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PEACE

The Problem with GDP

In this extract from his debut book, ‘Peace in the Age of Chaos’, IEP
Founder and Executive Chairman Steve Killelea unpacks the
problem with GDP and why we need better measures of societal
wellbeing and progress.

GDP is a misleading measure of national

wealth and wellbeing. Many key goods,
including peacefulness, environmental
protection or family bonding, are not
measured in GDP because they do not
involve transactions. In fact, GDP includes
pollution, crime, the health costs of
cigarettes and environmental disasters as
‘growth’ because they generate spending.

The most ubiquitous measure of social progress is GDP. For most countries it’s the
major measure used to determine social health or wellbeing. If it’s going up, then
the general assumption is everything else is improving too. However, it has long
been known that GDP is simply a measure of transactions and has severe
limitations.

In the 1960s Robert F. Kennedy commented that it measures ‘everything except

that which makes life worthwhile’. It only counts human activities that involve
the exchange of money, without any consideration of the social value of those
exchanges, or even the concept of a national capital account.

GDP first came into its own in the 1940s, when the economist John Maynard
Keynes published a pamphlet, How to Pay for the War, arguing that there needed
to be a proper calculation of what the British economy could produce with its
available resources. This led to the first set of national accounts being published
in Britain in 1941. Keynes, sensing the limitations of GDP as a measure, did not
expect it to be continued after the war was over, but in 1953 the United Nations
established the System of National Accounts, which gave a prominent position to
GDP. What started out as a wartime measure became a universally applied
yardstick of national output and standard of living.

Even Simon Kuznets, who led the postwar transformation of economics into an
empirical science, warned against equating GDP growth with wellbeing. As the
British social commentator George Monbiot puts it: The problem with gross
domestic product is the gross bit. There are no deductions involved: all economic
activity is accounted as if it were of positive value. Social harm is added to, not
subtracted from it.

A train crash which generates £1bn worth of track repairs, medical bills and
funeral costs is deemed by this measure as beneficial as an uninterrupted service
which generates £1bn in sales. Cleaning up the 2010 oil spill in the Gulf of Mexico
was ‘worth’ more to GDP economically than the carbon absorption provided by
the Amazon rainforest. This highlights some of the faults of GDP, but it has
become such a pervasive measure that societal happiness is equated to it.
Probably its biggest flaw, after not counting what makes us happy, is that it’s only
a measure of consumption; there is no capital account. If you had a car accident
and went to hospital that would be good for GDP; you would have to buy a new
car and spend money on doctors. But it would be a negative for you, physically,
emotionally and financially. Nor does GDP take into account the sustainability of
the resources used in the consumption or whether it’s even good for society.

As many have pointed out, if businesses used GDP-style accounting, they would
aim to maximise gross revenue at the expense of profitability, efficiency,
sustainability and flexibility.

GDP makes no additions to take into account the health of the population, the
quality of education, the strength of social relationships, the intelligence of public
debate or the integrity of public institutions, nor subtractions to account for
social strife, inequality or environmental degradation. If a house burnt down, !
then a new house would need to be built. This would increase purchases of "
building materials and require labour to rebuild it, thereby increasing GDP.
#
Viewed through this distorted lens, it would be considered a better outcome than
$
if the house had not burnt down.

However, there is a net loss in the quality of life. In the same way, many of the
elements of violence, such as expenditure on the military, jails, policing, the
judiciary and security will show up in GDP as a positive indicator, a way in which
the economy has ‘grown’. Because GDP is a measure of the money being
exchanged, and not what it is being exchanged for, it creates a deeply distorted,
materialistic picture of what a society is. When there is a heavy focus on GDP
there is also a tendency to reinforce the status quo, the existing transactional
system. This is especially obvious with the environment, where heavily polluting
activities are seen as a benefit to GDP because there is already an established set
of transactions related to them, such as income from electricity generated by
coal-fired power stations.

More environmentally-friendly substitutes, especially if they are new, are seen as

either a drag on GDP or irrelevant because of their negative effect on well-
established, high-GDP-generating industries. Soaring economic activity has
depleted natural resources and done inestimable damage to the environment; in
many countries much of the newly generated wealth is being shared between
fewer people than at any time in the past 80 years; and divisions within and
between societies are becoming apparent. Yet GDP has nothing to say about any
of this. It became important as a universal measure partly because its emergence
coincided with an era in which far more of human activity became subject to
recorded monetary exchanges.

At the end of the 20th century, 90% of the world’s population lived within a
formal recorded economy, compared with only 40% in the 1970s and 10% to 15%
at the end of the 19th century. Human activity continues to be absorbed into the
formal economy, which has the effect of increasing GDP because the number of
recorded transactions are increasing, even if there is little real additional
economic activity.

The informal economy in developing nations, which until recently primarily

consisted of barter or cash, is now being captured and recorded. For example,
new technologies such as mobile payments capture transactions that would have
formerly been invisible, thereby boosting GDP. This expansion of coverage helps
to partially explain high GDP growth rates in the developing world.

It is important to be able to measure economic growth and transactions, but

these indicators have become misleading proxies for human progress and
fulfilment. The problem is that GDP and its associated measures leave out
important and meaningful aspects of human experience.

The Indexes produced by the IEP are not intended to be a replacement for GDP.
They are designed to be complementary: to give a broader and deeper view of
the state of society when used alongside GDP. The transactional economy
measured by GDP is just one element of a complex system. The singular pursuit
of any goal to the exclusion of all others leads to imbalances.

Peace, and Positive Peace in particular, recognises that economic growth is just
one measure among many in a system that has to be seen holistically if we are to
arrive at an accurate view of what a thriving society looks like. The Global Peace
Index and Positive Peace provide a sound base to attempt to arrive at an
alternative view of what a thriving society looks like, but also one with better
economic outcomes.

FOOTNOTES

This is an excerpt from Peace in the Age of Chaos: The Best Solution for a Sustainable Future by Steve Killelea – IEP Founder and Executive
Chairman. To order a copy, visit www.peaceintheagechaos.org

AUTHOR VISION OF HUMANITY

Vision of Humanity is brought to you by the Institute for Economics and Peace
(IEP), by staff in our global offices in Sydney, New York, The Hague, Harare and
Steve Killelea Mexico. Alongside maps and global indices, we present fresh perspectives on

Author, Businessman & Philanthropist current affairs reflecting our editorial philosophy.

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