Are we really moving beyond GDP?

A tectonic shift in how policymakers think about economic performance and growth is said to be occurring. The work the Office for National Statistics (ONS) is doing in developing well-being measures to complement GDP is purportedly a prime example of the very real possibilities of integrating alternative social, economic and environmental indicators into the economic policymaking process.[1] Indeed, a Treasury paper has highlighted the potential for subjective well-being indices to become a realistic complement to traditional economic approaches.[2] David Cameron himself was adamant, in late 2010, that:

A tectonic shift in how policymakers think about economic performance and growth is said to be occurring. The work the Office for National Statistics (ONS) is doing in developing well-being measures to complement GDP is purportedly a prime example of the very real possibilities of integrating alternative social, economic and environmental indicators into the economic policymaking process.[1] Indeed, a Treasury paper has highlighted the potential for subjective well-being indices to become a realistic complement to traditional economic approaches.[2] David Cameron himself was adamant, in late 2010, that:

“It’s time we admitted that there’s more to life than money and it’s time we focused not just on GDP but on GWP – general wellbeing. Wellbeing can’t be measured by money or traded in markets. It’s about the beauty of our surroundings, the quality of our culture and, above all, the strength of our relationships. Improving our society’s sense of wellbeing is, I believe, the central political challenge of our time.”

This was reflective of similar approaches across the world, including the kingdom of Bhutan’s concept of Gross National Happiness (GNH), the use of ‘Green GDP’ indexes in many countries, and the work of the OECD and the European Union in developing alternative models of economic growth, prosperity, progress and well-being ‘beyond GDP.’[3] Much of the recent impetus for looking past GDP came from the Stiglitz Commission in 2009. The Stiglitz Commission, which was established by French President Nicolas Sarkozy and headed by Joseph Stiglitz, made a number of scathing criticisms about the tendency for many economists and policymakers to regard GDP growth and economic welfare as synonymous.

In reality, GDP increases are only associated with accompanying improvements in well-being to a degree, with a “threshold effect” eventually coming into play. As countries reach this threshold point – as most advanced industrial nations have – any additional increase in GDP either does not improve national well-being or even causes it to decline, as a result of the social and environmental costs associated with GDP growth - such as widening social inequality and disruptions in community cohesion.[4] Moreover, progress more broadly is often at odds with GDP growth. Researchers in Canada applied an index called Genuine Progress Indicator (GPI) – which adjusts national accounts by incorporating non-market economic activities (e.g. household labour), sustainability, environmental degradation and depletion of natural capital – to the province of Alberta and found that between 1961 and 2003 just as Alberta’s GDP index went up from 17 to 100, its genuine progress rating declined from 76 to 61.[5]

The conventional macroeconomic model also has many other shortfalls. For example, by only focusing on monetary exchanges, GDP cannot account for the value or growth of non-market activities. These constitute what David Halpern calls the economy of regard – those things that bind us together and build the social relationships that are the lifeblood of our communities. Unpaid household labour, looking after kin and non-kin, and engaging with community institutions – these are just some of the economic activities that are ignored by GDP and traditional national accounts, despite the fact that they often enable the ‘real’ economy to run smoothly, for example by creating the social conditions necessary for a functioning society. Not only does GDP ignore these positive, non-monetary human economic activities, it also perversely sees ‘bad’ things – or “social regrettables” – as economically beneficial. Under a GDP perspective natural disasters, rampant crime and environmental degradation lead to monetary exchanges, and therefore are regarded as benefiting national accounts. Indeed, there is no distinction between assets and liabilities in GDP.

For these reasons, politicians across the world have been keen to show there’s more to economic life and well-being than narrow market growth. But how genuine is their commitment? Pat Kane, a community activist that has been intimately involved in the well-being agenda, rightly points out that you’d be forgiven for thinking Sarkozy and Cameron – supposed well-being gurus – cared about much beyond conventional macroeconomic growth.[6] Witness Sarkozy lecturing Greece that there are macroeconomic ‘rules that have to be followed’, or David Cameron referring to GDP as ‘the foundation of all our aspirations.’

On Tuesday Oliver Letwin, who is involved in the well-being agenda in government, spoke at the launch of Demos’s ‘good growth index’. He said there’s a peculiar dissonance between what we all feel about GDP growth – i.e. that it is only one element of general economic growth and welfare – and what we actually say and do in practice. While we know GDP isn’t the central measure of progress, politicians, the media, economists and business leaders continue to act as if it’s the only measure of importance. Why is this? Jeroen van den Bergh has an interesting perspective. He argues that this GDP obsession is partly caused by a self-fulfilling prophecy mechanism, fuelled by the centrality of perceptions in financial markets. When all the key actors think GDP is important – politicians, governments, financial institutions, international organisations, consumers – then this inevitably influences the ‘real’ economy and in turn perpetuates perceptions about the importance of GDP in these actors’ minds. GDP information effectively creates a pro-cyclic effect. Politicians also face the pressures of needing to create the right climate for financial growth and stability, and also to be sensitive to public opinion. The GDP bias may additionally represent a form of bounded rationality, where a simple to understand indicator like GDP provides a conceptual simplification of complex processes – something humans are drawn to. In many respects it’s also become what John Searle refers to as a “social fact” – a form of socially constructed ‘reality’, which is passed on through docility (learning and absorbing ideas from others in a non-critical way).[7]

Moreover, as Kane alludes to, the Coalition government’s philosophy – cutting deep and fast to reduce the deficit and maintain macroeconomic stability and credibility, shrinking the state and simply trying to ‘nudge’ society to better outcomes – may be at odds with taking well-being seriously in a policymaking sense. For example, the income-compensation technique – a method derived from wellbeing studies and psychological damage assessments in legal cases – is able to use data on the correlation between wages and happiness to calculate the money that would be required to compensate someone for losing access to a free public good. A report from the Department of Culture, Media and Sport suggested that the psychological satisfaction derived from attending concerts regularly was equivalent to £9,000 of extra income. Conversely, a Young Foundation report calculated that a person that is made unemployed would require £23,000 per month to compensate for the resulting psychological injury.

If regular attendance of concerts is equivalent to £9,000 of extra income, then what might be the true psycho-economic cost of the government’s strategy of massive spending cuts to the public goods citizens were previously entitled to – not to mention the increasing rates of unemployment partly caused by its deficit reduction strategy? If policymakers really are interested in more than GDP, then why are they so preoccupied with gaining ‘macroeconomic credibility’ – which studies show is not particularly connected to well-being beyond a threshold point – while the services that really drive and sustain well-being are ignored or given to the markets or struggling charities and social enterprises to take responsibility for? This is clearly not a well-being agenda. Kane makes a very crucial point – we need a new Keynesianism, not fiscal austerity:

So wellbeing indicators, taken seriously at government level, could justify a gentler, more Keynesian response to the national deficit and global economic crisis.

The government’s response to such arguments is almost predictable. Services should definitely be in place to strengthen the nation’s well-being, they’ll say. But this shouldn’t be the responsibility of the state. It was Labour’s profligacy that got us here in the first place, after all! We don’t have the money. But the Big Society does. Let this Big Society entity take responsibility for ensuring well-being, even as we cut funding to it. Let our only job be to take control of this massive existential threat to the existence of the UK as we know it (yes, an even bigger threat than those pesky immigrants), the deficit. We need to take control of this national deficit, just so we can regain macroeconomic credibility and the markets love us again, at which point we’ll proceed to make arguments for needing to go beyond GDP again.

A top-down approach to ‘delivering’ well-being won’t work – citizens need to be empowered and provided with the capacity to co-produce the services that are so vital to their well-being. But this isn’t an argument for state shrinkage or withdrawal – it is the responsibility of the state, albeit in the context of a new role, to engage with this process; to make the ‘Big Society’ real, and not merely smoke and mirrors for fiscal austerity.

[1] http://www.ons.gov.uk/ons/guide-method/user-guidance/well-being/index.html

[2] http://www.hm-treasury.gov.uk/data_greenbook_news.htm

[3] E.g. see http://www.beyond-gdp.eu/

[4] E.g. see Costanza. R. et al. (2009), ‘Beyond GDP: The Need for New Measures of Progress’, The Pardee Papers, No. 4. http://www.oecd.org/dataoecd/29/6/42613423.pdf  

[5] Taylor, A. (2005), ‘The Alberta GPI summary report’, Pembina Institute for Appropriate Development (Alberta, Canada) 

[6] http://www.guardian.co.uk/commentisfree/2011/nov/13/wellbeing-agenda-navel-gazing-innovation-survival

[7] Bergh, J. van den (2007), ‘Abolishing GDP’, Tinbergen Institute Discussion Paper TI-2007 09/13.

[8] John Searle, The Construction of Social Reality (New York: The Free Press: 1995).