GDP – A Measure Of Quantity, Not Quality
How should we measure economies?
Although no perfect answer has been presented yet, influential experts from different fields have come to a valuable conclusion during the World Economic Forum in Davos. The typically used indicator Gross Domestic Product GDP - a measure of the economic performance of an economy over a certain time period - does not capture all factors of our increasingly complex becoming world and is, therefore, an outdated measure of well-being. The issue with the GDP concept is that it conveys an incomplete picture of an economic system, hence leading to dramatic misconceptions. Since GDP accounts only for all monetary transactions of goods and services produced, the social and environmental components of economies are disregarded. Consequently, the misrepresentation of development accelerates the depletion of natural resources. In GDP terms, 1,000 barrels of palm oil are valued higher than an untouched ecosystem including its services. Besides, the indicator is neither adjusted for the distribution of goods or leisure time nor are home production and black markets covered. Scientifically speaking, GDP overlooks substantial components of our economic system and therefore represents an ambiguous measure of well-being of a country leading to detrimental activities for the long-term economy.
The presented problems and especially limitations of the GDP concept underline the necessity for adjustments. In fact, there have been presented alternative indicators already. The Genuine Progress Indicator, for instance, suggests to include factors like income inequality, home production, and education while deducting pollution costs, crime, and unemployment. A second option represents the Sustainable Economic Development Assessment by the Boston Consulting Group BCG. This tool incorporates ten indicators grouped into the categories sustainability, economics, and investments. Additionally, the BCG creates a wealth to well-being coefficient indicating whether the population is proportionally better off. These alternative measures underline that GDP needs to embrace more dimensions in order to measure well-being accurately. However, it is worthwhile mentioning that there still does not exist a global consensus about how to exactly adjust or replace GDP.
As a result, the combination of the GDP with additional dimensions can lead to Popper’s view of critical rationalism in the form of a more accurate empirical analysis. Furthermore, GDP represents an epistemological problem. The supporters make the powerful assumption that an increase in money equals an increase in happiness. However, the epistemological question about the reasonableness of this assumption has been ignored by policymakers. Through adjustments, this assumption would be falsified. The perspective of double hermeneutic sheds light on an additional benefit. During the research process, experiences interact with the researcher’s construction of knowledge. The wrong application of the GDP concept influenced our construction of knowledge, to that effect that we link a higher GDP with a better off population. Adjustments can undo this link. By applying an adjusted GDP concept correctly, one can inform policymakers and population accurately about the well-being of a nation. However, it is necessary to maintain parsimony of the GDP statistic and avoid inflating it with too many indicators. Adjusting the measure too much can result in an inapplicable complex model. An adjustment of the GDP is feasible by taking alternative measures as an example and conducting further research in measuring social, technological, and environmental progress, whereas the desirability is questionable. Since GDP intended to measure merely macroeconomic activities, an adjustment diminishes the initial purpose, hence decreasing simplicity. Therefore, a replacement of GDP is more desirable in order to erase misconceptions caused by the wrong application of the concept.
