Despite the attention given by economists and politicians to the GDP as a measure of economic activity — and to some extent even the success — of a country, this metric is quickly losing its place in our digital world.
Where GDP falls flat
As David Piling of Financial Times points out, there is a certain beauty in GDP being a single figure. It has practically become the go-to statistic when comparing the performances of countries to one another. Needless to say, such overt simplicity comes with a price. Looking at economic activity in the context of income, GDP is overlooking a lot of equally important aspects that need to be considered in measuring a country’s growth.
Simon Kuznets, the developer of GDP advised against the use of GDP as a measurement of welfare. Recognizing the limitations of the statistic. Today this figure has ended becoming a proxy measurement for a country’s growth and wealth. It is frequently confused as a measure of well-being in spite of the warnings of Kuznets.
The GDP is a metric which has worked sufficiently in the era in which it was developed: The Great Depression. During this time, there is a huge fixation on manufacturing, so it makes perfect sense to use GDP as a measure of human activity at the time. However, times have changed drastically since then. We are moving in a completely different world now.
Overlooked in the digital age
Erik Brynjolfsson and Andrew McAfee discussed in their book, The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies the downfalls of GDP.
The GDP fails to take into account the shift in the priorities of consumers in the modern age. There are free products, services, and information whose conveniences increase value that isn’t captured by GDP at all. For instance, services like Wikipedia, Facebook, and Gmail are completely free from a monetary standpoint. With this, their intrinsic value isn’t taken into account by GDP.
As we can tell, not taking into account these productivity services is quite incorrect. In the past, communication and information access cost us hours of our time. With these services now existent, the productivity is heightened. Just with our intuition, it is clear that the end result of these services is more income gained. However, as Chihiro Watanabe and colleagues mentioned in their article, A new paradox of the digital economy – Structural sources of the limitation of GDP statistics, this is not what GDP registers at all.
Paradoxically, they found that the productivity in the digital economy shows a declining trend, in spite of the apparent and drastic growth in the information and communication technology (ICT) over the past decade. This paradox stems from the cash-centric view of GDP in economic value. For instance, the presence of Wikipedia cuts down cost on the production of encyclopedias. While in terms of money, being free is clearly less in the manner of economic activity, the value given by this service — information access — evidently caused huge growth. However, this is a domain that isn’t accounted for by GDP.
The world, more than ever, is viewing the growth of the nations as multidimensional. With this, the economic yardstick that is GDP is starting to be pushed off its pedestal.
In his book, The Growth Delusion: Wealth, Poverty, and the Well-Being of Nations, David Piling pointed other key flaws of the GDP:
- A rise in GDP does not mean an evenly distributed growth. Since the GDP simply aggregates income measures, an increase in income coming from 1% of the country will be registered as an improvement in economic activity.This is regardless of how good or bad the other 99% are doing. In essence, the poor people are pretty much invisible in the eyes of GDP.
- GDP is quantity-centric. The bigger the better. Yet as we know, this isn’t always the case in the real world. The 2008 Financial Crisis can attest to this matter.
- GDP is cash-centric. Regardless of the source. Piling noted that heroin and prostitution is taken into account in Europe’s GDP but activities like volunteer work are not.
What should be done, then? Do away with GDP in search for other metrics? No, not really.
Kevin Munford’s Prosperity, Sustainability and the Measurement of Wealth offers a good point. He notes that GDP is still directly related to a country’s growth. However, instead of seeing it as the be-all and end-all in terms of measuring growth and the larger domain of well-being, other measures should act as complements to the metric.
In our age, we value happiness, sustainability, natural resources, and other equally important aspects along with capital. Right now measures like the Human Development Index (HDI) and Green GDP take into account some of these aspects to some extent.
Munford also proposes national wealth accounting. This method removes the fixation on the currently existing profit, but instead takes into account the potential of a country to gain future profit.
This proposal makes perfect sense. National wealth accounting recognizes that the growth rate of countries are not the same. What is needed to be maximized is the potential — be it human or natural resources.
An obsession for ranks
The world has gone obsessed with rankings. Yet this obsession with being at the top is quite detrimental to our overall growth. If we continue to focus on how our country as an entity can grow without regard to how we impact other countries, we are becoming instrumental in impeding the growth of others.
Yet in the context of the climate crisis and the entrenched equalities we are facing in this world, being divided is the last thing we want to be right now.
The debacle of GDP
The debacle of GDP delivers a message of all sorts. It reveals how the world has gone increasingly fixated on money that it has essentially become the measure of our well-being as well.
If we want to veer away from this mindset, we should start asking the right questions: How can we attain sustainability? How can we reduce carbon emissions? How can we topple down inequalities? How can we truly be happy?
Our growth is more than just answering the question, “How can we gain more profit?”
These inquiries are not meant to be too idealistic. We have realistic means of answering them. We have large volumes of information thanks to the digital age. At the same time, we have the tools to collect more information to measure economic activity and well-being that is inclusive for everyone.
The debacle of GDP does not mean the inevitability of humanity’s doom. It is simply a signal for us to step back and take into account that things that matter to us.