GDP is a terrible way to measure economic growth

This article was originally published at Maclean’s.

In economics, as in life, the simplest questions are often the most difficult to answer. Dirk Philipsen, an ethicist who teaches a history of capitalism course at Duke University, discovered that eight years ago when a student asked him the following: how do we know we’re on the right track? Philipsen launched into a discussion of GDP, or gross domestic product, the widely used measure that sums the dollar value of all goods and services produced within a country’s borders. But the words sounded hollow. After all, he thought, how can a measure that ignores gaping wealth disparities, dwindling natural resources and a deteriorating environment profess to be leading us toward a desirable outcome?

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Feeling unsettled, Philipsen spent the next several years studying GDP’s origins and how it came to define our thinking about economic growth and progress. To wit: political leaders now routinely point to positive GDP growth as evidence their policies are working, while critics cite slower than expected GDP growth as proof they’re not. “What most don’t understand is GDP is much more than a measure,” says Philipsen, who last year had a book published on the subject. “It’s the very definition of the economy today.”

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The problem, of course, is there are plenty of economic activities GDP doesn’t measure, and many others it doesn’t measure well. An oft-cited example of the former is volunteer work and unpaid household labour. Government-provided services like health care and education have historically been another fuzzy spot. On the other hand, GDP dutifully catalogues all the extra spending that goes into mopping up disasters, making catastrophic accidents like BP’s 2010 Deepwater Horizon spill appear “good” for the U.S. economy.

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Economists are among the first to acknowledge GDP’s limitations: it’s an indicator of market expansion, not people’s well-being. Environmentalists, meanwhile, warn that, in an era of climate change, the costs of relentlessly pursuing GDP growth—transforming trees into lumber, farmland into malls, fossil fuels into CO₂—now outweigh the benefits. Even fans of unbridled capitalism have begun to question whether the post-2008 plague of stubbornly low economic growth may have something to do with the way GDP accounts, or fails to account, for a growing number of Internet firms like Facebook and Google who offer their services largely for free.

Read the full article at Maclean’s.