GDP Is a Bad Measure of Well-Being

Maybe we should retire it.

This is the best I could do with a censorship-happy AI.

GDP was never meant to be our goal.

We as humans are simple creatures. By and large, if you tell us that you have one number that we can focus on that will tell us if things are good or bad, we will believe you, and we will latch on to that number and attach all kinds of meaning to it that it doesn’t deserve.

GDP is the villain in this story. Our devotion to it is the problem.

In the 1930s, the economist Simon Kuznets was commissioned by the US Department of Commerce to come up with better economic metrics for measuring the economy than those that were in use at the time. Kuznets came up with gross domestic product (GDP). Gross domestic product simply measures everything produced in an economy. More formally, GDP is defined as:

The total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.

To be fair to Mr. Kuznets, at the time he warned that GDP should not be used to judge the total welfare of the country because it only measured economic output, ignoring all the factors that went into that economic output.

GDP is useful, but we lean too much on it to judge if we are succeeding as a society. I remember learning how important GDP was as a kid. Tom Brokaw would report on it once a month on the NBC nightly news, and I learned as an eight-year-old watching the news with my dad, that GDP was the country’s report card. Now, GDP has grown out of control. Every politician gets elected promising to grow GDP. To fail to grow GDP is seen as an economic and political sin.

It’s not.

The problem is that we don’t bother to measure whether what went into that GDP was useful or desirable. There is a famous joke about GDP I heard years ago, that sums up this problem well, if rather inelegantly. It goes something like this:

Two economists are walking in the forest. They come across a pile of shit.

The first economist tells the second economist, “I’ll pay you $100 if you eat that shit.”

The second economist does so.

They soon come across more shit.

The second economist says to the first, “I’ll pay you $100 if you eat that shit.”

The first economist does so.

The economists then congratulate each other on increasing GDP by $200!

Not only is GDP growth forever not achievable, but we also need to pay better attention to whether we want what comes with that GDP growth. Like the economists in the woods, we shouldn’t just applaud any old thing that increases GDP. Cigarettes are a great business. Lots of GDP growth has come from selling cigarettes. But the cost to society isn’t worth the GDP we gain. It is the same with climate change and other environmental degradation. Flirting with the collapse of civilization isn’t worth ever-growing GDP.

GDP is a useful indicator. But we shouldn’t base our lives on meeting some arbitrary growth target. But we very much do. Politicians and companies are in the business of promising and delivering growth. You tell me a politician who says growth isn’t one of his or her top goals and I’ll tell you a politician who is no longer a politician. The same goes for business leaders. If they fail to grow, they fail to be employed.

This is where we come in.

We need to permit these leaders to step off the growth for growth’s sake treadmill. Exponential growth cannot go on forever. We have limited resources here on earth, and we are already bumping up against constraints. If GDP went up even 2 percent for 100 years, we would have to start getting resources from other planets just to get by.

We need to tell politicians that we don’t want our society judged solely on economic growth. We should be weighing human outcomes like health, literacy, education, and happiness with equal or more weight than we currently give GDP.

So, let’s get to that.

Alternatives

Alternatives to GDP exist, and countries, states, provinces, and cities are using them. However, they are often used to complement measures of performance and societal health like GDP, not to replace them. We will discuss some of them below.

Genuine Progress Indicator

The genuine progress indicator (GPI) is an alternative to GDP that uses GDP as an input and then adjusts for negative externalities. GPI separates the idea of societal progress from economic growth. The GPI I used in ecological economics, and more fulsome explorations of societal progress. GPI includes the environmental and social costs of economic production and consumption.

I did not find any rankings of GPI by country, as I did for other metrics in this list. If you know of any please let me know, so I can update this writing. Currently, the European Union and Canada have used GPI the most to inform policy decisions.

Human Development Index (HDI)

The Human Development Index uses inputs such as life expectancy, education length and quality, and standards of living. The HDI is calculated by:

1. Calculating the Health index (LEI) using life expectancy.

2. Calculating the Education index (EI) using mean years of schooling (MYSI) and expected years of schooling (EYSI).

3. Calculating the Income index (II) using the natural logarithm of Gross National Income per capita.

4. The HDI is the geometric mean of these three indices.

Better Life Index

The Better life index was created by the OECD to help governments design better policies for better lives for their citizens. To create the index, 11 topics reflect what the OECD has identified as essential to well-being in terms of material living conditions (housing, income, jobs) and quality of life (community, education, environment, governance, health, life satisfaction, safety and work-life balance). The chart is a little hard to read, but Norway, Iceland and Switzerland come in the top here of OECD countries, with South Africa, Columbia and Mexico at the bottom of the OECD list.

Index of Sustainable Economic Welfare (ISEW)

The Index of Sustainable Economic Welfare (ISEW) adds social and environmental factors to traditional economic indicators. The aim is to provide a more fulsome understanding of the welfare of a country’s people. The metrics covered are:

• Personal consumption

• Public non-defensive expenditures

• Private defensive expenditures

• Capital formation

• Services from domestic labor

• Costs of environmental degradation

• Depreciation of natural capital

The Good Country Index 

The Good Country Index looks to measure how a country contributes to the planet through its policies and behaviors. Both positives and negatives are taken into account. This index is essentially a balance sheet for humanity and the planet. The index combines 35 data points to create an overall ranking, as well as rankings in seven categories: Science and Technology, Culture, International Peace and Security, World Order, Planet and Climate, and Prosperity and Equality.

Social Progress Index

The Social Progress Index (SPI) measures the extent to which countries provide for the social and environmental needs of their citizens. Fifty-four indicators in the areas of basic human needs, foundations of well-being, and opportunity to progress show the relative performance of countries. The social and environmental factors include wellness, equality, inclusion, sustainability, personal freedom, and safety.

Gross National Happiness

The term GNH (Gross National Happiness) was introduced by the country of Bhutan in 2005 to better understand the positive impact of the Bhutanese government’s policies on its citizens’ lives.

In Bhutan, people are asked questions about their life satisfaction and then given a report card based on how things are going for them. The result of this report card determines how well the country measures up to its potential for development.

So which of these alternative indicators do you think is the best to replace GDP? Or should we use a number of them? Are you curious about where your country stands on these other indicators?

Tune in on Thursday to find out.