GDP is a Terrible Indicator of Progress

GDP loves a toxic waste dump.

This post is an edited version of one on my private blog February 7th, 2008.

Gross Domestic Product is used as the primary measure of a country's growth. The problem is that it is simply a measure of economic activity (i.e. money changing hands) and makes no attempt to characterize that activity. For more about its shortcomings, I recommend this article from The Atlantic.

This a symptom of a practice which is commonplace in economic theory: if there is a factor that is difficult to quantify or is subjective, economists often will neglect it, thereby assigning it a value of zero. CO2 emissions are probably the best known example of that. If they had been valued fifty years ago, things would be quite different. That particular example would've required a great deal of foresight, and there were powerful special interests at work but it is still indicative of the general methodology.

So, what to do about this? Well, I propose that we admit that economics is, as a general rule, a gross parody of the real complexities that underlie society and we apply high level goal-driven restrictions based on probability to attempt to value intangibles. For example, we can't tell how bad CO2 emissions might be, but it's got to be more than zero, so give it an actual cost now and refine it later. Cancer research is intrinsically more valuable than beanie baby manufacture, so bias things so as to favor such more worthy pursuits. Fast food is unhealthy, so penalize its consumption (or reward the consumption of healthier alternatives). Exercise is lacking, so enact incentives to encourage it. For the free market to have a prayer of working well, it needs to know what direction a positive outcome lies in. This new approach would benefit even the wealthy among us as improvements in the standard of living resulting from technological improvements will always outstrip the short-term increases obtained by amassing more wealth.

I would also propose a new economic progress indicator: the number of hours a week that an average citizen must work to provide a set standard of living (subject to environmental concerns, health impacts, and other constraints) for himself and one child. The goal should be to reduce this number over time. It could include, if desired, bureaucratic barriers that force people to work longer than they need too and of course the standard of living should be updated with time to reflect advances in technology. This is merely a yardstick; someone could always work more than they needed to in order to purchase luxuries. There are other proposed progress indicators, but by making free time the parameter to be maximized it sidesteps the need to assign it an explicit value.