Sense and Function

Politics, Philosophy, Art, Media, Environment, and Economics
JANUARY 25, 2012 12:00AM

Why GDP is Not Related to Well-Being

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The Problem with GDP Accounting 

One lesson of the Occupy movement is that economic value is not the only or even the most important kind of value. In fact, economic activity has no necessary correlation with well-being, and in significant cases, thrives on sickness and catastrophe.

One reason for this is that national income accounting does not have a debit side. This means that all economic activity is good for GDP and for growth. It doesn’t take much imagination to see how shocking this is.

This problem is illustrated beautifully by Marilyn Waring, in “Who's Counting?” (click through for video: 4:15-6:55). It is called a "composition problem." Here's an example:

Japan, shortly after the Tsunami in 2011  

Japan right now has a very high GDP and immense growth because of the tsunami. There are perhaps 125,000 homes and buildings destroyed, an uncounted number of roads and bridgeshundreds upon hundreds of thousands of cars, trains, boats, airplanes, laptops, rice cookers, shoes, playstations, shops, warehouses, fields, and power plants. 

 A cleared path in Japan after the Tsunami 

The estimate for rebuilding it is about $300,000,000,000, or about eight million six hundred thousand times the median annual income of women in the US. Every bit of that counts toward GDP, every bit of it counts as economic growth. As Waring says: "As long as it passes through the market, it’s good for growth."

Having no debit side means that other expensive international and national catastrophes are great for GDP, too, such as the wars in Iraq and Afghanistan, Hurricane Katrina and the BP oil spill in the Gulf of Mexico, and national epidemics like obesity, cancer, and crime—most prisoners are worth more in prison than out.
This is because, as Waring observes, national accounting is based on a system adopted by a Britain devastated during Second World War: people had very poor standards of living, but extremely high GDP and economic growth.
The immediate conclusion is that to the extent that our political decisions are made based on increasing GDP, on the growth of economic productivity, they are deeply compromised. Your economic activity will greatly increase when you get sick with cancer: the hospital bills, insurance companies, court fees, political legislation, cancer fundraising, research grants, surgeons, lab technicians, university medical courses, and the many expensive pieces of technological equipment that test and intervene on your body. If you die, there is the casket, the funeral parlour, the tombstone, the tractor and its driver to dig the grave, the hall rental for family gathering, the hotel and last-minute airplane expenses, the catering and restaurant meals, the flower arrangements. If the government seeks above all to safeguard and to promote economic growth, then there is no reason for your sickness and death not to count as an economic success. 

The Problem, According to Economics Textbooks

All this to say that there is no necessary correlation between GDP and human well-being. A Haverford College economics course asserts without any reservation that "The higher the GDP per capita for a country the better off the country is." The very next sentence goes on to say "But there are some problems with using GDP per capita to measure a country's standard of living." It lists:

"Problems with using GDP to Measure the Standard of Living:
1. non-market transactions are not included in GDP
2. leisure increases a standard of living but isn't counted
3. improved product quality often isn't accounted for in GDP
4. We must use per capita GDP
5. increases in GDP may harm the environment and decrease the standard of living
6. the underground economy is not included in GDP"

Note number 1 and number 5. Number one means that care for children and helping to rebuild your neighbor's barn are not included in GDP. They limit #5 to environmental concerns, but this is an arbitrary restriction: crime, sickness, obesity, and so on are evidence of the same thing. This problem, that increases in GDP can decrease the standard of living, is not a trifling caveat within a proposition that GDP is a reliable indicator of standard of living: it is its contradiction.

Monetary Value vs. Real Value

We need new ways of measuring wealth, of quantifying the real value of things, measurements that take into account environmental, human, and social costs. This is unbelievably difficult to put into numbers.
It is also probably evil to put a number value on a life, because doing this allows it to be treated as a financial quantity, an expense, a utility bill. But many companies see it that way already, as is argued in Fight Club: that paying settlements is cheaper for car companies than making cars safer.

For more about these measurements, see the Worldchanging website, the Sustainability matrices and indices and Green Accounting pages (the latter is terrifyingly sparse), and Yale’s website. See also Pam Muckosky’s Sustainability Research Blog.

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