When we focus exclusively on GDP as the ultimate yardstick of economic performance, we lose sight of what actually contributes to a happier, more prosperous society and a healthier environment. To get the measure of what really matters, we should be using other metrics, says Lukasz Krebel.
What is GDP?
GDP feels like a familiar concept, even if we don’t always ask what it really means. It was initially conceived in the 1930s by Simon Kuznets, economist at the National Bureau of Economic Research. He wanted a way to measure ‘national income’, to help the US government get a better understanding of the economy and guide the response to the Great Depression.
Kuznets’ initial goal was to create a metric focusing on national welfare that would count economic activities that contribute to social wellbeing, while subtracting those that do not. However, with the outbreak of the second world war, the US government prioritised developing a measure to help track and mobilise economic resources for the war effort.
GDP then evolved to be narrowly focused on economic production, rather than on social wellbeing. By design, it only focuses on monetary values and ignores non-monetary things, like unwaged domestic work and childcare, even though they are crucial underpinnings of the wider economy.
This approach also means that GDP is subject to being overestimated in periods of market booms.
What are some of the issues with GDP?
GDP also disregards harms from many economic activities. Still, when adjusted for population size, countries with higher GDP tend to perform better on a variety of wellbeing measures, like education and life expectancy.
This is reflected in Human Development Index (HDI) scores – where the UK is near the top of the global table. However, the correlation of GDP with better life outcomes is strongest at the lower levels of national income. A certain level of GDP is necessary to provide people with decent living standards, but above this, growth in GDP per capita, let alone GDP overall, becomes less impactful for social wellbeing.
Crucially, GDP, even if presented in per capita terms, doesn’t tell us how prosperity is shared out in society. Higher GDP doesn’t necessarily mean a better life for all of a country’s residents, since how the economic pie is shared is often extremely unequal, both within countries, and between them.
Economic growth has also historically correlated with greater carbon emissions. Following the industrial revolution, the growth in western economies was literally fuelled by the greater use of energy, primarily from burning fossil fuels. More recently, some advanced economies like the UK began to see decoupling of GDP growth from growth in emissions.
This is partly a result of improved energy efficiency and less reliance on fossil fuels, but also because much carbon-intense manufacturing has been outsourced to countries like China. Yet, our relentless pursuit of GDP growth continues to put unsustainable pressure on many natural resources and contribute to the underdevelopment and exploitation of countries in the Global South.
What do we want to achieve?
Rather than a preoccupation with growing GDP, our policymakers should focus on the specific destination we want the economy to get to. This should include a reduction in the amount of resources and pollution our economy needs to function, while boosting clean energy production, and other parts of the economy that deliver positive social outcomes. Beyond a certain level, further growth in GDP should be seen as secondary to reaching key social goals in a sustainable way.
Economists and policymakers have developed alternative measures of the health of an economy, like inclusive growth, the UN sustainable development goals and wellbeing metrics like those used by the Office for National Statistics.
Some approaches try to redefine what the economy is for, like wellbeing and staying within environmental limits. One notable example is the concept of ‘doughnut economics’, which situates the economy within nine ‘planetary boundaries’ and 11 dimensions of ‘social foundations’
Moving to a sustainable economy will require policymakers to pay attention to measures other than GDP. We need to make sure that everyone can have a living income that meets their needs. We need to slash dangerous carbon emissions as fast as possible, as tracked by the Climate Change Committee. We also need to develop metrics to track financial flows in our economy so that regulators can intervene and ensure harmful activities are curbed and finance flows towards green investments.
We like to think a single metric can tell us everything we need to know about a country, but ultimately no one number will be able to capture everything of importance.
Our economy is built to take people to particular places. When we lay the tracks for our economic future, we shouldn’t base them on something as reductive as GDP, but on where we want our society to go.
Related content
Find out more about our Centre for Sustainable Finance