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Nobel-prize winning economist Robert Mundell passed away on 4 April 2021. Mundell made a huge contribution to supply-side economics and monetary theory, laying the groundwork for introduction of the euro.

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Byte Size Economics is a new blog that talks about everyday political and economic experiences and connects them with the big picture. Our posts cover public policy, economic theory, government, markets, technology and much more.

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GDP graph.jpg

Play stupid games, win stupid prizes

 

GDP does precisely what it says it does - and not much more

 

Bashing GDP as a measure has been in vogue since GDP was first invented. It's well documented that Simon Kuznets, the modern inventor of GDP, noted that it wasn't a measure of societal success. I'm sure many economists have written an article to provide their spin on the topic of GDP. In that sense, this article is a cliché, but let's see how we go.

 

GDP does exactly what it says it does - it's in the name. Gross Domestic Product. GDP measures the value of all goods and services within an economy. For that purpose, GDP is extremely useful. Assigning undue importance to it and not fully considering a broader set of social and economic measures is not economist's fault.

 

GDP was first stumbled across by English economist William Petty in the 1600s. He developed it as a means to investigate high taxes on English landlords. Its modern incarnation came about through the work of Kuznets in 1934 through a paper he wrote for the United States Congress. Since then, GDP has become an important feature in economic and political analysis.

 

A current example - New Zealand recently signed the Regional Comprehensive Economic Partnership (RCEP) free trade agreement with China, Japan, and a number of other countries across Asia. Guess what? The first sentence in the Beehive press release states that the agreement will increase NZ's GDP by $2 billion overall. Measuring the increase in GDP from these types of decisions is standard practice. That's not a bad thing, it's just not close to the full picture.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other measures of societal success don't have the same level of importance

GDP matters. It is an important measure. Not for the number itself obviously, but what it implies. High GDP suggests an economy is producing a lot of stuff that can be used by people to better their lives and wellbeing. People care about the economy so it makes sense to measure economic success. Measuring GDP was an important step in the right direction in terms of measuring social and economic wellbeing.

 

Money may not buy happiness, but it definitely helps. Of course, taking GDP in isolation is stupid. But there is nothing wrong with it as a measure in and of itself, GDP is an important thing to take stock of on a regular basis. The problem is how GDP is used and the attachment to it.

 

There are many other measures of social success. However, other than employment figures, they just aren't ascribed the same level of importance. That is the crucial point. GDP is assigned a higher level of importance than is warranted for what it does. Perhaps that's because it's easy to understand and communicate. Or maybe politicians love the fact that it tends to go up and that makes them look good.

Play stupid games, win stupid prizes

 

GDP doesn't care if you dig a hole, and fill it in again. GDP will still be higher from paying someone to do that, even though nothing has changed. A sick person visiting the doctor increases GDP. Spending all day at the beach on the other hand does not, unless you buy ice cream. Visiting the beach is much more enjoyable than seeing the doctor, but its not worthwhile from the perspective of GDP. GDP measures throughput. That's it. Not social wellbeing. GDP is the result of effort rather than being a good outcome in its own right.

 

With this in mind, we don't necessarily want GDP to go up. It depends on why it goes up. Increasing GDP, because people do more of what they enjoy, is a good thing. Increasing GDP because a country goes to war and spends up large on missiles and tanks is not.

 

A society that chases GDP designs an economy to maximize GDP. That is where ascribing too much importance to GDP becomes incredibly dangerous - hence play stupid games win stupid prizes. When we chase GDP in lieu of innovations/investments that would meaningfully improve social progress we prioritise the economy instead of human experience.

 

Ideas like a four-day workweek seem relatively less important if it means we compromise a day of productivity. Being a stay at home parent could be considered to have limited value because production is how the economy recognises value. We know that is nonsense, however, people may believe that they have less to offer if they don't create much economically speaking.

 

The issue here is one of relative priority. We prioritise economic measures ahead of others that are also critical.

 

So we need other measures of societal success on par with GDP in terms of importance

 

What other measures of societal success are important? A few come to mind:

  • Amount of free time - the more free time the better. Reducing work hours is generally a good thing as it gives people more time for family and hobbies.

  • Life expectancy - longer life is a crucial measure of societal success as it tells us a lot (but not everything) about people's health status.

  • % of people who have all the necessities of life - the % of people with enough food, shelter, clothing, etc. Measures like this tell us about how we treat the most vulnerable.

  • Equality - there are many measures of equality, the Gini coefficient, the % of people earning 80% of income, or the % of people with 80% of the wealth. Governments should choose one measure and try to improve on it the way they do GDP. Equality is important as it tells us the extent to which the benefits of wealth/income are shared.

Reporting on these measures already exists - which is the point. It's easier to work with what you've got. Elevating their level of importance in the public eye would be a step in the right direction to a more holistic understanding of societal success.

 

GDP is great at what it does but reporting social measures like equality alongside GDP is something governments and media could do today to reduce the focus on it as a measure of success. Dashboards like the Living Standards Framework developed by the NZ Treasury are an essential step in this regard. They help people see the bigger picture and support the acceptance and the development of more measures of societal success.