Sunday, 18 September 2011

How the Political Focus on GDP Growth is Harming Society

It has long been held, in an unqualified manner, that economic growth is good. That is to say, that increases in Gross Domestic Product (GDP) - which is the aggregated market value of all the final goods produced/sold in a country during a year - are beneficial to society. As such, increases in GDP have become a central goal of political action, and decreases in GDP are seen as signs that an earlier policy was harmful. The logic has some merit to it: increases in GDP equate to increases in the economic activity in a country, if there is greater economic activity there are more jobs and more products, people are thus materially wealthier and there is more work for the unemployed - society is better off.

However, the focus on GDP growth and the logic supporting it is mistaken on several counts. Firstly, GDP was never intended as a measure of the good of society. Indeed, it's inventor, Simon Kuznets, on presenting GDP to the US Congress said that "the welfare of a nation can scarcely be inferred from a measurement of national income." To do so is to reduce the good of society to purely economic, market measures.

Secondly, as a consequence of the first point, that which is outside the market (i.e. not sold) is not considered. Instead, many things which are beneficial to society are not included. So, informal childcare arrangements, family housecare, home-made/grown produce, neighbourhood watches, charity support groups, sports teams, youth groups, etc are not included; are not, by users of the metric, counted as beneficial to society. Equally, many things that are harmful to society - crime, inequality, environmental damage, etc - are also not included in GDP. For example, an increase in GDP could be caused by a few people (say, bankers) getting significantly richer, rather than a more general increase in the welfare of society. Put together, increases in GDP could accompany a reduction in non-market factors that are beneficial to society and an increase in non-market factors that are harmful to society - GDP simply does not reflect them.

Thirdly, GDP growth does not necessarily equate to an increased numbers of jobs. GDP can be increased, without accompanying job growth, by increases in productivity or by the increased production of an expensive primary resource or service. Equally, GDP can decrease while the number of jobs goes up by movements from the production of high-market-value  products to low-value products (such as a company switching from financial services advice to growing potatoes.)

The essential point, then, is that GDP is not a measure of the welfare of society, nor is it a proxy measure. In itself, this point does not matter. However, that GDP growth is a central goal of political action means that the weaknesses of GDP have real world consequences, in that by promoting GDP growth negative outcomes can be encouraged. For example, in Canada the tar sands projects, which are destroying and degrading large areas of Canada and its environment, account for about 2% of national GDP. So, according to the "growth is good" mantra and in spite of any serious lasting damage the projects are doing, the tar sands exploitation equate to an improvement of the national well-being.

If we continue to follow this "GDP fetish", then environmental restrictions, consumer protections, mandatory safety features - regulations that can improve societal welfare - will  persist in being seen as costing GDP growth and thus as harming society, and activites that harm society will carry on to be seen as beneficial. What we will continue to do, then, is to set the cart before the horse - to favour "growth" over genuine progress.


  1. Nice blog mate, you should keep it up. The current focus, purely on economic growth as the path to happiness, is clearly misguided. At the risk of sounding all buddhist, many would be much better off if they stopped seeing wealth as the source of happiness and human progress. Ha Joon Chang also argued that the concept that free market economics leads to progress is undermined by history. America and Britain could only obtain the classical economies so admired by those on the right after heavy periods of protectionism. Put simply, the free market follows want people want, which does not always lead to progree.

    I see your doing a PhD in politics, and i was just wondering about how your finding it? Im about to do history and politics at york, and am sort of worried about future prospects. I mean, do you have a career in your sights at the moment, that the phd will help you get, or are you just studying for learning's sake? I thought about going into journalism or teaching but it all seems so competitive.
    But anyways nice blog

  2. Thanks for the comment Alfie. History does certainly agree that free market economics is not (and massive intellectual piracy is) a driver for growth.

    I'm doing my PhD to become an academic, which is a pretty tough job sector (along with everything else.) I imagine teaching is less competitive than journalism, although you could possibly get more hands-on experience at your student newspaper to build your CV. Anyhow, if you're interested in politicy-type jobs is a good resource.