no agreed method to work out how much money was coming in and how much was being spent by the state. Countries didn’t know with precision how much businesses were producing, nor did they have much of a sense of consumption patterns. This is what GDP was partly intended to fix. Forged in the fires of the Great Depression and the Second World War, the rationale behind GDP was that governments needed such data.

For arguably a majority of economists, and certainly for the assembled Washington gathering, GDP provided nations with an accurate account of their economies. The act of measurement also enabled, or coincided with, their nations becoming wealthier. The world’s richest nations belong to a club called the Organization for Economic Cooperation and Development, or OECD. According to the OECD, today’s nations are in effect ten times richer when their GDP of today is compared with their GDP in the early 1800s.3 And it is no coincidence that this increase has coincided with the eighty years in which calculating a nation’s GDP has been a global activity.

In his remarks to the gathering Daley flashed up a slide showing a simple chart with three vertical bars colored in black. The three bars represented America’s GDP for three different years. Two of the three bars illustrated data for 1900 and 1929, xxvibefore GDP was formally worked out. The third represented GDP in 1999.

America’s GDP for 1900 was a lowly $290 billion. Twenty-nine years later it was $730 billion. In 1999, six decades after the great invention, US GDP had leapt to $9.2 trillion. Next to the other two years, that period appeared like a skyscraper on Daley’s slide. “Gone are the bank runs, the financial panics, the deep and drawn out recessions, and the long lines of the unemployed,” Daley said. “Obviously, the GDP accounts are not solely responsible for putting America’s economy on a steadier track—as much as I’d like to make that claim. But no question about it: They have had a very positive effect on America’s economic well-being.”

The Washington party therefore had an extra-special resonance for the DC elite: at the same time as celebrating one of their own—William Daley—Alan Greenspan and colleagues were honoring a system of measurement that had contributed to the United States becoming the most powerful nation on Earth.

The only hint of caution that morning came, ironically enough, from Greenspan. This was still some years before the crash of 2008, and the Federal Reserve Board chairman was at the height of his powers and regarded as the chief architect and steward of America’s seemingly unending run of prosperity. “I cannot say what the size of the economy will be 1 year from today or 100 years from now,” Daley joked. “But I can say that when we reach the next milestone—$10 trillion—will depend a lot on … Chairman Greenspan.”xxvii

Amid the celebrations, however, the Federal Reserve Board chairman had a warning for his audience. In the very mildest of terms, he said that it would be wrong to conflate GDP with quality of life, and he cautioned that an increase in one did not necessarily mean an increase in the other. Just because a country such as the United States has high rates of economic growth, it doesn’t automatically mean it will enjoy a high quality of life, Greenspan said. To illustrate what he meant, Greenspan asked his audience to compare how people in the northern states cooled themselves during the summer months compared with folks in the South. While the northern residents were fortunate to enjoy cool sea breezes, those down south had to turn up the air-conditioning. While both, you could say, enjoyed an equally high quality of life, in GDP terms, the air-conditioned group would come out on top. “The wonderful breezes you get up in northern Vermont during the summer, which eliminates the requirement for air conditioning, doesn’t show up in the GDP,” Greenspan added.4

Greenspan was correct. GDP is neither a measure of welfare nor an indicator of well-being. That is because it is not set up to recognize important aspects of our lives that are not captured by the acts of spending and investing. There is no room in GDP for volunteering or housework, for example; nor does it recognize that there is value in community or in time spent with families. More measurable things such as damage to our environment are also left out, as is job satisfaction. GDP doesn’t even measure the state of jobs.

Greenspan’s was by no means a lone voice cautioning against reading too much into GDP beyond what it says about the state of production, or spending, or incomes. From the earliest days, its inventors, including Simon Kuznets and the British economist xxviiiJohn Maynard Keynes, understood that it is not really a measure of prosperity, and Kuznets in particular became skeptical of the way in which his invention was being used as a proxy for this. As far back as 1922, the English banker and statistician Josiah Stamp questioned why national income did not include the value of housework or volunteering and remarked that the trend seemed to be to value those things that are important to rich people.5

Today, such voices have been joined by many more, including the leaders of developed and developing nations. Together with government ministers and civil servants, academics, campaigners, and business folk, they recognize that GDP has strengths but also flaws, and they want change. But they cannot agree on what could or should change, and they are even less certain about how change could happen.

Many support the idea that world leaders should be encouraged to follow a “dashboard” of numbers, of which GDP could be one, alongside indicators of the state of a nation’s health, education, employment, living standards, environment, and wellbeing. This dashboard might include the Human Development Index, a pioneering idea that in a single number captures life expectancy, literacy and schooling alongside income. The HDI was created more than twenty-five years ago as an alternative to GDP but would stand for better things, according to one of its architects, the Pakistani economist Mahbub ul Haq.6 A dashboard of alternatives to GDP might also include Gross National Happiness, an innovation from the landlocked state of Bhutan. India’s Nobel Prize-winning economist Amartya Sen famously said that if you wouldn’t drive a car by looking at a single indicator, say, the fuel or temperature gauge, why adopt such a flawed principle to managing an entire economy?xxix

Sen has a point, and I for one wish that such a multifaceted approach became the norm. But the practice of the past eight decades tells us that our leaders are not quite ready to embrace the complexity that Sen and so many others are advocating. If anything, in our era of Big Data, the volume and frequency of information are greater than at any time in history. Policy makers, at the same time, are on the whole less expert than they once were. More than ever they need an index that can capture complex phenomena and represent them in easy-to-digest formats. That is quite possibly why, in the years since the introduction of the HDI and the many indicators that have come in its wake, one index continues to reign, and that is GDP. While it is true that nations are now better informed on the alternatives, it is GDP on which our leaders are judged. Even if every single one of the alternatives on the dashboard were to show a positive sign, it is economic growth (for which read GDP) that matters at the ballot box for any serving head of government and his or her finance team. So long as growth remains the overriding objective, that effectively means there will always be a higher priority for economic policies that result in higher production and higher consumption, no matter what the costs of those policies may be.

If we are to assume that GDP isn’t going away anytime soon, then the challenge is not about introducing a better alternative indicator, because that won’t make a difference to economic policy making. The challenge has to be to change GDP itself so that it is better able to represent the things that matter to us.

NOTES

1. J. Steven Landefeld, “GDP: One of the Great Inventions of the 20th Century,” Survey of Current Business, Bureau of Economic Analysis, January 2000, 6.

2. William M. Daley, “Press Conference Announcing the Commerce Department’s Achievement of the Century,” Survey of Current Business, Bureau of Economic Analysis, January 2000, 10.

3. Jan Luiten van Zanden, Joerg Baten, Marco Mira d’Ercole, Auke Rijpma, Conal Smith and Marcel Timmer, How Was Life: Global Well-Being Since 1820 (Paris: OECD Publishing, 2014), 64.

4. Alan Greenspan, “Press Conference Announcing the Commerce Department’s Achievement of the Century,” Survey of Current Business, Bureau of Economic Analysis, January 2000, 12.

5. Josiah Stamp, “The Measurement of National Income,” in Wealth and Taxable Capacity: The Newmarch Lectures for 1920–1 on Current and Statistical Problems in Wealth and Industry (London: P. S. King & Son, 1922), 39.211

6. Khadija Haq and Richard Ponzio, Pioneering the Human Development Revolution: An Intellectual Biography of Mahbub ul Haq (New Delhi: Oxford University Press, 2008), 101