Is GDP the right measure of progress?
Is GDP the right measure of progress?
In 1934, America’s economy had collapsed by half in three years. Nobody had a clear picture of how bad things actually were. Simon Kuznets, an economist, was tasked with figuring it out, and what he built became GDP (GNP at the time).
Kuznets wasn’t trying to measure raw output. He wanted to measure welfare, how well people were actually doing. He was explicit about this. Armaments, advertising, the inflated cost of urban housing that people pay just to be close enough to earn a living, he wanted all of that excluded.
The government didn’t care. World War II was on the horizon, and what they needed was a production gauge. How many tanks, how many planes, how much steel? By 1942, GNP/GDP was that gauge. Everything counted. A dollar spent on a bomb and a dollar spent on a school lunch were the same dollar.
Kuznets tried again in 1962: “Distinctions must be kept in mind between quantity and quality of growth. Goals for more growth should specify more growth of what and for what.” By then, it was too late. GDP had become the scoreboard, and nobody was going to retire it.
Recently, UN Secretary-General António Guterres put it bluntly: “When we destroy a forest, we are creating GDP. When we overfish, we are creating GDP.”
Economist Diane Coyle has a nice example. A widower marries his housekeeper. She does the same work she was doing before, in the same house, for the same person. But because he stops paying her a salary, GDP shrinks. She didn’t stop working. The payment stopped. Or if you grow your own vegetables instead of buying them at the store, GDP falls. Cook dinner instead of ordering in, and GDP falls. The work is identical, but it just stops being counted.
A country strips its forests bare, and GDP goes up. Cancer clusters emerge, hospital bills pile up, and GDP goes up. Public transport falls apart, everyone has to buy a car, and GDP goes up. The metric rewards the disease and the cure equally.
GDP tells you real things about production and employment. But it was built in the 1940s to count tanks. We’re now facing one of the biggest economic shifts in history, thanks to AI, and that’s still the gauge we’re using.