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GDP – What is it good for?

So  I thought that rather than spending another late night drinking tea and arguing round in circles with you I’d write a public response to our private argument! Or, probably I should say discussion, as really what it is is a kind of failure to really understand each other. The problem is that I studied economics and work in a bank – and that gives me what must seem a strange kind of perspective. So i thought I’d try and share a slice that perspective with you, and my handful of readers, in order to try and build a bridge that we can return to whenever this kind of thing comes up again.

I said last night in our conversation that countries with higher GDP per capita were generally better. We were discussing this in the context of whether international aid was harmful or helpful. GDP is one of those things that means very different things to different people. To an economist the meaning is quite simple – the total value of the goods and services produced by an economy in a year. It includes much that does not matter and counts much that might not be regarded by many as bad or harmful – many countries even include drugs and prostitution in GDP statistics now – but it is essentially the sum total of everything that’s produced that can plausibly be counted. Now, in general because we believe that most human relations are voluntary, it largely follows that more GDP means more things produced and actions done that fulfilled peoples needs and wants. In that sense, it’s a pretty uncontroversial claim that more GDP is better than less.

However, the opposite of a great truth is another great truth. Arguably, a big chunk of liberal political thought relates to dealing with the times more GDP is not better. I say liberal here meaning contemporary social democratic, think Many important liberal causes explicitly relate to this. Environmental protection for example, which you specifically described, essentially deals with the fact that there are external costs imposed by pollution that need to be addressed in some way to prevent harmful activity happening. The concern with inequality is, to a large extent, the concern that increasing the amounts of goods and services consumed by the rich and powerful is not very useful. This , I think, rather distorts the perspective of people who are associated with these causes such as you! During our conversation you were extremely quick to point to these issues. This difference in perspective creates a difficulty because it affects how we view something like differences in GDP between countries. For you, studying and thinking about the ways in which economic activity can harm things as you inevitably do in your field of international relations, you’re going to view GDP differently.

When you demand to an economist that they consider something “beyond” GDP, or consider a wider perspective, you’re making a big assumption that they don’t already do so! Whilst it’s manifestly true that GDP is not everything, and even within economics there are many other numbers and things that one could look at to say interesting things about the world, it’s kind of a trivial point. Economists know this quite intimately – because we know that GDP is a pretty arbitrary and artificial statistical construct, and actually quite a recent invention. It doesn’t measure everything and it’s not supposed to. Economists know this. However, it does include a lot. If you consider that GDP includes babysitting services and sales of tickets for death metal gigs as well as the output of steel mills – it’s obvious that we’re not just capturing the more cold blooded and impersonal aspects of human relations when we measure GDP, or talk about “The Economy”. It’s not some special and narrow slice of what goes on in the world – it’s a pretty broad look.

The other thing to bear in mind is that many of the alternatives are quite bad. Many have tried to foist alternative measures of output on the world – or even worse subject people to arbitrary and biased surveys of happiness that are hugely skewed by the norms and ideas of those doing the surveys. Looking at things like Child Mortality, or Education levels can be good for sure, but most of those things are so correlated with GDP that they don’t really tell us much more about a society at the margin. I prefer, in general, to not let the perfect be the enemy of the good.

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