GDP: an outdated indicator

TRANSLATED BY LAURA DELAGRANGE AND CAROLINE CARDEN

Historically, countries which pollute the most have a high level of GDP growth. China (6-7%), India (7%) and the United States (2.5%) – three high-carbon economies – take the lead of countries emitting the largest quantities of CO2 (non-EU). While many envy Germany’s economic growth, questioning our economic model and redefining its priorities might be a better use of time.

As expressed by the American economist James Galbraith, GDP growth became the main economic objective following to the development of the post-war New Economy. Everything was possible in 1950. Growth and progress seemed to be infinite. If the economy wasn’t “progressing” (if there was no growth), the government was at fault, but never the model. This ideology is based on false premises, and still today the shortcomings of the GDP are missing from our political and media debates.

The perfect equation, almost

For those who study the economy, the equation for production is written as Y=f(K;L) where Y [GDP] is the production, K the capital invested and L the labour force. This model does not include two critical elements in the economic circuit: raw materials as a factor of production and undesired externalities caused by economic operation.

Including these elements into the model helps to expose the limiting factors of economic activity by revealing its misinterpretation. Calculating the increase of our economic production while ignoring both the scarcity of raw materials and the pollution that it causes seems to be rather unconventional.

“Exponential growth in a finite world”

The first law of thermodynamics shows that matter and energy cannot be created or destroyed in a closed system. The opportunities to consume resources and to produce waste are restricted by our earth system’s capacities, meaning the scarcity of raw materials limits the economy. How could we build anything if we do not have sand? And what about water? How could we not consider the economic costs of the pollutant waste and assets we are creating?

“Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.” Kenneth Boulding

In these conditions, “green growth” or “sustainable development” seem to be a smokescreen. The GDP’s growth alone cannot mask our impact on the environment.

Poorly distributed growth

Today, a few big spenders possess more money than half of the world’s population combined. Even at the end of the 19th century, the wealth resulting from a robust GDP growth was not as poorly distributed. Thomas Piketty’s book, Capital in the Twenty-First Century, helps explain why. Is GDP growth a healthy goal while social inequalities are so present? And what does it show about our life quality?

OCDE (2017), real GDP prediction (indicator). doi: 10.1787/c2ed0d5a-fr (consulted February 1, 2017).

We should recognise that GDP is outdated because it ignores our environment and our wellbeing. Lowering the taxes to earn growth and unemployment points while risking a rise in wealth inequality and environmental degradation is more akin to a headlong rush than to a rational model.

There are alternatives everywhere to measure the real impact of our economical activity and its development. Changing the mathematical indicator would not be enough for such a transition. Our reasoning and our relationship with the environment are now more important than ever. The good news? Since the 1970s, in developed countries, the economic growth has drastically decreased. It is another reason to consider prosperity without growth and other kinds of indicators.

Read the follow-up article: GDP Alternatives: A Realist Perspective of the Economy

Photo credit: Gerard Touren Photography

 

 

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