ECONOMICS Money vs Wealth: Why GDP is the wrong measure

There is law in the science of ecology that says if you try to optimise just one parameter in diverse, complex ecological system, you’ll eventually kill it.

Yet that is exactly what is happening globally in the economic-political sphere. Here the preoccupation is on maximising financial activity – or money flowing through society, as measured by the GDP (Gross Domestic Product). The result is an increasing sense of imbalance.

While global indicators show we’ve been experiencing the longest period of growth in history, millions of people are finding life more difficult if not unbearable. In New Zealand simple indicator of this fact is that 30 percent of children now live below the poverty line. This highlights the discrepancy between what we’re led to understand and reality.

Despite decades of economic growth, many are now having difficulty making ends meet without two or three jobs per family. How can we feel so harried, stressed, and under siege when the Government says the economy is doing well?

There never seems to be enough money for education, health care, safety nets for the poor, public funding for the arts, public radio and television, adequate pensions for the elderly or protection for the environment.

Meanwhile the world’s 450 billionaires alone have combined financial assets greater than the combined annual incomes of half of humanity. So quantity of money is not the problem. Nor is it just the rich guys taking advantage of us.

The problem is that as society we’ve supported the growing and destabilising gap between rich and poor because we’ve failed to recognise that money is not wealth – and measuring its growth is not true indication of social wellbeing.

Our real wealth is our natural capital plus human, social and cultural capital – the goodwill we have for one another and the free time we have to do what we want. But these don’t feature in GDP – and what we measure is what we get.

GDP vs GPI
Growing awareness of the inadequacy of GDP as true measure of economic progress has led to the creation of another option. The Genuine Performance Indicator (GPI) has been specifically designed to take real wealth factors into account. Let’s look at these two systems of measurement.

The GDP was developed for war economy by Simon Kuznets. It was not his intention that it be used beyond this scope. But the strangest thing happened. The GDP as simple adding machine became the GDP as holy grail of progress. Kuznets spent the rest of his life pointing out GDP is not true measure of society’s well-being and should not be construed as one.

That is because GDP is simply gross measure of market activity, of money changing hands. It does not account for the immediate or long-term effects this money transfer has on either society or the environment. For instance, crucial economic functions performed in the household and volunteer sectors go entirely unrecognised.

As result, GDP masks the breakdown of the social structure and the natural habitat on which the economy and life itself ultimately depends. Worse, it actually portrays such breakdown as economic gain. For instance, economic activity due to war, crime, prisons, pollution, addictions or gambling all contribute to positive GDP.

New Zealand’s Marilyn Waring, public policy specialist who’s made major contributions in this field, says the essential features of the GDP originate from the UN System of National Accounts (UNSNA). Required of every nation state and used to compare the supposed economic well-being of countries, it counts money but not human and environmental cost.

Waring cites the Exxon Valdez oil spill as classic example of this.

“What most environmentalists consider to be an environmental disaster of enormous proportions is actually deemed to contribute to the economy using the GDP measurement system.”

That’s because the spill was positive contributor to the GDP in terms of job creation and spending. The tanker was replaced and the clean-up became an economic boon to disaster-response industries. “So on the basis of GDP it would be good to have couple of incidents like this every year or more – it’s good for the economy,” says Waring.

Far from being guide to prosperity and well-being, GDP functions as dysfunctional compass. Even economists are unhappy with the way it adds things up.

Around 400 of them, including Nobel laureates, made joint statement describing it as “both inadequate and misleading as measure of true prosperity”. They urged policy makers, economists and international agencies to publicly acknowledge its shortcomings and embrace new indicators of progress such as the GPI.

In the June issue of Management, economic writer Bob Edlin pointed to serious criticism of GDP as introducing “fundamental errors so great that some might conclude that there are never any productivity gains in the public sector”.

So what are the advantages of GPI?

Dr Ron Colman, who is constructing GPI system for Nova Scotia as pilot for Canada (see www.gpiatlantic.com), was recently in New Zealand to discuss the system. He believes that GPI can be constructed at any or all levels of society (eg, local government community) without any permission from other levels – so we could just get on and do it.

The Nova Scotia system presently uses 22 factors of measurement including such features of healthy society as time use, natural capital, environmental quality, socioeconomic factors and social capital. The rich-poor gap is measured in the distribution of income as one of the factors of equity.

One area of creative application of the GPI is to develop an SME (small to medium enterprise) business well-being indicator that addresses long-term business viability and supports the development of sustainable society.

Leadership is another potential measure of well-being. Here we need leadership that makes decisions through an ethical lens, one that incorporates the values that help create healthy society. The multi-dimensional measures of the GPI can be used by decision makers to develop policies and action programmes that unquestionably contribute to our well-being.

Business managers will love this approach to growth because it creates more efficient environment in which to conduct business – with healthier more robust customer base in which to market products and services.

GDP is unlikely to disappear overnight regardless of its inadequacies. It is too entrenched and has many powerful supporters who benefit from its use. But there is nothing to prevent GPI being mobilised as viable alternative at community or local government level – an alternative that takes into account the complex balance of our environmental and social ecosystems.

If we choose to grow our wealth (via GPI) rather than our money (via GDP), we can create country that is truly vibrant, where growth is sustainable and which can boast one of the highest qualities of life in the world.

Dave Breur is the founding director of Anew NZ.

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