Rethinking GDP: A flawed measure of economic growth

The once-celebrated formula of relentless GDP growth appears to have lost its efficacy.

(Sanghnomics is a weekly column that tracks down and demystifies the economic world view of Rashtriya Swayamsevak Sangh (RSS) and organisations inspired by its ideology.)

As the leading figures in business, economics, finance, and policymaking meet in Davos, Switzerland, for the annual World Economic Forum (WEF) from January 20 to January 25, it is appropriate to rekindle the debate on how relevant Gross Domestic Product (GDP) is as a measure of economic growth.

In February 2020, World Economic Forum (WEF) published an article by  Austin Clemens Manager, Washington Center for Equitable Growth titled, ‘GDP is outdated, here are the alternatives’. Clemens wrote that the new metrics for the well-being of a nation is long overdue as GDP isn’t the most appropriate measure. Clemens repeatedly referred in his write-up about the annual meeting of American Economic Association held in January 2020 where a panel of top experts emphasised the need for the nations to go beyond GDP.

The economists speaking at this event, in a panel aptly titled "Beyond GDP," made it clear that considering GDP as the true measure of prosperity is a grave mistake. GDP misses a lot; for instance, it doesn't account for cooking, cleaning, and child-rearing done in households. It doesn't consider the value of people's health or a clean environment. It ignores the distribution of income or wealth and overlooks quality of life.

Princeton economist and Nobel laureate Angus Deaton, a panelist at this event, has dedicated recent years to researching the troubling surge in 'deaths of despair.' These self-inflicted deaths, often caused by suicide and drug overdoses, have become a significant public health concern.

Deaton highlighted the alarming trend of declining life expectancy in the United States for three consecutive years. He attributed a large portion of this decline to the opioid epidemic, which has tragically claimed over 200,000 American lives.

He underscored the significant profits pharmaceutical companies have made from this crisis, raising concerns about the current economic system. "We have a system that is literally causing deaths, yet we consider these profits as a measure of economic growth (GDP)," Deaton stated, emphasising the absurdity of this situation.

Kuznets and GDP

American economist Simon Kuznets formulated the concept of GDP in 1934. It took the world of economics by storm. By the time the Bretton Woods Conference took place in 1944, GDP had become the gold standard for measuring the economic growth of nations.

Ironically, Kuznets himself had warned the US Congress in 1934 that GDP should not be used as a parameter of a nation’s economic growth. He stated, "The welfare of a nation can scarcely be inferred from a measure of national income."

Despite early warnings from its creator, GDP rose to global prominence, with nations focusing intensely on maximising its growth. This drive led to massive infrastructure projects—such as roads and highways—the stimulation of consumer spending, and substantial subsidies for industries and transportation. However, starting in the 1970s, GDP growth began to slow, initially in Western countries and eventually worldwide.

GDP: A war metric

Oxford economist Diane Coyle told the WEF in 2021 in an interview that, in reality, GDP was “a war-time metric.” It tells you what your economy can produce when you’re at war – as was the case in the early 1940s – but it does not tell you how you can make people happy when you’re at peace. It tells you how valuable trees are when you cut them down and turn them into fences or benches, but not what they’re worth when left standing, said Coyle.

Global annual GDP reached its peak alongside a surge in our ecological footprint, resulting in a significant ecological deficit. Deforestation drove agricultural and industrial expansion, overfishing drained marine resources, and the unchecked burning of fossil fuels polluted the atmosphere, accelerating climate change. While these activities initially boosted economic growth, they ultimately eroded health, wealth, and overall well-being.

Peter Vanham, executive editor, Fortune,  mentioned in an article published by WEF in 2021 that in the 1980s, governments sought to revive GDP growth through industrial liberalization and the expansion of international trade, hoping that increased competition would spark a new wave of economic expansion. Although this approach initially yielded success, its negative consequences soon emerged: rising market concentration, a shrinking share of income for workers, stagnating median wages, and the degradation of public services.

Today, the once-celebrated formula of relentless GDP growth appears to have lost its efficacy. In Western nations, GDP growth has slowed dramatically, while indicators of well-being have stagnated. A growing sense of societal crisis has taken hold—and perhaps rightly so. As Simon Kuznets wisely cautioned, prioritising GDP growth as the sole policy objective was a profound error, a truth we are now forced to confront.

Earlier Sanghnomics columns can be read here.