It’s an odd quirk of historical past that, on the primary day of his ill-fated presidential marketing campaign in March 1968, Robert F Kennedy selected to speak to his viewers in regards to the limitations of gross home product* (GDP) – the world’s headline indicator of financial progress.
It appears stranger nonetheless that, regardless of the ability of that iconic speech, development in GDP stays to this present day the predominant measure of progress the world over. Financial success is measured by it. Authorities coverage is assessed by it. Political survival hangs on it.
Kennedy’s speech impressed a bunch of critiques. It has been quoted by presidents, prime ministers and Nobel laureates. But GDP itself has survived till now, more-or-less unscathed. However amid ever-louder considerations in regards to the failure of nationwide economies to deal with the a number of threats posed by local weather change, spiralling vitality prices, insecure employment and widening ranges of inequality, the necessity to outline and measure progress differently now seems as unarguable as it’s pressing.
The products, the bads, and the lacking
In easy phrases, GDP is a measure of the dimensions of a rustic’s economic system: how a lot is produced, how a lot is earned, and the way a lot is spent on items and providers throughout the nation. The financial whole, whether or not in {dollars} or euros, yuan or yen, is then adjusted for any normal improve in costs to provide a measure of “actual” financial development over time. When governments undertake insurance policies to pursue financial development, that is how these insurance policies are evaluated.
Since 1953, GDP has been the headline measure in a fancy system of nationwide accounts overseen by the United Nations. Developed through the second world conflict, these accounts had been motivated partly by the necessity to decide how a lot governments may afford to spend on the conflict effort.
This story is a part of Dialog Insights
The Insights crew generates long-form journalism and is working with lecturers from totally different backgrounds who’ve been engaged in tasks to deal with societal and scientific challenges.
However in measuring the financial worth of financial exercise, GDP can incorporate most of the “bads” that detract from our high quality of life. Conflict, air pollution, crime, prostitution, visitors congestion, disasters like wildfires and the destruction of nature – all can have a constructive affect on GDP. But they can’t actually be construed as parts of financial success.
On the similar time, there are quite a few facets of our lives that merely go lacking from this typical account. The inequality in our societies. The contributions from unpaid work. The labour of those that take care of the younger and the aged at dwelling or locally. The depletion of pure sources or biodiversity. And the worth of knowledge and lots of digital providers.
What lies exterior the market, together with public providers funded out of taxation, stays unmeasured in a metric of financial change. Kennedy was blunt: “[GDP] measures every little thing, in brief, besides that which makes life worthwhile.”
It’s a sentiment that has resonance half a century later. In a putting encounter through the Brexit debate, a UK tutorial was making an attempt to convey to a public assembly the risks of leaving the EU. The affect on GDP would dwarf any financial savings from the UK’s contributions to the EU price range, he advised the viewers. “That’s your bloody GDP!” shouted a girl within the crowd. “It’s not ours.”
This sense of an indicator out of contact with actuality could also be one of many causes there may be momentum for reform. When GDP conceals essential variations between the richest and the poorest in society, it inevitably says little in regards to the prospects for odd individuals.
However there are different causes too for an rising change of coronary heart. The pursuit of GDP development as a coverage objective, and the affect that has on authorities, enterprise and private decision-making, has accompanied rising devastation of the pure world, a lack of forests and habitats, the destabilisation of the local weather, and near-meltdowns of the world’s monetary markets. On the similar time, GDP has develop into a poor measure of the technological transformation of society.
Its tenacity as a measure of progress, regardless of these well-known limitations, arises from elements that are on the one hand technocratic, and on the opposite sociological. Because the headline measure in a complicated system of nationwide accounts, GDP has a technocratic comfort and analytical class that continues to be unsurpassed by many different measures. Its authority arises from its means to be concurrently a measure of manufacturing output, consumption expenditure and revenue within the economic system.
Learn extra:
GDP numbers should not what they appear: how they increase US and UK at expense of growing international locations
Regardless of this complicated framework, it additionally presents the misleading simplicity of a single headline determine which seems to be immediately comparable from yr to yr and throughout nations, based mostly on the easy (if insufficient) concept that extra financial exercise essentially results in a greater life.
Nonetheless, the mixed technical authority and political usefulness of this concept has led to “path dependence” and types of social lock-in which can be troublesome to deal with with out important effort. Consider switching to another as being like switching from driving on the left to the right-hand aspect of the highway.
But what we measure issues. And whereas we’re busy wanting within the flawed path, as Kennedy identified, unhealthy issues can occur. Kennedy’s marketing campaign – and his critique of GDP – was minimize cruelly brief on June 5 1968, when he was fatally wounded by an murderer’s bullet. Greater than half a century later, his name for reform of how we assess progress (or its absence) has by no means been stronger.
The difficulty with GDP: historic flaws
The way in which societies have understood and measured progress has modified significantly over the centuries. Measurement of “the economic system” as an entire is a comparatively trendy, Twentieth-century idea, starting with efforts by statisticians and economists resembling Colin Clark and Simon Kuznets within the Twenties and Thirties to know the affect of economic disaster and melancholy.
Kuznets, now finest recognized for his curve describing the connection between GDP and revenue inequality, was notably involved to develop a measure of financial welfare moderately than simply exercise. For instance, he argued for omitting expenditures that had been unwelcome requirements moderately than providers or items customers actively needed – resembling defence spending.
Nonetheless, the second world conflict overtook and absorbed these earlier notions of a single measure of financial welfare, leading to what first turned trendy gross nationwide product (GNP), after which GDP. The crucial – set out on the Allied aspect by John Maynard Keynes in his 1940 pamphlet The right way to Pay for the Conflict – was measuring productive capability, and the discount in consumption required to have sufficient sources to help the army effort. Financial welfare was a peacetime concern.
Submit-war, unsurprisingly, American and British economists resembling Milton Gilbert, James Meade and Richard Stone took the lead in codifying these statistical definitions via the UN – and its course of for agreeing and formalising definitions within the system of nationwide accounts (SNA) continues to be in place immediately. Nonetheless, since at the least the Nineteen Forties, some vital inadequacies of each the SNA and GDP have been extensively recognized and debated.
Certainly, as way back as 1934, Margaret Reid revealed her e-book Economics of Family Manufacturing, which identified the necessity to embody unpaid work within the dwelling when fascinated by economically helpful exercise.
The query of whether or not and the right way to measure the family and casual sectors was debated through the Fifties – notably as this makes up a bigger share of exercise in low-income international locations – however was omitted till some international locations, together with the UK, began to create family satellite tv for pc accounts round 2000. Omitting unpaid work meant, as an example, that the UK’s elevated productiveness development between the Sixties and Eighties was then overstated, as a result of it partly mirrored the inclusion of many extra girls in paid work whose contributions had beforehand been invisible to the nationwide GDP metric.
One other longstanding and extensively understood failure of GDP will not be together with environmental externalities and the depletion of pure capital. The metric takes incomplete account of many actions that wouldn’t have market costs, and ignores the extra social prices of air pollution, greenhouse fuel emissions and comparable outputs related to financial actions.
Learn extra:
An obsession with financial development is not going to make the perfect use of pure belongings
What’s extra, the depletion or lack of belongings resembling pure sources (or certainly buildings and infrastructure misplaced in disasters) boosts GDP within the brief time period as a result of these sources are utilized in financial actions, or as a result of there’s a surge in development after a catastrophe. But the long-term alternative prices are by no means counted. This large shortcoming was extensively mentioned on the time of landmark publications such because the 1972 Limits to Development report from the Membership of Rome, and the 1987 Brundtland Report from the World Fee on Surroundings and Improvement.
As with family and casual exercise, there was latest progress in accounting for nature, with the event of the System of Environmental Financial Accounting (SEEA) and publication of standard (however separate) statistics on pure capital in a lot of international locations. The UK has once more been a pioneer on this space, whereas the US lately introduced it will begin following this method too.
New challenges to the worth of GDP
Different, maybe much less apparent failings of GDP have develop into extra outstanding lately. Digitisation of the economic system has remodeled the best way many individuals spend their days in work and leisure, and the best way many companies function, but these transformations should not obvious in official statistics.
Measuring innovation has at all times been tough, as a result of new items or improved high quality should be included into observable costs and portions – and what’s the metric for a unit of software program or administration consultancy? However it’s tougher now as a result of many digital providers are “free” at level of use, or have the options of public items in that many individuals can use them on the similar time, or are intangible. For instance, knowledge is doubtless bettering the productiveness of corporations that know the right way to use it to enhance their providers and produce items extra successfully – however how ought to a dataset’s worth, or potential worth, to society (versus a giant tech firm) be estimated?
Current work wanting on the worth of telecommunications providers within the UK has estimated that output development on this sector since 2010 has ranged wherever from about 0% to 90%, relying on how the worth index used to transform market costs to actual (inflation-adjusted) costs takes account of the financial worth of our quickly rising use of knowledge. Equally, it isn’t apparent the right way to incorporate advertising-funded “free” search, crypto currencies and NFTs within the measurement framework.
Avenue artist Banksy’s momentary showroom critiquing world society in south London, October 2019.
Shutterstock
A key limitation of GDP, notably when it comes to its use as an indicator of social progress, is that it presents no systematic account of the distribution of incomes. It’s fully potential for common or combination GDP to be rising, at the same time as a big proportion of the inhabitants discover themselves worse off.
Peculiar incomes have stagnated or fallen in latest many years even because the richest in society have develop into wealthier. Within the US, for instance, Thomas Piketty and his colleagues have proven that within the interval between 1980 and 2016, the highest 0.001% of society noticed their incomes develop by a median of 6% per yr. Earnings for the poorest 5% of society fell in actual phrases.
Given these many points, it might sound stunning that the controversy about “Past GDP” is barely now – probably – turning into actions to vary the official statistical framework. However paradoxically, one hurdle has been the proliferation of other progress metrics.
Learn extra:
How poorer residents pay the worth of financial change within the UK
Whether or not these are single indices that mix a lot of totally different indicators or dashboards showcasing a variety of metrics, they’ve been advert hoc and too different to construct consensus round a brand new world manner of measuring progress. Few of them present an financial framework for consideration of trade-offs between the separate indicators, or steering as to the right way to interpret indicators shifting in numerous instructions. There’s a breadth of data however as a name to motion, this can not compete towards the readability of a single GDP statistic.
Statistical measurement is sort of a technical commonplace resembling voltage in electrical energy networks or the Freeway Code’s guidelines of the highway: a shared commonplace or definition is important. Whereas an amazing majority would possibly agree on the necessity to transcend GDP, there additionally must be sufficient settlement about what “past” truly entails earlier than significant progress on how we measure progress may be made.
Change behaviour, not simply what we measure
There are lots of visions to supplant GDP development because the dominant definition of progress and higher lives. Within the wake of the COVID pandemic, it has been reported that most individuals desire a fairer, extra sustainable future.
Politicians could make it sound easy. Writing in 2009, the then-French president Nicolas Sarkozy defined he had convened a fee – led by internationally acclaimed economists Amartya Sen, Joseph Stiglitz and Jean-Paul Fitoussi – on the measurement of financial efficiency and social progress on the premise of a agency perception: that we are going to not change our behaviour “until we modify the methods we measure our financial efficiency”.
Sarkozy additionally dedicated to encouraging different international locations and worldwide organisations to comply with the instance of France in implementing his fee’s suggestions for a set of measures past GDP. The ambition was a minimum of the development of a brand new world financial, social and environmental order.
In 2010, the recently-elected UK prime minister, David Cameron, launched a programme to implement the Sarkozy fee’s suggestions within the UK. He described this as beginning to measure progress as a rustic “not simply by how our economic system is rising, however by how our lives are bettering – not simply by our lifestyle, however by our high quality of life”.
As soon as once more, the emphasis was on measurement (how far have we bought?) moderately than behaviour change (what ought to individuals do in a different way?). The implication is that altering what we measure essentially results in totally different behaviours – however the relationship will not be that easy. Measures and measurers exist in political and social spheres, not as absolute information and impartial brokers to be accepted by all.
This could not dissuade statisticians from growing new measures, nevertheless it ought to immediate them to have interaction with all who is perhaps affected – not simply these in public coverage, commerce or business. The purpose in any case is to vary behaviour, not simply to vary the measures.
Economists are more and more adopting complicated techniques pondering, together with each social and psychological understandings of human behaviour. For instance, Jonathan Michie has pointed to moral and cultural values, in addition to public coverage and the market economic system, as the large influences on behaviour. Katharina Lima di Miranda and Dennis Snower have highlighted social solidarity, particular person company and concern for the atmosphere alongside the “conventional” financial incentives captured by GDP.
GDP alternate options in follow
Since Kennedy’s 1968 critique, there have been quite a few initiatives to exchange, increase or complement GDP through the years. Many dozens of indicators have been devised and applied at native, nationwide and worldwide scales.
Some purpose to account extra immediately for subjective wellbeing, for instance by measuring self-reported life satisfaction or “happiness”. Some hope to replicate extra precisely the state of our pure or social belongings by growing adjusted financial and non-monetary measures of “inclusive wealth” (together with a crew on the College of Cambridge led by this text’s co-author Diane Coyle). The UK authorities has accepted this as a significant method to measurement in a number of latest coverage paperwork, together with its Levelling Up white paper.
There are two basic arguments for a wealth-based method:
It embeds consideration for sustainability within the valuing of all belongings: their worth immediately will depend on your entire future move of providers they make out there. That is precisely why stockmarket costs can fall or rise abruptly, when expectations in regards to the future change. Equally, the costs at which belongings resembling pure sources or the local weather are valued should not simply market costs; the true “accounting costs” embody social prices and externalities.
It additionally introduces a number of dimensions of progress, and flags up the correlations between them. Inclusive wealth consists of produced, pure and human capital, and likewise intangible and social or organisational capital. Utilizing a complete wealth steadiness sheet to tell choices may contribute to creating higher use of sources – for instance, by contemplating the shut hyperlinks between sustaining pure belongings and the social and human capital context of individuals residing in areas the place these belongings are below risk.
Different initiatives purpose to seize the multi-dimensional nature of social progress by compiling a dashboard of indicators – usually measured in non-monetary phrases – every of which makes an attempt to trace some side of what issues to society.
New Zealand’s Dwelling Requirements Framework is the best-known instance of this dashboard method. Relationship again to a 1988 Royal Fee on Social Coverage and developed over greater than a decade throughout the New Zealand Treasury, this framework was precipitated by the necessity to do one thing in regards to the discrepancy between what GDP can replicate and the last word purpose of the Treasury: to make life higher for individuals in New Zealand.
The NZ Treasury now makes use of it to allocate fiscal budgets in a fashion in line with the recognized wants of the nation in relation to social and environmental progress. The relevance to combating local weather change is especially clear: if authorities spending and funding are centered on slim measures of financial output, there may be each chance that the deep decarbonisation wanted to attain a simply transition to a web zero carbon economic system might be inconceivable. Equally, by figuring out areas of society with declining wellbeing, resembling youngsters’s psychological well being, it turns into potential to allocate Treasury sources on to alleviate the issue.
The UK’s Measuring Nationwide Wellbeing (MNW) programme, directed by Paul Allin (a co-author of this text), was launched in November 2010 as a part of a government-led drive to put larger emphasis on wellbeing in nationwide life and enterprise. A lot of the emphasis was on the subjective private wellbeing measures that the UK’s Workplace for Nationwide Statistics (ONS) continues to gather and publish, and which seem like more and more taken up as coverage objectives (pushed partly by the What Works Centre for Wellbeing).
The MNW crew was additionally charged with addressing the complete “past GDP” agenda, and undertook a big session and engagement train to search out out what issues to individuals within the UK. This offered the premise for a set of indicators overlaying ten broad areas that are up to date by the ONS sometimes. Whereas these indicators proceed to be revealed, there isn’t any proof that they’re getting used to complement GDP because the UK’s measure of progress.
Accounting for inequality inside a single combination index is clearly tough. However a number of options to this drawback exist. Certainly one of them, advocated by the Sen-Stiglitz-Fitoussi fee, is to report median moderately than imply (or common) values when calculating GDP per head.
One other fascinating chance is to regulate the combination measure utilizing a welfare-based index of inequality, such because the one devised by the late Tony Atkinson. An train utilizing the Atkinson index carried out by Tim Jackson, additionally a co-author of this text, calculated that the welfare loss related to inequality within the UK in 2016 amounted to nearly £240 billion – round twice the annual price range of the NHS at the moment.
Learn extra:
The seek for a substitute for GDP to measure a nation’s progress – the New Zealand expertise
Among the many most bold makes an attempt to create a single different to GDP is a measure which has develop into referred to as the Real Progress Indicator (GPI). Proposed initially by economist Herman Daly and theologian John Cobb, GPI makes an attempt to regulate GDP for a variety of things – environmental, social and monetary – which aren’t sufficiently nicely mirrored in GDP itself.
GPI has been used as a progress indicator within the US state of Maryland since 2015. Certainly, a invoice launched to US Congress in July 2021 would, if enacted, require the Division of Commerce to publish a US GPI, and to “use each the indicator and GDP for budgetary reporting and financial forecasting”. GPI can also be utilized in Atlantic Canada, the place the method of constructing and publishing the index types a part of this group’s method to its growth.
A possible gamechanger?
In 2021, the UN secretary-general António Guterres concluded his Our Frequent Agenda report with a name for motion. “We should urgently discover measures of progress that complement GDP, as we had been tasked to do by 2030 in goal 17.19 of the Sustainable Improvement Targets.” He repeated this demand in his priorities for 2022 speech to the UN Normal Meeting.
Guterres referred to as for a course of “to convey collectively member states, worldwide monetary establishments and statistical, science and coverage consultants to determine a complement or enhances to GDP that may measure inclusive and sustainable development and prosperity, constructing on the work of the Statistical Fee”.
The primary handbook explaining the UN’s system of nationwide accounts was revealed in 1953. It has since been via 5 revisions (the final in 2008) designed to meet up with developments within the economic system and monetary markets, in addition to to fulfill person wants the world over for a wider unfold of data.
The subsequent SNA revision is presently in growth, led by the UN Statistics Division and primarily involving nationwide statistical places of work, different statistical consultants and institutional stakeholders such because the IMF, World Financial institution and Eurostat.
However not like the UN’s COP processes regarding local weather change and, to a lesser extent, biodiversity, there has, so far, been little wider engagement with events – from enterprise leaders and political events to civil society, non-governmental organisations and most people.
Because the British science author Ehsan Masood has noticed, this revision course of is going on beneath the radar of most people who find themselves not presently customers of nationwide accounts. And this implies many very helpful concepts that could possibly be being fed in are going unheard by those that will finally make choices about how nations measure their progress sooner or later.
Learn extra:
Why UK’s ‘treasured free-market economic system’ is not going to obtain web zero
The essence of sustainable growth was captured within the 1987 Brundtland Report: “To contribute to the welfare and wellbeing of the present technology, with out compromising the potential of future generations for a greater high quality of life.” But it stays unclear how the subsequent SNA revision will present such an intergenerational lens, regardless of a brand new deal with “lacking” capitals together with pure capital.
Equally, whereas the revision programme is addressing globalisation points, these are solely about world manufacturing and commerce – not, for instance, the impacts of nationwide economies on the atmosphere and wellbeing of different international locations and populations.
Formidable deadlines have been set additional into the longer term: reaching the UN’s Sustainable Improvement Targets by 2030, and decreasing world web emissions of greenhouse gases to zero earlier than 2050. The SNA revision course of – which is able to see a brand new system of nationwide accounts agreed in 2023 and enacted from 2025 – is a key step in reaching these longer-term objectives. That’s the reason opening up this revision course of to wider debate and scrutiny is so vital.
It’s time to desert this ‘GDP fetish’
One lesson to be taught from the historical past of indicators, resembling these about poverty and social exclusion, is that their affect and effectiveness relies upon not solely on their technical robustness and their health for goal, but additionally on the political and social context – what are the wants of the time, and the prevailing local weather of concepts?
The present SNA revision ought to be a course of as a lot in regards to the use and usefulness of recent measures as about their methodological rigour. Certainly, we’d go so far as Gus O’Donnell, the previous UK cupboard secretary, who stated in 2020: “After all measurement is tough. However roughly measuring the precise ideas is a greater approach to make coverage decisions than utilizing extra exact measures of the flawed ideas.”
Briefly, there may be an inherent rigidity concerned in setting up a substitute for GDP – particularly reaching a steadiness between technical robustness and social resonance. The complexity of a dashboard of indicators resembling New Zealand’s Dwelling Requirements Framework is each a bonus when it comes to meaningfulness, and a drawback when it comes to communicability. In distinction, the simplicity of a single measure of progress such because the Real Progress Indicator – or, certainly, GDP – is each a bonus when it comes to communication, and a drawback when it comes to its incapability to supply a extra nuanced image of progress.
In the end, a plurality of indicators might be important in navigating a pathway in direction of a sustainable prosperity that takes full account of particular person and societal wellbeing. Having a wider vary of measures ought to enable for extra numerous narratives of progress.
Some momentum within the present SNA revisions course of and ongoing statistical analysis is directed towards measurement of inclusive wealth – constructing on the economics of sustainability introduced collectively in Partha Dasgupta’s latest overview of the economics of biodiversity. This framework can in all probability achieve a broad consensus amongst economists and statisticians, and is already being applied by the UN, beginning with pure capital and environmental accounting.
Learn extra:
Nature: how do you place a worth on one thing that has infinite price?
Together with wellbeing measures within the combine would sign that wellbeing issues, at the least to a few of us, whereas additionally recognising that many alternative issues can have an effect on wellbeing. The proof so far is that planting wellbeing measures in a special a part of the info ecosystem means they are going to be ignored or ignored. Wellbeing measures should not a panacea, however with out them we’ll proceed to do issues that limit moderately than improve wellbeing and fail to recognise the potential financial, social and environmental advantages {that a} wellbeing focus ought to convey.
The duty of updating the statistical framework to measure financial progress higher is non-trivial. The event of the SNA and its unfold to many international locations took years and even many years. New knowledge assortment methodologies ought to be capable of velocity issues up now – however step one in getting political buy-in to a greater framework for the measurement of progress is an settlement about what to maneuver to.
Nationwide accounting wants what the identify suggests: an internally-consistent, exhaustive and mutually unique set of definitions and classifications. A brand new framework would require accumulating totally different supply knowledge, and due to this fact altering the processes embedded in nationwide statistical places of work. It might want to incorporate latest adjustments within the economic system as a result of digitalisation, in addition to the long-standing points resembling insufficient measurement of environmental change.
‘That which makes life worthwhile’: Robert Kennedy visits a summer time studying programme in Harlem, 1963.
Alamy
In the end, this “past GDP” course of must grapple not solely with measurement issues but additionally with the assorted makes use of and abuses to which GDP has been put. Kennedy’s neat abstract that it measures “every little thing besides that which makes life worthwhile” factors as a lot to the misuse of GDP as to its statistical limitations. Its class in being concurrently a measure of revenue, spending and output implies that in some type, it’s prone to stay a sound instrument for macroeconomic evaluation. However its use as an unequivocal arbiter of social progress was by no means acceptable, and possibly by no means might be.
Clearly, the will to know if society is shifting in the precise path stays a reputable and vital objective – maybe extra so now than ever. However of their seek for a dependable information in direction of social wellbeing, governments, companies, statisticians, local weather scientists and all different events should abandon as soon as and for all what the Nobel Laureate Stiglitz referred to as a “GDP fetish”, and work with civil society, the media and the general public to ascertain a more practical framework for measuring progress.
*Strictly talking, Robert Kennedy referred to gross nationwide product (GNP) in his 1968 speech. You’ll be able to learn extra in regards to the UN’s In the direction of the 2025 SNA course of right here.
For you: extra from our Insights sequence:
Local weather scientists: idea of web zero is a harmful entice
Sexual exploitation by UN peacekeepers in DRC: fatherless youngsters converse for first time in regards to the ache of being deserted
The general public price of personal faculties: rising charges and luxurious services elevate questions on charitable standing
To listen to about new Insights articles, be a part of the lots of of 1000’s of people that worth The Dialog’s evidence-based information. Subscribe to our publication.
Paul Allin is a member of the UK Nationwide Statistician's Skilled Consumer Advisory Committee and he’s the Royal Statistical Society's Honorary Officer for Nationwide Statistics. Views expressed on this article are private don’t essentially characterize these of the NSEUAC or the RSS..
Diane Coyle receives funding from the Financial Statistics Centre of Excellence and ESRC through the Productiveness Institute. She is a member of the UK Nationwide Statistician's Skilled Consumer Advisory Committee and of the Royal Statistical Society. These are private views.
Tim Jackson is Director of the Centre for the Understanding of Sustainable Prosperity which receives funding from the Financial and Social Analysis Council and Laudes Basis. CUSP supplies the secretariat for the All-Get together Parliamentary Group on Limits to Development. The views expressed listed here are private.
