GDP measures economic activity but misses the point

Since the second World War, most countries have used gross domestic product (GDP) as the core metric for prosperity and for generally gauging how well the country is doing. However, GDP only measures market activity and is not a metric of social or even of economic wellbeing.

In fact, reliance on GDP as a measure of general wellbeing has worsened people's health and happiness and damaged the environment. In addition to GDP we need a plurality of other metrics to monitor all the areas important for human and environmental flourishing. Prof Joseph Stiglitz, 2001 Nobel laureate in economics, is developing "dashboards" of metrics that countries can use to measure how well they are meeting all important goals. He describes this work in Scientific American (August 2020).

During the Great Depression in 1930s America, government had no statistics on inflation or unemployment to help it to steer the economy. Economist Simon Kuznets was charged with collecting national statistics on income and went on to create the concept of GDP in the 1940s. GDP was simply the aggregate dollar value of all goods and services produced in the country in a given period, usually a year, and is easily calculated.

Kuznets warned that GDP measures market activity only and could not be used to measure social wellbeing. When used in the latter context, GDP makes the unwarranted assumption of equating price with value. For example, GDP places great value on expensive armaments but little value on caregiving, much of which is free.

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As the US recovered from the Great Depression by boosting production and consumption of material goods, GDP increased rapidly, particularly around the production of armaments during the second World War. The International Monetary Fund and the World Bank began to fund projects around the world, gauging success almost entirely in terms of GDP growth, and, across the globe, good economic policy was interpreted to be that which increased GDP the most.

Reagan presidency

Ronald Reagan became US president in 1980 following a period of muted economic performance, elected on a platform of boosting the economy. He deregulated the financial sector, cut taxes for the better-off and radically exploited the environment to mine fossil fuels. Benefits from these activities were expected to "trickle down" to the less well-off. GDP did increase somewhat, but inequality also soared across the nation.

Most people would surely agree that significant levels of inequality are a sign that a country is not thriving in terms of human quality of life. Actually, inequality is a good example of how using GDP as a catch-all metric is a bad idea. GDP per capita in America rose steadily over the period 1960-2018. One would expect that, if GDP were a reliable index of human wellbeing, inequality would lessen as GDP rose.

At the very least one wouldn’t expect inequality to get worse. However, as Stiglitz reports, inequality in America rose steadily in step with the rise in GDP over the period 1960-2018. The three richest men in the US already own more wealth than the bottom half of the population combined.

Persistently taking cost-cutting measures across the board to increase GDP causes harm. Stiglitz illustrates this with some examples from the US. For example the American health system prides itself on its cost-efficient use of hospital beds, getting by with 2.8 beds per 1,000 people, far fewer than in other advanced country. However, when the Covid-19 pandemic arrived, this American hospital system couldn't cope with the surge in patients. And the US, the richest country in the world, had more than 100,000 Covid-19-related deaths by June 2020, whereas Vietnam, with only 4 per cent of US GDP per capita, had none.

Irish performance

Ireland performs very well in terms of GDP. IMF 2020 global rankings of national GDP per capita (in US dollars) place Luxembourg in first place ($109,602), Ireland third ($79,669), US fifth ($63,051), Germany 15th ($45,466) and the UK 21st ($39,229). Ireland ranks artificially high because of the multinational financial investments here passing through empty corporate shells with no real activity.

But our high GDP also allows us to borrow money on the international market at very low interest rates. An alternative index, Gross National Income (GNI) per capita, can be used – the country's final total income before tax divided by population. Ireland ranks ninth in the world on GNI.

William Reville is an emeritus professor of biochemistry at UCC