Aarati Krishnan

The myriad imperfections of GDP

Aarati Krishnan | Updated on January 23, 2018

Title: The Little Big Number: How GDP Came to Rule the World and What to Do about It <br>Author: Dirk Philipsen<br>Publisher: Princeton University Press<br>Price: $29.95

Dirk Philipsen

The book probes how the seemingly flawed growth metric came to be adopted by nations across the globe

How did one opaque number — the Gross Domestic Product — become the overarching measure of economic prosperity across the world? Is the pursuit of GDP growth really desirable without stopping to take stock of what we are producing, and its impact on the society and environment?

These are the interesting questions that Dirk Philipsen, an economic historian and sustainability advocate poses in his passionately argued book The little big number: How GDP Came to Rule the World and What to Do About it. Flagging the danger that ‘we become what we measure’, Philipsen advances four key arguments against GDP as the sole yardstick for economic well-being.

Quantity, not quality

For starters, GDP as we know it today, blindly counts output without making any distinction between the good and bad that is produced. Thus, national income estimates lump together in a single metric the value of everything from super-sized burgers and 9 mm semi-automatics, to health insurance and school fees; they disregard the moral and social dimensions of that output.

But it is by now clear that untrammelled production of material goods can leave behind ‘great furrows of wreckage’ in the form of depletion of natural resources and climate change.

Two, by counting only goods and services that can be ascribed a monetary value, GDP diminishes the value of things which are essentially ‘free’, but contribute greatly to our happiness.

To illustrate this, Philipsen offers the colourful example of the hypothetical Ms Golden Arrow. If Ms Arrow brews herself coffee, is served breakfast by her husband or decides to home-school her children, all this may give her immense happiness. But it doesn’t add to the nation’s GDP.

But if she frequents Starbucks, enrols her children in a private school and scores of after-school classes, and then spends her whole day driving them around, she adds to GDP by leaps and bounds. Ironically, if Ms Arrow stays happily married throughout her life her ‘spousal bliss’ adds nothing to GDP.

But if she has marital problems, consults doctors, takes anti-depressants and ultimately goes through an expensive divorce, that’s great for the nation’s GDP!

The cost

Three, GDP also flouts the basic principles of accounting by counting in the value of all output but completely ignoring the social and environmental costs incurred to produce it.

While measuring the value of power produced by a coal-fired plant, do we not need to factor in the clean-up costs that it has entailed due to air pollution, or the medical costs borne by the plant’s workers or neighbours?

By incentivising economies to maniacally chase output without reckoning costs, the GDP metric is effectively robbing future generations of a good quality of life.

A final flaw with the GDP obsession is that it accords priority to growth over equality. As the author notes, the profit maximisation that GDP growth engenders has led to vicious income disparities across the world. In the USA, he says, ‘virtually all the benefits of economic growth’ have gone to the top 1 per cent of the population.

Too elaborate

While the above arguments against GDP are no doubt compelling, the main problem with this book is that it devotes entirely too many pages to explaining them. The points about excessive consumerism, disregard for the environment and the fact that all the best things in life come free, are obvious to any reasonably literate citizen.

The author is also overzealous in punctuating every page with long extracts from political speeches, excerpts from documents and cross-references to research papers to buttress his arguments. (The bibliography sections make up 100 of the total 398 pages).

This makes for rather tedious reading. Frequent citations and cross-references also make it difficult for the reader to distinguish between the author’s own convictions, and those of his sources. The tendency of the chapters to go back and forth in time also detracts from their flow.

History of GDP

Having said this, some of the most interesting parts of this book lie in its initial chapters that detail the history of GDP, basically explaining how the metric was ‘born out of disaster’.

In the years from 1929 to 1931, the US was in the throes of its worst ever economic downturn. The Great Depression had ensured that thousands of banks had shut down, private investment was in the doldrums and factory output fell without stop.

Unemployment had become endemic and was visible in widespread poverty and lengthening breadlines. Yet, with little hard data, the government of the day was paralysed by inaction. It was in these circumstances that the US senate initiated research into America’s national income in 1932 and thus was born GDP.

The task was handed over to Simon Kuznets, a brilliant economist and a Jew who had fled revolutionary Russia and sought employment with the newly formed National Bureau of Economic Research. Over the next few years, Kuznets battled bureaucratic apathy and lack of data, to finally arrive at the estimates of national income for the US.

The numbers turned out to be far worse than anyone had imagined. He found that US national income had shrunk by 40 per cent between 1929 and 1932, unemployment had risen from 2.2 million to 9 million and that income inequality between property owners and workers was a yawning chasm.

With this data becoming widely available, it began to actively drive policy-making. Franklin D Roosevelt declared in 1938 that “all the energies of government and business must be devoted to increasing the national income”. Thus GDP, from being a mere measure of income, became a goal that nations began to ardently pursue.

It is this historical perspective GDP and the possible alternatives to it that the book’s sub-title promises; but doesn’t fully deliver on. The subject of how GDP came to be adopted by nations other than the US needed fleshing out given the author’s obvious expertise in this area.

My other disappointment was that the book dwells too much on the ills of being ruled by GDP and too little on the alternative measures that can dethrone this admittedly imperfect measure.

After all, even in a developing economy like India, the GDP obsession is not as pervasive among policymakers as the author makes it out to be. We all know that poverty alleviation, access to basic water and sanitation facilities and health and education for all, matter far more than GDP growth. This is precisely the foundation for welfare initiatives in recent years on subsidies, financial inclusion, direct benefit transfers and support prices.

But knowing that a problem exists is one thing. Quantifying and measuring it, is quite another. The amount of criticism that the recent socio-economic census has drawn is evidence of this.

MEET THE AUTHOR: Dirk Philipsen is a professor of economic history, a Senior Fellow at the Kenan Institute for Ethics and a Duke Arts and Sciences Senior Research Scholar. He was educated in Germany and the US, and holds degrees in economics and history. He is the author of We Were the People: Voices from East Germany’s Revolutionary Autumn of 1989.

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Published on August 09, 2015
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