In Defence of the GDP

The GDP as a measure has well-known limitations – in fact, I learnt about these limitations in the same chapter of the introductory Economics textbook that taught me how the GDP is calculated. The most glaring among these limitations is that voluntary and unpaid labour is not taken into account in its calculations. This tends to devalue women’s work. A woman cooking for her family in her own kitchen does not add to the GDP, but if the family hires a cook, the payment to the cook does. Likewise, as Alan Greenspan pointed out, a natural breeze does not show up in the GDP, but air conditioning does. Other things being equal, a society naturally endowed with pleasant weather is better off than one that has to keep the A.C. on all the time, no matter what the GDP says.

There are other criticisms that I am sympathetic to from the moral point of view. Purchase of cigarettes adds to the GDP, but a cigarette reduces the well-being of a smoker. The GDP has no way of knowing that. As far as it is concerned, a rupee spent on a cigarette or a prostitute’s services is as good as a rupee spent on buying healthy snacks for the children. This shortcoming has led some to argue that we must junk the GDP as a measure. Apparently, one of them is Lorenzo Fioramonti, who has written The World After GDP. I haven’t read the book, but I learnt of it by reading this broadly unsympathetic review in the FT (The FT article is subscription-only, so you should probably not bother clicking that link, and you should continue to read this blog post)

Now, as a non-smoker who abhors cigarette smoke, I am willing to lend a sympathetic ear to any method of GDP calculation that would lead to us not counting cigarette purchases while measuring the GDP. But is it really fair to say that the GDP is a top-down measure which takes society in the direction that it would not prefer to if it didn’t have GDP growth as a target? The argument that it is is not convincing.

First off, the GDP isn’t top down. It is a bottom up measure. In a market economy, a nation’s GDP is what it is because of the individual purchasing decisions of individual citizens. In fact, it is precisely because it is a bottom up measure that it ends up measuring things that some of us find abhorrent.

My friend is a smoker who smokes two cigarettes a day. Were you to ask him if his smoking makes him happy, his answer would be an empathetic no.  He claims to have cut down his smoking from his earlier quota of three a day and periodically claims that he is planning to quit altogether, but rather dubiously explains that quitting all at once is not recommended. He used to carry two cigarettes with him to work every day, but he’s stopped that. Now he walks down to the cigarette shack to buy his fix. The shack is 500 metres away from the office block, and his hope is that the prospect of doing the 1km trek twice a day will, at some point,  discourage him from going. It hasn’t so far. He takes his two breaks right after lunch and at around 4pm each day.

Peak temperatures these days in Hyderabad hit 42 degrees Celsius; I get dehydrated just looking out of the window. My friend pays for the cigarettes, not only in money, but also in sweat, quite literally. He is also quite willing to spend an hour of his time each day. Only the money he spends shows up in the GDP. Going by what he spends on it, the value added by those cigarettes to the national economy is actually much more.

Wait a minute! Didn’t we start from the premise that my friend’s smoking should be excluded from the GDP,  because when you ask him, he says that he does not like smoking and wants to quit? The problem is, if I tell the GDP: “Exclude my friend’s smoking when you get calculated. He says he doesn’t actually like smoking”, GDP will answer: “Look, first of all, it is very common for people to say one thing and do the other. That is why economists have a term called ‘Revealed Preference’. Words are cheap. People can say what they want, but the best way to find out if they get value from something is to check if they are willing to give away something they worked hard for, for it.

“Second of all, it’s not just a question of your friend. There are millions of smokers in this world, and it would be impractical to hand out a questionnaire with every cigarette that asks the smoker ‘Are you smoking this cigarette because you get utility out of it or are you just hopelessly addicted and trying to quit?’ And if you want me exclude smoking from my calculation because of a few people’s opinion that smoking does not add value to the smoker, well, that is not what I’d call a bottom-up way to measure me.”

OK, so the argument that the GDP is a top-down measure is unconvincing. What about the argument that the GDP as a top-down target leads us in the wrong direction? Well, that is even less convincing. When you get to work each morning, do you do it because you want to do your patriotic duty to your country by increasing its GDP or do you do it to earn money to buy the things you and your family want?  Or perhaps you are highly competitive and you enjoy the sense of achievement, you like winning the rat race, or you just enjoy having a lot of money. People have different motivations for doing things that contribute to the GDP, but “I want to increase the nation’s GDP” is rarely one of them.

The same goes for companies and businesses. They often do boast of how much they contribute to the nation’s economy, but surely primary motivation of those who run businesses is the growth of their business’s bottomline. This motivation would be unaffected if the government’s statisticians stopped reporting the GDP.

Does the GDP as a target take government policies in the wrong direction? Politicians want to get reelected, and the policies they pursue are the ones that will help them with that goal. While they may think of the GDP or the economy as a useful shorthand for the things that voters want, they must surely be aware that what the voters want is not the GDP in the abstract, but tangible things like jobs, roads, education for their children. These things tend to be correlated with the GDP, but voters will not stop wanting the tangible things they want just because the government stops reporting the GDP. In fact we know that governments do implement policies like protectionism even when they reduce the GDP. They do it because they care more for tangible things like saving jobs than the GDP in the abstract.

Given all this, I am just not convinced that giving up on, or even modifying the calculation of the GDP is worth the bother. If you are concerned about the untrammeled pursuit of material wealth, the problem is human nature. We aren’t doing it because the GDP tells us to, and we won’t stop if the GDP tells us to stop.

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