A Post-GDP World?

by Matthew Fright

In 2009, then-President of France Nicolas Sarkozy commissioned the Stiglitz Review; a report by leading economic experts which deeply questioned the role of Gross Domestic Product (GDP) as a policy tool.  Announcing the review, Sarkozy said,

Our statistics and accounts reflect our aspirations, the values that we assign things. They are inseparable from our vision of the world and the economy, of society, and out conception of human beings and our inter-relations. Treating these as objective data, as if they are external to us, beyond question or dispute, is undoubtedly reassuring and comfortable, but it’s dangerous.

The Review reflects the aftermath of the global financial crisis, when many had become sceptical of the ability of ‘experts’ to observe and forecast the economy, and questioned the nature of value and how it is measured.

At the centre of these debates is the question of what measures like GDP are for. Early economic measurement dates back to the late 17th century, when William Petty, a student of Thomas Hobbes, sought ‘objective’ figures to understand the economic strength of England, in response to the upheaval of the English Civil War, fear of war with France, and the need of the state to finance a defence force efficiently. In the 20th century, the world wars fuelled similar efforts to measure national income in Britain and across Europe, to allow governments to finance their war efforts while keeping inflation under control. The British accounts from this period, devised by James Meade and Richard Stone following a new framework devised by John Maynard Keynes, became the foundation of the figures we use today. In the aftermath of the war, the United Nations adjusted this accounting system into a global standard, which placed primary emphasis on growth, and pushed state policy towards “growthmanship.”

Using GDP, which descends from this post-war consensus, as a barometer of welfare is therefore inaccurate. Its inventors would hardly condone it being used this way as the health of a society requires us to consider a host of other criteria beyond the financial health of the state such as justice, the environment, health and education outcomes. Indeed, using GDP as a proxy for welfare is dangerous. Statistics can have a huge influence upon public opinion and government action, and it would be wrong to plan government policy on the basis that state financial security is synonymous with social welfare, as new data on life expectancy in Britain shows.

Economists have in recent decades been experimenting with alternative measures of welfare. These include the Human Development Index, a figure modelled on GDP but with social measures such as life expectancy and education additionally factored in, which has gained prominence because it is a simple measure. Yet the number and specificity of social metrics that can be incorporated in this kind of aggregate measure is necessarily limited.

Instead, scholars have begun to turn to more specific measures that emphasise a particular vision of welfare. For example, the Capability Approach draws on the works of Amartya Sen and Martha Nussbaum to measure the Ancient Greek notion of Eudaimonia or ‘human flourishing,’ emphasising freedom and choice as measures of social welfare. While influential in academia, the philosophical complexity of this model have made it hard to sell in a fast-paced policy environment.

Others, including Richard Layard, have sought to measure happiness using people’s own subjective perception of their own wellbeing. This measure has influenced wellbeing surveys conducted by governments, including the UK, but it can be hard to sell as sensible when taken to the extreme.

Environmental economists have advocated for Green National Accounting, to measure the sustainability of economic production, while feminist economists have argued for ‘household time measures’ to integrate domestic labour like cleaning, cooking and caring for children to better represent the women who still shoulder the burden of this work. This approach promises to recognise all of society rather than just those who work in the ‘market place.’

While these conversations are welcome, the number of alternative approaches, and the debates between their proponents, have made it difficult for any one measure to overtake GDP, which continues to be misused as a social welfare metric. This is in part because each of the alternative metrics is relevant to particular areas of policy, but public debate often calls for a clear summary number that can reach across policy areas. So GDP lumbers on.

At the same time, its core purpose – as a measure of financial health – has been called into question by the shift to a digital economy which is difficult to measure according to a conceptual framework developed for the industrial age. GDP can adapt to these changes, however. In the 1970s statisticians adjusted the way they measured the quality of production, for example, to account for the effect of spiralling inflation on market prices.

At the time of the Brexit referendum, it was clear that notions of “governing the country” and “managing the economy” had become too abstract, tied to decisions taken at the national and international level. People are increasingly clamouring for a picture of the world they actually live in, and for more decision-making at the local level. Popularising alternative measurements that foreground people’s welfare can help.

For more on the power of statistics, try these recent public lectures.

About the Author

Matthew Fright

Matthew Fright is a PhD Candidate in Development Studies at the University of Cambridge, where his research focuses upon the emergence of Social Accounting in 1930s and how we measure value today. He previously worked in the UK's National Audit Office.