Economists deny that Gross Domestic Product (GDP) was ever intended as a metric of overall country progress or well-being. However, that’s how it is being used. Leaders express alarm if the GDP—the value of all goods and services produced within a nation in a given year—falls. Countries are ranked by GPD or GDP per citizen, implying that countries with higher rankings are doing better overall than countries with lower rankings.

What nonsense. We need a better metric for improved quality of life and progress. We need a Genuine Progress Indicator (GPI) that accounts for not only monetized economic wealth but, more importantly, includes vital environmental and social factors. Here are five reasons why it’s time we replaced the GDP with a GPI.

1. The GDP only counts spending

As progressive economist Mark Anielski says in “The Economics of Happiness,” the GDP measures what is produced, but ignores what is required to create that production. That’s why it is called a “gross” domestic product, not a “net” domestic product. It only celebrates one side of the ledger. If we ran our household budgets that way, the person who is the most bankrupt wins. The more a nation depletes or degrades its natural resources used to produce goods and services, the more the GDP goes up. The more we over-consume and drown ourselves in debt, the more the GDP rises. This is progress?

2. The GDP encourages layoffs

National economists warn of “productivity gaps” between their countries and others. They alert us to lack of adequate “productivity growth.” They measure productivity as GDP per hour worked. They encourage automation and more R&D so that we can produce more goods with fewer people. That means fewer jobs and higher unemployment. This is progress?

3. The GDP celebrates disasters

As the “What’s Wrong with the GDP” web page says: “Since the GDP records every monetary transaction as positive, the costs of social decay and natural disasters are tallied as economic advance. Crime adds billions of dollars to the GDP due to the need for locks and other security measures, increased police protection, property damage, and medical costs. Divorce adds billions of dollars more through lawyer's fees, the need to establish second households and so forth.” This is progress?

 

4. The GDP omits what matters most

As Mark Anielski outlines in his above book, the GDP minimizes the value of expenditures on health care, education, social services, and environmental protection. It ignores democratic progress. It excludes the value of natural capital and the vital services provided by nature. It excludes the value of unpaid housework, child care, volunteer work and leisure. These are all good things that matter to us. If the GDP doesn’t count them, does the GDP count?

 

5. The GDP sets a bad example for businesses

Governments send signals of what’s important. They influence companies to track and do well on what they consider important enough to measure. The GDP is myopically focused on the economic aspect of the triple bottom line and ignores the environmental and social bottom lines. If the GDP doesn’t track all legs of the 3-legged stool of sustainability, why should companies?

 

Click on image to enlarge

The GPI, and other similar metrics listed in the adjacent slide, is a more complete, accurate, and holistic assessment of what we care about. It assesses the well-being / happiness / quality of life of citizens. Isn’t that what matters most? It’s time we had an adult conversation about what we track and celebrate. It’s time we tracked progress toward genuine social wealth, natural wealth, and economic wealth. It’s time for a GPI.

Bob

13 Responses to “5 Reasons Why a GPI Should Replace the GDP”

  1. […] as measure of country well-being and progress is ludicrous. As explained in my March 2011 blog, “5 Reasons Why a GPI [Genuine Progress Indicator] Should Replace the GDP,” the GDP measures the wrong things and ignores the right things. The bonus from investing in […]

  2. Bob Willard says:

    Mike, when you say that people who are affected by the layoffs from automation should be helped, I think you are agreeing that there could be more unemployment as GDP rises. I assume that the assistance for unemployed is provided by government with our tax dollars, so we are paying for the GDP increase. I’m not sure that is a good thing. Also, when you say that we should celebrate a shorter work week from the productivity gains that automation gives, it assumes that we have the same earning power despite a shorter work week. That’s a pretty big assumption. Bob

  3. Mike says:

    Number 2 is silly. Is there greater unemployment in the countries that have the greatest GDP? Or GDP growth? Or GDP per capita? Of course not. So if you write “The GDP encourages layoffs”, then you must also write that “The GDP encourages hiring”. Or the GDP encourages employee turnover. OK. But that is different. Automation is a good thing. We should aim to produce the things we want with the minimum amount of tedious work. Those people who are affected by the layoffs should then be helped. And our work week should decrease according to the productivity gains that automation gives.

  4. […] growth. Many economists and social scientists are proposing such indicators. Some argue we need a “genuine progress indicator”, which would include environmental and social factors as well as economic wealth. A number of […]

  5. Bob Willard says:

    Mojgan, you best approach is do a Google or Wikipedia search on “GPD” or “investments in GDP.” Those sources will be helpful than I can be. Best wishes. Bob

  6. Mojgan says:

    Hi, I am student of economics , I am working on an alternative for GDP. I need the tiny components of GDP , for example how Investment is calculated in a country, which company are included in GDP and how much. How can I find that?
    Who write a rule for the nations?
    Thank you so much

  7. [...] 5.  Willard, B. (march 8, 2011). Five Reasons Why a GPI Should Replace GDP. Retrieved on April 29, 2011 from <http://sustainabilityadvantage.com/2011/03/08/5-reasons-why-a-gpi-should-replace-the-gdp/&gt; [...]

  8. Bob Willard says:

    Marc, it will be interesting to learn whether you find an appetite for a GPI-like metric in China. We need to level the playing field or start a new game. It’s tough for a company to unilaterally start to internalize its externalities without doing itself serious damage in the eyes of its current investors. That’s why we need regulatory bodies to require all corporations to account for their carbon footprint externalities, their natural resource depletion externalities, their societal impact externalities, etc. Or companies can amend their charters or use new ones to set themselves up with new purposes that attract different investors who are looking for more responsible companies, as described in my new blog posted today.

    Bob

  9. Marc Major says:

    Hi Bob
    Great thoughts, as always … we've been thinking these things for awhile, and are wondering why our leaders still don't get it … we're doing a bit of research into a movement in this direction among certain provinces in China.  Will let you know what we find. 
    I'm also pondering what kind of company-level accounting changes could reduce externalities and other situations where optimizing a part of a system suboptimizes the performance of the whole — I've seen this occur both between companies and society, and between divisions within companies. 

  10. Bob Willard says:

    Thanks for your kind feedback, Vanessa. Thanks for the idea of exploring what a corporate-level GPI might look like. I think I’ll do that in my next blog. There are some good things going on that support the idea.

    Bob

  11. Vanessa says:

    Thanks for the great article Bob! This is such an important issue and highlights why our political focus on GDP and 'the economy' to the exclusion of all else is taking Canada down the wrong path.
    I've often wondered what it would look like it a corporation defined 'best interests of the shareholder' as more than monetary. How would they operate if they followed a GPI instead of maximizing profits.
    Totally sharing this article around. :-)

  12. Bob Willard says:

    Thanks, Geoff. The Maryland GPI website looks like an excellent resource. Good for them!

    Bob

  13. Geoff Stack says:

    The State of Maryland is experimenting with GPI – mostly just gathering data for now, but it will be interesting to watch how it evolves…
    http://www.green.maryland.gov/mdgpi/
    Geoff Stack
    geoff@stackcoordination.com

     

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