The Steinhoff Saga Management review - University of Stellenbosch Business School

July – December 2018

Why should GDP be the only indicator of progress?

GDP

Ms Grace Garland, Dr John Morrison and Prof Piet Naudé

  • OCT 2018
  • Tags Insights, Entrepreneurship, MBA Research, Motivation, Meaningful Work, Work Meaning
21 minutes to read

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By Ms Grace Garland, Dr John Morrison and Prof Piet Naudé

GDP as the most widely used economic statistic in the world

Gross domestic product (GDP) has been the subject of academic scrutiny for as long as it has existed, largely owing to the common, and problematic, practice of conflating GDP growth with success and shrinkage with failure.

Any common-use mention of GDP invariably carries the same understanding – the bigger, the better. An overall increase is generally understood as an indication of progress at societal level, while an increase per capita implies that the standard of living has progressed at individual level.

GDP remains the most widely used economic statistic in the world, featuring as a topic of discussion from the dinner table to the board room. Changes in GDP have wide-ranging effects for multilateral negotiations, politics, the media, international laws, national policies, institutional investments and individual life choices. In each context, the same implicit understanding is present: the more growth, the better things must be.

However, GDP was never intended to be an all-encompassing progress measure. The concept of progress is far more ambiguous and complex than what the linear logic of GDP was designed to capture. Some argue for the dismantling and replacement of GDP, suggesting that its use as an indicator of progress is an institutionalised mirage at best, or a structural information failure at worst. Many have tried to come up with an alternative. None have succeeded entirely.

The last few decades have witnessed an increasing awareness of the sustainability crisis, magnifying the scepticism that was already surrounding GDP and its exclusively economic parameters. Some of the countries that look the healthiest in GDP terms, and enjoy huge power and prestige as a result, have turned out to be the biggest contributors to climate breakdown, a planet-wide existential threat. Something is amiss.

If the fundamental logic of GDP is based on growth, it can only be an appropriate indicator in a boundary-less context, which is a characteristic the earth does not have. Growth, as an end in itself, is a wrong-headed goal for life on a planet with limited resources. Logically, it is not hard to see why GDP is not fit-for-purpose.

So why has the widespread intellectual critique of this one-dimensional (economic) progress measurement failed to establish a new paradigm in which economic growth is not automatically equated with rightness? A possible framework for understanding this apparent paradox, or stalemate, is Thomas Kuhn’s The Structure of Scientific Revolutions (1962). Kuhn was a physicist who developed a lens for understanding how and why major changes in thinking take place, and why sometimes they do not.

He suggested that no empirical practice exists in isolation from the inherited set of beliefs and values of the prevailing paradigm in which it is practiced. For the practice to change, the paradigm must change too, and paradigmatic change is nothing short of “revolution”. Analogously, prioritising GDP is consistent practice for a society in which material accumulation, industrialisation and consumption are foundational values in policy-making and, indeed, individual life choices. So, it is a revolution of values that is needed, not just a methodological amendment.

Despite historic and mounting criticism of GDP, a revolution in progress measurement has failed to take place, and the paradigm that exclusively conflates economic growth with progress prevails. Using Kuhn’s terms, society is in “crisis”.

Any common-use mention of GDP invariably carries the same understanding – the bigger, the better.

Is GDP a catch-all for societal progress?

Human beings have been committing vast amounts of energy to measure things since the early Enlightenment period, making sense of the world around them through statistics and data. This ability to capture the chaos of multifaceted reality in a few quantitative indicators is useful and necessary for effective decision making.

By reducing a complex reality into a few basic elements, people are able to apply analytical logic to the present and indeed forecast the future, bringing a degree of certainty and comfort. However, this can create an illusion of simplicity which effectively blinds the decision-maker to factors that fall outside of the described measure. In the case of GDP, such factors would include the ecological, social and non-market indicators that can also be measured, though not necessarily in monetary terms.

Because human beings are limited in their ability to comfortably entertain a large and diverse number of informational inputs at the same time, we are predisposed to focus on only one or two in the way we construct the world. This bounded selection process is informed by personal preference of what is convenient, quick or familiar (or ideally, all three).

The GDP calculation and mainstream interpretation thereof fulfil these criteria, making it the obvious choice for progress measurement.

The methodological framework of GDP is narrow, with niche applicability. It was developed by leading economists before and during the Second World War and became an indispensable tool to Allied governments eager to account the impact of military expenditure on their economies. Maximising the production of weaponry and supplies was crucial for strategic planning, and GDP precisely captured those factors in a single statistic. Similarly, production growth, reflected as GDP in the post-war recovery period, was a clear indicator that nations were rebuilding and societal welfare was improving.

In 1953, the UN institutionalised GDP in the System of National Accounts as a way of promoting international comparability among national accounting systems. It made sense to standardise, given that international trade was growing, as was diplomacy on a global scale. However, the choice of GDP has left a legacy; a number of writers have argued that institutionalising a production-based measure of progress has effectively shut the door on alternative, more integrated, indicators.

In recent years, the practice of using GDP as a definitive yardstick is being challenged by the growing consciousness of environmental and human development imperatives – the blind spots of the GDP calculation. The demands of the future require humanity to respond with a paradigmatic shift away from economic growth-centricity and towards a more holistic definition of progress.

In the case of GDP, such factors would include the ecological, social and non-market indicators that can also be measured, though not necessarily in monetary terms.

“Sustainable development” is entrenched as the overarching goal of modern society and acknowledges that the kind of progress mankind should be aiming for in the 21st century is multi-faceted, with a profound number of challenges that must be overcome. Economic growth is a component of this progress, not synonymous with it. In reality, though, the conflation between the two concepts is insidious, and there is no better demonstration of this than the continued predominance and widespread use of GDP as an indicator of how well or how poorly society is doing.

GDP’s shortcomings at capturing the complexity of “progress” have already been hinted at. Yet, some further comments are in order. Importantly, GDP fails to discriminate between welfare-enhancing and welfare-degrading expenditures. Also, it cannot account for environmental and social “externalities” or informal economic activity. Money changing hands between formal entities – that is what it counts. What the money-generating activity looks like makes no difference, and any other form of labour or value-add is ignored.

This gives rise to some counter-intuitive conclusions. Pollution, for example, is computed as a double benefit to the economy: GDP is boosted even if the manufacturing process of some materials releases toxic chemicals, and again when they have to be cleaned up and remediated. Another example is the boost to GDP when an increased number of high-security gates are installed, or more candies containing palm oil are bought, when the former is in fact the result of the social evil of crime and the latter is the result of the environmental evil of deforestation. And what about the family who plants their own vegetable garden, deriving much pleasure in the process? This sort of non-monetary value does not figure in GDP’s definition of progress. Stretching its interpretation beyond production factors is a misrepresentation of reality.

Seeking an alternative

Political leaders and policy makers generally attach extreme significance to GDP in their decision-making.

When economic growth statistics are reported on by statisticians and disseminated in the mainstream media, the positive real growth results tend to provoke an optimistic response, observed in upside trading patterns in financial markets and accelerated retail activity. The opposite scenario is equally true, and the ensuing instability and pro-cyclic effect create volatility which is hair-raising for the majority of working adults with retirement savings.

Central banks formulate their interest policy on growth expectations in GDP terms, as do credit ratings agencies when determining sovereign solvency. Politicians know that a negative GDP forecast may hurt them at the voting polls and therefore subordinate decisions that risk this outcome, even if the investment will have a long-term pay-off, including those relevant to climate breakdown. This is particularly relevant to future planning – by omitting the depreciation of natural capital associated with climate breakdown, as well as the depletion of extractive resources through industrial activity, GDP falsely implies that we are richer than we really are, and that we will continue to be rich into the future.

… a number of writers have argued that institutionalising a production-based measure of progress has effectively shut the door on alternative, more integrated, indicators

The environmental degradation and human under-development crisis has produced a number of challengers to GDP. These include the Human Development Index (HDI), Sustainable Economic Welfare (ISEW) and its later version the Genuine Progress Indicator (GPI), and the Happy Planet Index (HPI). All have all managed to complement GDP to varying degrees of success, but not replace it.

For every new index proposed, dozens of methodological oppositions arise in response. The contentions surrounding these alternatives capture the major challenges that arise in trying to develop a truly holistic measurement, simply because the concept of progress is profoundly complex. None has managed to beat GDP “at its own game”.

Specific difficulties aside, there is the overarching challenge of widespread acceptance and diffusion, without which the impact of a new measurement will remain limited. GDP’s very embeddedness is a source of its resilience. Stalemate.

The obstacles to a paradigm shift

A true paradigm shift, in Kuhn’s conception, is nothing short of a revolution, and it requires three things: (1) logical evidence that the current paradigm is wrong, (2) a community of supporters promoting the change, and (3) sufficient promise that the alternative paradigm is attainable and desirable.

The strength of a paradigm lies in its universality, providing the fundamental explanation for the world which allows scientists to experiment with the details and make new discoveries within the bounds of its truth. Part of the process of discrediting the prevailing paradigm is to make explicit its invisible assumptions and fundamental truths. This can be applied to our fixation with GDP growth.

(1) Making the case through evidence

The single-minded pursuit of economic growth has had a disastrous impact on both the environment and humanity, to the extent that the long-term future of both is threatened. Threatened by the assumption that money is really all that matters, the prevailing system can be said to be in “crisis” with the potential for revolution.

Instead, the major supranational entities responsible for global decision-making have responded by prioritising what they call “sustainable development”. In so doing, society has embraced the environmental and social challenges without really altering from a growth course. The solutions proposed by sustainable development are not revolution but rather a more responsible version of growth. The argument that economic growth can be “decoupled” from environmental and social damage, that the environment can be accounted for in monetary terms, and that the resources of the earth exist for human use, still places human economic interests front and centre. Nothing very fundamental is going on here.

Technology is regularly hailed as the flagship of sustainable development due to the improvements it can bring. It must however be acknowledged that we do not fully understand the impact of technology on society. Also, it would be disingenuous to view its capabilities in isolation from the humans who use it. The deeper point is that, so long as material and wealth accumulation are valued as the signifiers of success, resource depletion and inequality will not be averted by technological intervention. The economies of scale afforded by digital production will just make us more efficient at producing the stuff we desire.

Economic growth is a component of this progress, not synonymous with it.

Therefore, while the logical strength of the evidence to discredit the prevailing paradigm is acknowledged, the mainstream discourse of sustainable development has successfully expanded to include it. Attaching “responsible” or “inclusive” to “growth” is a welcome improvement, but it is not the deep sort of change that brings about shifts at the paradigmatic level.

(2) Power of the people

The community calling for the amendment or replacement of GDP has grown substantially in recent decades and, since the global financial crisis, with greater vehemence. However, far from presenting a coherent alternative, this community is characterised by fragmented efforts in multiple directions with few sharing the same interpretation of core ideas.

Ecologists have a limited understanding of institutional power and social change, while social scientists lack an appreciation of the ecological context of social skills. Silos in academia, business and other institutions also do not assist with presenting a “united front”.

The general population is the largest and arguably the most powerful community of followers of the growth paradigm. The invisible conflation of success and wealth has a profound influence on virtually all spheres of life including employment choices, voting patterns and interpersonal relationships. The picture of what a good life looks like – one defined by wealth and its associated social status – is reinforced ad infinitum through mainstream advertising and entertainment media. This is despite the fact that research into human happiness has added empirical weight to the notion that consumption for consumption’s sake brings with it certain dissatisfaction.

There are of course alternative lifestyles that foreground meaning over wealth and material accumulation, but whether they will spread to the extent that they convert a large portion of the general public away from a growth-centric worldview remains to be seen. Even then, the challenge would likely remain, as it is those who have benefited most from the growth paradigm who have the power and status to draft new policies to change it. It would require truly visionary global leaders to push for policies that go against their own interests for the betterment of all. Unfortunately, not many of those type of leaders seem to be around.

Therefore, while the movement for a new progress measure to shift the focus away from economic growth has gained significant momentum, it lacks the necessary coherence to convince the mainstream that change is necessary, worthwhile and achievable. It may be that the deeply complex nature of the crisis itself renders the articulation of a coherent solution impracticable.

(3) The future picture

The scale, depth and multi-dimensional nature of the sustainability crisis has meant, to some, that efforts to develop a new progress indicator that reflects this complexity will not be achieved, and it will take more than a new statistical measure to bring about societal change.

Importantly, GDP fails to discriminate between welfare-enhancing and welfare-degrading expenditures.

Positive projections of a sustainable future are, at best, guarded, while prognoses for the environment are pessimistic, even frightening. This leaves the sustainability crisis without a promising alternative, and the resilience of GDP then can possibly be attributed to “rather the devil you know, than the devil you don’t”. This apathy has a powerful de-motivating effect on the will required to embrace deep changes.

If it is only the next generation of decision-makers who will have the knowledge, networks and future plans to bring about a different paradigm, then it is up to today’s adults responsible for their education to ensure they are familiar with what is at stake. The most powerful community to advocate for change today, then, are the educators who recognise the paradoxes of modern life and decide to do something about it. They can make an ethical commitment to empower their students with the tools and values to disrupt the stalemate when it is the student’s turn to make the important decisions.

The solution lies in resisting the urge to be satisfied by technologically-driven solutions under the sustainable development banner, and to rather reach across disciplinary boundaries to amass a more unified and coherent counter-community in order to imagine and promote a different way of living. This will harness the three forces necessary to bring about a revolution. No young person who completes formal schooling this side of the release of the Sustainable Development Goals should be without a clear understanding of the nuances of society and the interconnected vulnerabilities of mankind, peace and planet.

The invisible conflation of success and wealth has a profound influence on virtually all spheres of life including employment choices, voting patterns and interpersonal relationships.

If future decision-makers can be conscientised to appreciate the complexity of the concept of progress to the extent that they reject the notion that any singular indicator could capture it, the advocates of this generation will have succeeded. It will be no small achievement – nothing short of revolutionary – and it is not an exaggeration to say that the future depends on it.

  • Read the original journal article here: Garland, G. M., Morrison, J. M., & Naudé, P. (2018). Economic growth and progress: A paradigmatic conflation. African Journal of Business Ethics, 11(2), 37-55.
  • Ms Grace Garland holds an MBA from USB and is currently completing a Master of Applied Ethics at the University of the Witwatersrand. She is a freelance thinker and writer, and is an Associate at The Ethics Institute.
  • Dr John Morrison is a senior research consultant at USB, specialising in project management, research methodology and research coaching.

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