Much Fuss Over GDP But How Do We Measure Happiness?

The debate over India’s GDP numbers (economists are still locking horns over the truth and objectivity in these figures) was back into currency with this Arvind Subramanian piece published in June this year. He said that India may have overstated its GDP figures by 2.5 percentage points every year since 2011. Another insightful piece said the figures may have been overstated by 1-1.5 percentage points. This is significant, and while there may be a difference in figures quoted, inaccurate reporting of GDP is now an elephant in the room, too big to ignore.

GDP is an important economic tool. It measures the production of all goods and services bought and sold in an economy each year, by this very fact, has been of utmost importance to economists trying to measure economic growth. But of late, there have been concerns that GDP my not be a perfect tool to measure growth. Jacinda Ardern, New Zealand PM took it a step further when she said her government is going to look at fresh ways to measure happiness and wellbeing of the people of her country.

So, what are we going to do when we fix our GDP numbers back home? May be, join the global efforts on finding means to measure happiness, because number-driven GDP is already being punched for being an ineffective tool.

Courtney Goldsmith, in this piece, argues why GDP as a measure of economic growth may not be effective:

In an independent review of the UK’s economic statistics published in 2016, Sir Charles Bean wrote that GDP is often viewed as a “summary statistic” for the health of the economy. This means it is frequently conflated with wealth or welfare, though it only measures income. “Importantly, GDP… does not reflect economic inequality or sustainability (environmental, financial or [otherwise]),” Bean wrote. What’s more, GDP is not the precise and flawless figure that many believe it to be – it is merely an estimate. “This uncertainty surrounding official measures of GDP is inadequately recognised in public discourse, with commentators frequently attributing spurious precision to the estimates,” Bean continued.

Sarah Arnold, Senior Economist at the New Economics Foundation (NEF), told World Finance that GDP as a measure of economic activity is simply a means to an end: “It has become so synonymous with national success that the rationale for pursuing economic growth in the first place seems to have been long forgotten.”

Putting the flaws highlighted by Bean and Arnold aside, GDP is still an inaccurate measure of prosperity, as it fails to convey much of the value created in the modern world. GDP was developed during the manufacturing age and, as David Pilling, Africa Editor of the Financial Times, wrote in his book The Growth Delusion: Wealth, Poverty and the Wellbeing of Nations: “[GDP] is not bad at accounting for production of bricks, steel bars and bicycles.” Where it struggles, though, is with the service economy, a segment that accounts for a growing proportion of high-income countries’ economies. “[Try GDP] out on haircuts, psychoanalysis sessions or music downloads and it becomes distinctly fuzzy,” Pilling wrote.

GDP’s preference for tangible goods also means it is insufficient at capturing the value of technology.

Of course, the number-focussed measure of GDP may not be equipped to assess job quality, wellbeing, carbon emissions, inequality, and physical health, key indicators of happiness and wellbeing that development economists have been focussing on.

Goldsmith, in her piece, further argues:

For GDP, which does not distinguish between good and bad production, bigger is always better. …Wars and natural disasters, too, can be a boon to GDP as a result of the associated increase in spending. Comprehensive wealth, on the other hand, accounts for all of a country’s assets, including: produced capital, such as factories and machinery; natural capital, like forests and fossil fuels; human capital, including the value of future earnings for the labour force; and net foreign assets.

GDP’s neglect of natural capital in particular has received more attention in recent years. Natural assets, such as forests, fisheries and the atmosphere, are often regarded as self-sustaining, fixed assets. In actual fact, all of these resources can be – and are being – depleted by humans. Since the 1990s, economists have looked into the possibility of putting a price tag on natural resources to ensure their value is taken seriously. Ecological economist Robert Costanza published a paper entitled ‘The Value of the World’s Ecosystem Services and Natural Capital in Nature’ in 1997 that valued the whole of the natural world at $33trn. While Costanza’s research was highly controversial, the idea of accounting for natural depletion within the landscape of economic growth is becoming more common.

This McKinsey report says:

GDP as a unit of measure has not kept pace with the changing nature of economic activity. Designed to measure the physical production of goods in the market economy, GDP is not well suited to accounting for private- and public-sector services with no output that can be measured easily by counting the number of units produced. Nor does GDP lend itself to assessing improvements in the quality and diversity of goods and services or to estimating the depletion of resources or the degradation of the environment associated with production. Transformative change in technology is not easy to measure using GDP because so much of the benefit accrues to consumers.

World Bank too has touched upon the subject with its own concept of “comprehensive wealth“, covering in its sweep all produced capital such as factories and roads; natural capital like forests and water; human capital, which leads to earnings; and net foreign assets, to project a fuller picture of economic wellbeing and growth. Experts today are also working out ways to measure intangible qualities of happiness and knowledge but we have a long way to go.

There are interesting cues here, in this Econlife piece published today, which questions if money could indeed buy happiness, by comparing GDP, social support, life expectancy et al of the top 10 happiest countries (according to the UN Happiness Report) in the world.

I think happiness couldn’t ever be measured except in smiles and those trying to chase happiness are the unhappiest lot. Think of this at a national level and tell me: is it possible to make everyone happy? I like it when they say, happiness is a state of mind. Of course, this is because this happiness question weighs heavy on my soul so escapist statements best resolve the moral dilemma. However, honestly, GDP and happiness do not always go together, that’s very much true. 

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