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GDP revisited

A few months ago, we published a piece questioning the value of the Gross Domestic Product as an index of well-being, and noted the harm done when GDP growth became an objective of government policy. Our scepticism about the value of the GDP figure is widely shared.

The European Union itself is concerned and sponsored a conference on the subject in November 2007, “Beyond GDP”, with the objectives of clarifying which indices are most appropriate to measure progress, and how these can best be integrated into the decision-making process and taken up by public debate. The conference brought together over 650 policy makers, experts and civil society representatives to address these critical issues. Preceding the main conference, an expert workshop was held, where leading practitioners discussed the development and application of indicators of progress, true wealth, and well-being.

Speaking at the Conference, Joaquin Almunia, Commissioner for Economic and Monetary Affairs, saw integrated environmental and economic accounting as likely to be the “strongest tool” for supporting the promotion of well-being and progress.

The problem of GDP as in index of well-being was nicely summarised again in an article in the Swedish daily newspaper Dagens Nyheter on 23 August. Under the title “Well-being should increase, not GNP”, the author, Anders Wijkman, Vice Chairman of the Club of Rome and the Tällberg Foundation, pointed out that many important things are excluded from the GNP measure. If we dry our clothes in the sun, it is not reckoned as being of any value, whereas if we use a tumbler-drier, it counts as a plus for the GDP. The fixation on economic growth has, in Wijkman’s view, been exaggerated to the point that it has become something of a holy cow. Many important activities, such as as work within the household, voluntary work and transactions which take place outside the formal market are left out of the calculation. At the same time, negative things such as accidents, and the like are included in the GNP figure as a positive. Environmental damage does not count at all, whilst the indispensable services which the natural environment provides free of charge, such as the purification of air and water, pollination of plants and control of the climate, are ignored. In promoting GNP growth, both governments and oppositions are chasing the wrong goal, Wijkman argues.

The concept of GNP was introduced in the 1930s by the economist Kutznetz, who emphasised that it was not a term that could be used interchangeably with “well-being”. But that is precisely what has happened. Political debate is dominated by a preoccupation with GNP growth.

We would suggest, though very tentatively, that the aggregate land rental value of a country might be a good measure of its overall well being – its capacity to create real wealth and its population’s level of satisfaction. It is, at the very least, as Joaquin Almunia advocates, an integrated accounting measure, and it is one that reflects both positive and negative factors. Pollution is recorded as a “bad”. Natural resources and natural processes are measured as a “good”, in a way which GDP can not. A further point about land value is that although it is objective and not arbitrary, it is ultimately the summation of everyone’s subjectivity. The weighted preferences of those individuals who want to live in a suburban house with a large garden are counted, just as much as those who would rather have flat in a city centre.

It also follows that if governments used Land Value Taxation as a principal source of revenue, there is a built-in incentive to keep the national estate in good order. It is at least worth thinking about.

Beyond GDP
Article in Dagens Nyheter (in Swedish)