The Great Invention: The Story of GDP and the Making (and Unmaking) of the Modern World

  • Ehsan Masood
Pegasus: 2016. 9781681771373 | ISBN: 978-1-6817-7137-3

Since its invention during the Second World War as a thermometer of economic health, gross domestic product (GDP) has become a familiar incantation in claims and counter-claims about the well-being of nations. Some environmentalists and feminists were early critics, but until recent decades, few others questioned it. Now, campaigners ranging from left-wing Nobel-prizewinning economist Joseph Stiglitz to the free-market Economist magazine want to replace GDP with direct measurement of human well-being. The technology industry has joined them, bemoaning the failure of GDP to account properly for digital technologies, including free online services, because the relevant statistics are not collected or do not fit easily into existing categories. There is even a mini-boom in books about economic statistics. A decisive coalition is shaping up in favour of moving away from GDP. The question is what to use instead.

The act of measuring economies would ultimately determine how economies would be managed.

In The Great Invention, Ehsan Masood, editor of policy periodicals Research Europe and Research Fortnight, argues for an improved GDP. Into this single metric for economic-activity indicators — defined as the monetary value of all goods and services produced in a country — he would combine environmental impacts and human well-being. His book traces the history of GDP since its creation, as well as the calls for alternatives, mainly from environmentalists. Masood agrees with the sentiment of suggestions to use 'dashboards' that incorporate other economic data and supplementary indicators, but he concludes that GDP matters. As he writes of countries that adopted it: “The act of measuring their economies would ultimately determine how their economies would be managed.” And it matters despite, or because of, its flaws. GDP is too entrenched to be successfully replaced, he finds; instead, it needs radical reform.

Formative factors

GDP began, as Masood notes, as an aggregate measure when the need arose for governments to manage economies during the Depression in the 1930s and the Second World War. Pioneers of the statistics involved, such as US economist and Nobel laureate Simon Kuznets, intended to create a metric to meaningfully capture a society's economic welfare.

There were other formative factors at work. One was the need to avoid suggesting that the war effort was reducing welfare. Another was the thinking of influential British economist John Maynard Keynes, as set out in his 1936 The General Theory of Employment, Interest and Money. Keynes theorized that raising aggregate demand or total spending in the economy through government expenditure can avoid the sort of mass unemployment that was seen in the Depression by stimulating growth and improving stability. He and his supporters were determined to make the new metric serve that government role by defining federal spending as a key component of the equation, along with consumer spending and investment. Thus, GDP was born as a transatlantic effort, led by Keynes's assistants in the UK treasury, Richard Stone and James Meade. By the end of the 1940s, it was standardized through the United Nations, and the same international process is in place today.

Masood covers decades of challenges to GDP conventions that make for a fascinating institutional and human story. Those seeking an alternative included UN official Maurice Strong, a key figure in the 1972 UN Conference on the Human Environment and the 1992 Earth Summit. Other critics were Italian industrialist Aurelio Peccei and British civil servant Alexander King, who together established think tank the Club of Rome and published the influential report The Limits To Growth (Universe, 1972). Environmentalists, and the officials whom they influenced, were swift to point out that GDP doesn't take into account how natural assets are depleted to generate current income and consumption. Several proposals for new models have underlined the need to account for the environment; Masood (an erstwhile Nature journalist) praises a 1997 paper on these proposals co-authored by economist Robert Costanza (R. Costanza et al. Nature 387, 253–260; 1997). Economists James Tobin and William Nordhaus also took into account environmental costs — and the value of work in the home — in their 1972 proposal for a metric called the Measure of Economic Welfare.

Another challenge to convention came from Mahbub Ul Haq and Amartya Sen, who in 1990 created the now widely used UN Human Development Index (HDI), which includes factors such as life expectancy and education.

More social scientists are now exploring the definition and use of economic statistics. There is also policy interest alongside the scholarly debate. In 2008, then-French president Nicolas Sarkozy set up a commission led by Sen, Stiglitz and fellow economist Jean-Paul Fitoussi to investigate the measurement of economic well-being. And UK economist Charles Bean's 2016 Independent Review of UK Economic Statistics (see raises fundamental questions about GDP's viability in a modern economy, for example concerning its mismeasurement of digital activity.

One or many

GDP is so tightly woven into the economic fabric that anything more complicated than a single number will put politicians and the media off.

The balance of opinion in economics currently favours supplementing GDP with a dashboard that incorporates measures of environmental impacts, health and social indicators, as Costanza neatly summarized in his 1997 article (see also R. Costanza et al. Nature 505, 283–285; 2014). Economists are taking considerable interest in the measurement debate, although oddly, Masood claims that the profession is ignoring the issue. His own call for a nuanced metric that factors in natural capital and human well-being sticks to one indicator. He thinks that GDP is so tightly woven into the economic fabric that anything more complicated than a single number will put politicians and the media off. The solution, as he sees it, is “to value the things that matter and then incorporate this value into the GDP accounts”.

But single-indicator alternatives to GDP have a serious drawback. They hide relative valuations of their components, whereas GDP makes these explicit because it uses market prices. For instance, Martin Ravallion, former director of research at the World Bank, notes that the HDI implicitly values poor lives much less than rich ones. Because income and human life expectancy are combined into one index, there is an implied value of just US$0.51 for an extra year of life in Zimbabwe, compared to several thousand dollars in rich countries (see M. Ravallion Troubling Tradeoffs in the Human Development Index; World Bank, 2010). This flaw could be corrected, but the point is that any single index internalizes such trade-offs.

The debate over whether to use a dashboard or a single indicator is unresolved. Interest among economists, other social scientists and environmentalists has climbed in recent years, but there is much to research and discuss on how best to measure economic welfare, taking into account sustainability and the quality of life, before a new international standard is defined and adopted.

In hindsight, the original debate about GDP looks more compressed than it really was — some economists were still disputing it into the 1950s. A new shift will take just as long, but it is definitely under way. And about time too, for the reasons that The Great Invention explains so clearly.