What’s going on with GDP? Rethinking economic success

GDP was never meant to be a metric of economic prosperity. Yet years of inertia in the study of economics stifled the birth of alternatives. As economic debate experiences a renaissance, so do the demands to measure economic progress beyond GDP.

Beyond the resurging demands, there is also a revival of options. Yet, a challenge arises in consolidating these many options into a united enough front capable of challenging the hegemony of GDP. From the wellbeing economy to doughnut economy, postgrowth to degrowth, beyond growth and beyond GDP, the story of how to measure the health of our economies is beginning to unfold.    

What is GDP, and why is it being criticised? 

GDP stands for gross domestic product. It is a monetary measure of the market value of all the final goods and services produced in a specific time period by a country. It can be measured in three different ways:  

• The total output or production of the economy.
• The total expenditure or final demand of the economy.
• The total of all incomes in the economy.

GDP is the overall measure of the economy, whereas GDP per capita refers to this total amount divided by the number of people in the country. This means that a hugely populous country like India can have a very high total GDP with a low GDP per capita, whereas a small but rich country like Finland can have a smaller total GDP but a very high GDP per capita. As a general rule GDP per capita is the measure most commonly associated with living standards, whereas total GDP is often looked at more when considering power on the world stage.

GDP growth means that the economy is producing more monetary value than at a previous point. The growth rate often referenced by politicians (which now worries many of them for being too slow) is the change in the monetary value produced by the economy from one period to the next — or, otherwise, the rate of change of GDP. This will often be discussed in yearly, quarterly or monthly terms depending on the context. GDP growth is frequently the overarching target of economic policy, and is often a politically “safe” justification for a whole range of other policies, from renewable energy investment to education. We’ll hear GDP growth rates being used to discuss the health of economies, while negative growth (the shrinking of the economy, which officially becomes a recession if it persists for two quarters or more) remains a spectre over modern economics.

The origins of GDP

The original formulation of GDP was presented by economist Simon Kuznets in 1937, and was standardised in the form we know it today in 1953 when the UN created the ‘System of National Accounts’ (SNA). Crucially, it was never intended as a welfare measure, and Kuznets explicitly warned against using it for this purpose. Despite the theoretical and empirical scrutiny that has followed GDP, it has prevailed as the dominant metric guiding economic policymaking. This is partly due to a series of historical contingencies and lock-in effects, particularly with respect to the prominence of GDP in standard economics curricula. But, admittedly, the measure also has appeal: 

• It conveys a coherent and easy-to-understand message (up = good, down = bad). 
• It is rigorously calculated according to a system overseen by a respected international organisation in the UN. 
• It is standardised globally, such that inter-country comparisons are relatively simple. 
• It correlates with other important things (at least to some degree); countries with a higher GDP per capita tend to have higher living standards on average across many measures, while a large total GDP is a moderately good proxy for military and geopolitical power.

GDP is effective in what it does. But, as many are coming to acknowledge and many more have known for some time, what it does is at best limited and at worst dangerously flawed.

Climate, welfare, and inequality crises: here’s why GDP can’t tell the whole story

The most obvious limitation of GDP is that it doesn’t capture everything—or even most things—most of us think are important in life. As President of the European Commission, Ursula von der Leyen, noted in her speech during 2023’s Beyond Growth conference:

“It was Robert Kennedy back in the 1960s who famously said that GDP ‘measures everything, except that which makes life worthwhile: the health of our children, or the joy of their play’. And I am sure had he given his speech today, Kennedy would have included the sound of birdsong and the joy of breathing clean air.” (Source)

Oversights in GDP measurement 

This critique of GDP has been made with particular focus by both feminist and ecological economists. Using a feminist lens, we can see that GDP erases the value of unpaid “socially reproductive” labour such as care work, which is often undertaken by women. This labour is essential to the proper functioning of our economies and societies, and yet is ignored by GDP. GDP doesn’t just omit social goods such as care work, but it also positively counts social ills. Increases in the sale of cigarettes, for example, will boost GDP figures. The same can be said for the whole class of “defensive expenditures”: spending which people undertake to protect against worsening external conditions, such as on pollution masks when their air quality worsens. Here too, GDP sees a benefit.

Insensitivity to inequalities

GDP and its growth, even on a per capita basis, are also insensitive to distributional considerations. GDP growth in many cases correlates with rising inequality, meaning an overall “positive” figure of growth and increased wealth can mask those at the bottom of society being left behind, or even being made worse off via mechanisms such as social exclusion. This is also true at the global level, where discussion of the “global economy” as a whole as measured by world GDP obscures the immiseration and exploitation of many countries across the global south under the current economic order.

Misvaluation of consumption and basic needs

The fact that GDP aggregates all forms of consumption or output equally also means that one person’s losing access to the fundamentals of life can be compensated by another’s trivial consumption. GDP would remain unchanged if a reduction in food production and consumption due to some not being able to feed themselves was offset by a single wealthy individual spending the same amount on custom jewellery. Intuitively, when we consider the hierarchy of human needs, we would likely agree that these things should not be equivocated.

The Easterlin Paradox

It should also be noted that while GDP is somewhat of a proxy for other important things, it’s not a particularly good one. For human wellbeing, the so-called Easterlin Paradox shows that while rich people within countries are happier than their poorer counterparts, over time, aggregate happiness across a given country doesn’t increase with GDP. One of the most common hypothesised mechanisms for this phenomenon is that past a point our wellbeing is significantly determined by our relative position compared to others in our society, rather than absolute wealth. So, if I get richer but don’t get richer than others, this won’t significantly improve my wellbeing. These observations broadly apply to wealthier countries. In poorer countries, increased GDP correlates positively across many measures of wellbeing. However, there appears to be a threshold effect: past a certain point, further increases in GDP don’t seem to produce more welfare. Research varies on where the link between GDP and welfare becomes patchier. Studies have produced numbers ranging from $20,000 to $25,000 in purchasing power-adjusted dollars per capita — the wage of a part-time worker just above the minimum wage in the US. 

Evaluating health, education, and power differentials

The same principle applies to what we might consider important determinants of wellbeing, such as health and education. While a higher GDP can mean more money to spend on these things, past a point they are far more a result of policy around how we choose to allocate our resources rather than the total resources in our society. Outliers on both ends of the spectrum illustrate this point. For example, the UAE has over 7 times the GDP per capita of Cuba, yet life expectancy at birth in the UAE is close to 6 years lower than in Cuba. Similarly, in education, based on harmonised scores from student attainment tests, Vietnam has managed to achieve better learning outcomes than the USA despite being almost 6 times poorer in GDP per capita terms. When it comes to military and geopolitical power, GDP can obscure many important economic characteristics such as a nation’s level of industrialisation, technological advancement, military spending itself, and so-called “soft power”. Even here, GDP doesn’t tell the whole story.

Ecological critique

It is the ecological critique of GDP that has arguably gained the most attention in recent years. Gross domestic product tells us nothing about the environmental outcomes, and particularly the environmental damage, of our economic activities. Moreover, since GDP treats all types of economic activity equally, even acts that harm the environment can appear as positive contributions to GDP.  To take one of the paradigmatic examples, an old-growth forest will only show up in GDP calculations when it is cut down and sold. GDP growth has caused and continues to cause vast ecological damage, even while the headline figure paints a positive progress figure. This is not a state of affairs which can be maintained.

Two major suggestions for going beyond GDP 

Following these critiques, two major schools of thought have developed. The first school concerns the supplementation of GDP with other measures to make it more robust. The second stream suggests replacing it entirely.

Suggestion 1: Supplementation

The first suggestion is to supplement GDP with various alternative metrics covering the areas it overlooks, such as environmental impacts and wellbeing outcomes. This is the mainstream position and is what is targeted by the majority of beyond-GDP initiatives in institutions such as the EU and UN. The 17 Sustainable Development Goals, with their 247 indicators covering a range of social, economic and environmental outcomes, are the paradigmatic example of this approach.

More critical voices say this supplementation-based approach is insufficient. These critiques can again fall into two camps. First, it can be argued that the symbolic and narrative hold of GDP means that even if we supplement it with excellent alternatives, GDP will politically and discursively “crowd them out”. Many countries have wellbeing and environmental performance indicators already, and the SDGs have existed for years. Yet GDP still dominates political discourse and decision-making. The most poignant illustration of this is that the world is “woefully off track” to meet the SDGs by the agreed date of 2030, while it is likely that almost no one beyond the most dedicated specialists is aware of how their country is performing concerning the Goals. 

Suggestion 2: Eradication

The second strand of criticism is more radical. It argues that retaining GDP, even as part of a wider set of metrics, implies that economic growth should still be a target of economic policy. At least in the global north, this premise has been hotly disputed. 

An alternative response to the shortcomings of GDP has been to advocate for its complete removal. These critics argue that the only way forward is to ignore GDP entirely. We should stop talking about it, referencing it, and using it to guide and justify economic decision-making. This is the more radical position, usually endorsed by those referenced above who are also critical of growth.

This group of critics argue that continuing to use GDP results in a dangerous fixation on economic activity, often tangential to human wellbeing in wealthier countries and actively damaging the environment and society.

The counterarguments to such a position are usually found in two interrelated points:

• Even if GDP is limited, understanding the level of economic activity is still important and useful for policymakers. And growth is still an essential and legitimate goal of economic policy.
• Whatever one thinks of GDP, it is politically infeasible to replace it. The pragmatic path is to supplement rather than try (and inevitably fail) to replace it.

Current beyond-GDP propositions lack consistency and evidence, which hurts mainstreaming and research

While abundant evidence shows that GDP is inadequate in measuring economic prosperity, policymakers have not moved beyond it. And neither has economic reporting. There is currently no apparent effort to measure the success of economies in other ways. In the current geopolitical climate, chasing growth has once again become the key objective. Still, there is now evident uncertainty around the effects of previously-considered-certain economic policy and, in these moments of ambiguity, new ideas can spread and flourish. 

Better measures of economic prosperity than GDP can exist, but are they ready to reassure and guide decision-makers?  

While GDP is a unified and standardised measure — also rigorously calculated and carrying the legitimacy of years of history and usage by all of the world’s major economic institutions — the world of beyond-GDP metrics is far more prolific and young. 

A vast number of indexes and dashboards are jostling for position as a viable alternative to GDP, produced by academics, think tanks, IGOs, and governments. Currently, there are no agreed standards of measurement that a central arbiter could uphold. 

The most prominent points of diversity currently include:

• Whether it is preferable to use a dashboard of discrete indicators or try to combine them into a single index.
• Whether to try and measure the ends of wellbeing directly via subjective measures like life satisfaction, or focus on objective measures of wellbeing correlates such as health.
• Whether to adopt “weak sustainability” which takes the environment as substitutable (i.e., environmental degradation can be outweighed by improvements in other areas) or “strong sustainability” which rejects such substitution (i.e., environmental damage is environmental damage, whatever other outcomes it produces).

Synthesising suggestions as one first strategic objective for beyond-GDP?

Diversity and debate are healthy and should be encouraged, but in the current climate, the lack of cohesion could be undermining the utility of the field. However, work is underway to rectify this issue. A series of new EU-funded projects seeks to build alignment and coherence in the field, to explore whether this enables more meaningful engagement with policy. MERGE, which establishes collaborative science-policy networks to improve the usability and accessibility of beyond-GDP policy frameworks and indicators, facilitates cooperation and exchange among European Commission-funded leading research projects, including:

• SPES (Sustainability Performances, Evidence and Scenarios)
• ToBe (Towards a sustainable wellbeing economy)
• WISE Horizons (Wellbeing, inclusion, sustainability and the economy)
• REAL (A Post Growth Deal)

These projects bring together leading scholars in the field. They will take the high water mark of beyond-GDP thinking that has reached in the past years even further, and provide the best chance yet at creating a coherent, rigorous and impactful field.

The next goals for the field

Even with the recent upswing in attention and activity, not all of the issues with beyond-GDP measurement will be solved immediately. And even when they are, institutional inertia and increasingly volatile political dynamics will present hurdles of their own. 

But it’s imperative that societies explore their options. The fact that even the most mainstream of economic institutions and even the leading academic lights of the orthodox old school are beginning to recognise their oversights is a sign the tide is turning. 

These developments mark a promising turn in economics. However, metrics alone are not enough. Will there be a leap from measurement to governance and policy? Will it be successful? It depends on whether we can strike a balance between pragmatism and urgency. Research shows that, when it comes to the transformative potential of metrics, the identity of their creators matters significantly. 

But even more deeply, uncovering the transformative potential of metrics requires us to reflect on how they relate to the dominant narratives, values and presumptions we bring to our work.