New frontiers: Why economists are rethinking growth beyond GDP

Jasper Jolly
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The size of Kenya's largely informal economy was massively under-measured (Source: Getty)

A lot changed after the financial crisis. But then again, a lot stayed the same. The public face of the economy is embodied in a single number which dominates the discourse: GDP growth. Politicians tout their GDP growth credentials, economists wrangle over forecasts, and media without exception breathlessly report any deviation from the upwards march.

It’s a warped mirror to our progress, says David Pilling, a Financial Times journalist. In The Growth Delusion he turns the looking glass back onto the extensive critiques of the economy’s most important number and the battered methodologies which make it possible.

Given its fundamental place in the lives of anyone with an interest in the economy, the idea of measuring the actual size of everything we do is actually relatively young. In 1933 the immigrant US economist Simon Kuznets was tasked with coming up with the first ever set of national accounts, and along with that came up with a “disarmingly simple” idea, Pilling says: to encapsulate the economy in a single number.

Collected through vast surveys – much the same as the method still used today – the accounts showed a snapshot of the everything produced domestically; it is a gross measure because it does not account for depreciation of capital goods. The national accounts underpinned US President Franklin Roosevelt’s economic stimulus, the New Deal, and played a crucial role in the reorientation of the US economy in the Second World War.

GDP contains multitudes, then. It also contains weirdnesses galore: prostitutes and drugs add to the UK economy, yet in the prim US version such activities do not contribute, thank you very much. More importantly, GDP also fails to account for any labour where money does not change hands, at a stroke leaving out volunteer work and the unpaid domestic work still disproportionately carried out by women. One study of the UK found the size of domestic household labour came in a £877bn during the year 2000, an output almost half the size of what we think of as the economy which barely figures in the statistics on which economic policy relies.

The flaws magnify when you move down the GDP line. Pilling, the FT’s Africa editor, brings an important international perspective to our universal yardstick, and a deep scepticism born of experience of less formalised economies. In Nigeria the economy grew by 89 per cent overnight as methods were changed; in Kenya night-time satellite imagery showed the size of the rural economy was being dramatically mismeasured because it was not capturing income from large proportions of the population.

If the measurements can be inaccurate, often the statistics are simply measuring the wrong thing. Nowhere is this more evident than in regard to the environment. GDP is an excellent measure of flows, but a terrible measure of quality or efficiency: if a factory pollutes a lake, requiring an expensive clean-up, it will boost GDP; pollution is nominally good for our economy.

These arguments against GDP’s exalted position are familiar: indeed, Pilling emphasises that Kuznets, no villain in this piece, was GDP’s earliest critic. The methodical demystification of GDP makes The Growth Delusion a vital disclaimer which should be useful to anyone who deals with statistics, but the more important insight is that our scepticism should concern what is measured, not just how accurately we measure it.

A thorough debunking of GDP leads to inevitable questions of what should replace it. Pilling starts with the uncontroversial GDP per capita, and skates through measures more esoteric and more complicated, with nods to measures like the Human Development Index and various measures from the burgeoning field of happiness studies. Then there are other approaches, like Maryland state’s Genuine Progress Index or the unfortunately named Happy Planet Index, which try to adjust GDP to take into account non-monetary goods, as well as what are otherwise known as negative externalities, like the depletion of natural resources or deaths caused by lung cancer among smokers.

There is no easy answer; the plea for nuance, even ambivalence, in our attitude to growth is noble and persuasive – and GDP is left well and truly debunked – but Pilling eventually shies away from making the choice of what comes next.

That criticism cannot be made of Kate Raworth, a former Oxfam and now University of Oxford economist. In Doughnut Economics she takes on the enormous task of sketching out a new approach to the economy in 290 pages. Indeed, sketching, or rather drawing, is the book’s central metaphor: a simple diagram through which an “agnostic” attitude towards economic growth can be understood.

The titular doughnut stands for a never-ending cycle of sustainability – rather than an onwards and upwards march of progress – within environmental limits on the outside and socio-political on the inside. Reorient the economy not to touch the sides, the idea goes, and we can avert catastrophe.

What then follows is a dizzying whirl through the 300 years of economic theory, and challenges to their fundamental principles: take into account the flow of energy through an economy; introduce wealth taxes; wean industry off newly extracted natural resources.

Perhaps inevitably, Doughnut sometimes reads like a shopping list, with massive and politically charged changes to how the economy works confined to a paragraph or two. Some of Raworth’s criticisms of older economic theories are unfair – complex understanding has to start with basics. Yet the valid concern is that fundamental models need to be challenged before any change can happen.

It is almost, but not quite, a banality to say that nothing can grow forever – and the financial crisis showed that the music can, indeed, stop. The thesis shared by these otherwise different books is that we “get over” growth before the music of the biospheres stops as well. Yet there is a seam of fear running through both these books: the fear that we may be too late.

The Growth Delusion | David Pilling | Bloomsbury | £20.00

Doughnut Economics | Kate Raworth | Random House Business | Paperback released 22 February | £9.99

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