Is GDP the right metric?

by Lars Mennen5 min read20th Jan 20218 comments

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Economic GrowthLongtermism (Philosophy)
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I recently read Tyler Cowen's Stubborn Attachments, which argues that we should be focusing on maximising the rate of sustainable economic growth and discusses why that is the most important thing to target. This sparked many questions for me about what we should be optimising for (GDP? Leisure time?). In this blogpost I take a stab at answering that question as a non-economist (so bear with me!).

Traditionally, most countries measure their GDP and target that as a measure of growth. GDP is a purely economic measure and has been under constant criticism for a variety of reasons. It doesn't include household work, doesn't value leisure time, and so on. Nevertheless, it has been and is the standard around the world for measuring economic growth.

There's no doubt in my mind that economic growth should be a central part of any reasonable solution to this question. Practically any important metric that you may care about correlates well with GDP in the long run. So I think it makes sense to take that as a starting point for discussion.

But I think there is no one around that wakes up and thinks "my life goal is to create a high GDP". And if there are people who do wake up like this (Presidents? Hopefully?) they are most likely using it as a proxy for better lives and happier people. So if the end goal is for us all (including future generations) to be happier, why wouldn't we just optimise for that? Or is there at least a a more comprehensive metric to optimise for than GDP?

Alternative metrics

First, let's deal with targeting happiness directly. There is a body of happiness research, which seems to be mostly based on surveys and questionnaires. Although these give some information (for example that income is log-linearly related to happiness; i.e. more money does make you happier, although at declining rates), there are also some problems with it. First of all, happiness is ill-defined and therefore also relative. People adjust their meaning of the word "happy" to what they can reasonably achieve or expect in the environment they're in. So it can be difficult to compare happiness across countries or even to aggregate such measures at a country-level. An 8 out of 10 for happiness in Tanzania is probably very different from an 8 in the U.S. In other words, a stationary happiness level could either mean stagnation or indicate we're just (locally) redefining what "happy" means. Besides that, we cannot survey the ones not born yet, so this doesn't take into account future generations well.

Secondly, even if we did solve for the relativity problem or get very close to a good metric on it, how would we optimise for this? We don't understand exactly what makes people happier. Is it more leisure time? Or just more wealth? Given that, it seems tricky to judge whether policy A would make people on average happier than policy B, especially if the effects are far out. To do this properly, it seems like you would want to find a decomposition of some definition of "happiness" into various factors and use that as a metric.

There have been some attempts at combining multiple indicators into a single metric. The Human Development Index for example was created to "emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone" [1]. It combines education levels, life expectancies and Gross National Income as a measure of development. This and other indices seem like a reasonable approach, but the question then quickly becomes: which factors do you include and how do you weigh them against each other?

This is a tricky question. Particularly because for some factors this is largely entangled with a question about time discounting. For example, if we include leisure time into the equation, then if we weigh that higher we are essentially saying that leisure time right now is more important than greater wealth for future generations.

Why is that? GDP growth is compounding, while leisure time is zero-sum. Over time, it makes a massive difference whether you grow the GDP 1% every year compared to 5%. For example, the GDP per capita in the U.S. in 1970 (expressed in 2011 U.S. dollars) was $23,958 [2]. At a constant GDP growth rate of 1%, that would be $39,796 today, while at a rate of 5% it would be $288,473. That's more than 7x more over 50 years! On the other hand, if you increase your leisure time by 5% every year, at some point your life will be just leisure time, and future people would be worse off than if you had focused on economic growth.

Factors like life expectancy and education levels are not zero-sum though. But I think that all such factors feed into GDP growth. If education levels rise, you would expect GDP to rise (after some time). More on such factors in a bit.

In the book, Tyler uses Wealth Plus as a metric, which he defines as "The total amount of value produced over a certain time period. This includes the traditional measures of economic value found in GDP statistics, but also includes measures of leisure time, household production, and environmental amenities, as summed up in a relevant measure of wealth.". It doesn't specify how each of these factors is to be weighted with respect to each other. With this metric of economic growth, he then proposes to maximise the long-term rate of economic growth, mainly for the aforementioned arguments around compounding effects benefitting future generations. He makes a strong case for not time-discounting those future generations.

Ideas for more comprehensive approaches

In my view, the book makes a good case for why we should be time-discounting future generations less. Compounding effects are real and large over time, so if we want to optimise for all of us - including future generations - it makes sense to not overly prioritise the current generation, which is what time-discounting in effect does.

However, it remains unclear what exactly Wealth Plus is, and the extra factors such as leisure time seem a bit arbitrary. It does go in the right direction though. At the core, we want to maximise the rate of sustainable economic growth as measured by GDP. Depleting the earth's resources, polluting the atmosphere etc. are clearly not sustainable, so I think this deals with environmental targets.

The book then argues that the only non-growth-related values that should bind practical decisions when optimising for this should be inviolable human rights. That we shouldn't violate those is a no-brainer. But I do think we should have some more values to bind practical decisions.

In particular, I think without some more explicit values it would be very difficult to determine what is sustainable and what isn't. Life expectancy, technological progress, education levels, and metrics on the state of the environment or strong institutions all are predicting indicators of sustainable growth I think. If for example life expectancy starts stagnating or, even worse, declining (as ever so slightly is the case now in the U.S. [3]), I would start to worry that the growth may not be as sustainable as we want it to be.

So I think we should be maximising the rate of sustainable economic growth as measured by GDP, while not violating human rights and monitoring a set of key indicators (as mentioned above, life expectancy, etc.). If we find that any of the key indicators start to stagnate, we focus on that. That seems both fair to the current generation, as they are also guaranteed to not see important indicators drop in favour of future generations, and future generations. It also avoids the issue of weighing the various key indicators against each other, as I believe that if we do focus on sustainable economic growth, those indicators should not be stagnating. But if they do, we should treat that as a warning sign and rethink our policies.

Now, most people don't value future generations nearly as much as current generations or at least their policies don't. Most policies and politicians are concerned with current generations or, even worse, the current election cycle. Future generations are far away and hence it's easy to prefer the here and now, especially if there are painful decisions involved that have negative effects on current generations. Most countries struggling with delivering on their Paris Climate Agreement promises is a good example of this (which isn't even that far away!). So I would argue we need to take future generations much more seriously in our policies. We should focus on growth that is sustainable. In most cases, I think it'll turn out to also benefit the current generation.

Appendix: What about inequality?

An argument occasionally heard against purely focusing on economic growth is that it'll just increase inequality. Although it may indeed be the case that inequality increases, that doesn't mean poor people stay poor or get poorer. If countries have large economic growth, generally everyone benefits. Richer people may benefit more and I'm all in favour of not having too much inequality, but I don't think it should get in the way of economic growth. In the end, it's more important that everyone is better off. If you're not convinced by this: this section in a post arguing for more focus on economic growth in developing countries has some great data on that.

[1] http://hdr.undp.org/en/content/human-development-index-hdi
[2] https://datacatalog.worldbank.org/dataset/world-development-indicators
[3] https://www.cdc.gov/nchs/hus/contents2018.htm?search=Life_expectancy,

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7 comments, sorted by Highlighting new comments since Today at 11:52 PM
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Thanks for the post! I'd add just one remark:

>it'll just increase inequality
According to Pikkety's (an egalitarian) inequality, if the rate of return on capital r is greater than economic growth g, then wealth inequality tends to increase (though some scholars contend that this is not an adequate explanation for our recent increase in inequality). Thus, I don't think (consistent) egalitarians would be against growth per se.

>In the end, it's more important that everyone is better off

True, but wealth inequality implies stark differences in power. Workers often see statements about how distributive policies might entail lower growth as a threat (of deinvestment) from capitalist classes - and that's quite plausible, at least when it comes to negotiations about sovereign debt. If you think about social issues as sets of bargaining games, it's quite understandable that some people will commit to egalitarian policies, even if they threaten to yield a lower pay-off - that's basically how strikes happen (workers don't directly benefit when factories shut down, but they use it to pressure for higher pay-offs). I don't fully agree with Gerald Cohen, but I'd recommend it as the best moral analysis I've read (in ethics and political philosophy) on distributive justice as a bargaining game.

Thanks for your comment! I agree with your point on how egalitarians can be in favour of growth.

True, but wealth inequality implies stark differences in power.

Good point, but I'm not sure that justifies a large number of policies that might lead to lower sustainable growth in the long run in favour of more equality. There's definitely a balance to strike here I think between making sure power does not get too unequally distributed and growth; it's not black and white. In particular, you also want to maintain a stable economy and democracy (necessary for growth to be sustainable), which does require solid institutions and I would argue also some degree of egalitarianism. Perhaps some metrics around stability can be added as early indicators to monitor while mainly focusing on sustainable growth? Curious for your thoughts on this. And thanks for the reading tip on Gerald Cohen, will add that to the list :) 

Thanks for your answer. I think we mostly agree - I'd welcome metrics on stability and sustainability; and I guess we'd also agree that weighting welfare metrics by some inequality index might yield a useful proxy to capture things like hedonic adaptation and decreasing marginal utility of consumption.

Since you asked for feedback, I'll try to briefly add some thoughts:

a) People often value equality per se (well, we're comparing ourselves to others all the time); that's likely explained by our evolutionary past in egalitarian hunter-gatherer tribes.
b) This doesn't mean equality is a moral good in itself (though some will advocate it is), but it does mean it's quite relevant for social stability.

c) I'd be particularly worried about how things like elite overproduction might jeopardize stability ( I don't endorse Turchin's dismal predictions, though).

Another argument in favour of replacing GDP or developing a complementary indicator could be that traditional macroeconomic aggregates are designed to measure only the monetary value of final goods produced and are not adequate to capture the role and value of data or non-monetary transactions. Thus, they do not effectively reflect the value created by the digital economy. 

Thanks for the comment, that's a very fair point! There are certainly some issues on how such services are represented in these metrics. I think if we can find a better way to measure the state of the economy that accurately includes this, I would be in favour. This article for example has a proposal to do that.

I don't think it changes the main argument for focusing on the sustainable economic growth (in that case measured by a more accurate metric) instead of focusing on metrics like happiness or life expectancy (or other metrics not directly measuring economic growth) though. What do you think?

Thanks for the article link. The proposed GDP-B indicator does seem like a step in the right direction. The European Commission is also working on developing a new indicator that does a better job at modelling the digital economy (feasibility study).

Yes, I'm not convinced that well-being metrics alone would do a good job either and your argument for emphasising sustainable economic growth seems quite convincing to me. 

GDP growth is compounding, while leisure time is zero-sum.... if you increase your leisure time by 5% every year, at some point your life will be just leisure time

This seems like a weird comparison. GDP reflects the total value of goods that people consume, whereas leisure time is just one such good, like food. Nobody cares if the total amount of food each person can eat increases by 1% each year, because 2000 kcal is enough for most people. The amount of leisure time available to people in the industrialized world has increased over the decades, but surely the amount of leisure time we can get will plateau at some point (it's mathematically impossible for leisure time to exceed 168 hours a week, but it would probably peak below that).