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GDP and happiness

Strengths and weaknesses. How should we measure a nation's progress or success? The most commonly used measure is the level and growth rate of it's economic prosperity, its Gross Domestic Product (GDP) which is simply the total money value of goods and services produced in an economy.
However, this measure has two major faults. The first fault is internal:  it is poor at measuring the increasingly important area of services, particularly public services, and it ignores large elements of working life, like housework, much childcare, the ‘grey’ economy and elements of voluntary work. The second fault is that it has a very narrow, pecuniary, view of success. It ignores inequality, health, education and the environment, for example, which are variously seen as important measures of well-being amongst people.

Why have so many economists, politicians and citizens ended up being so obsessed with the level and growth of GDP? Part of the explanation is that there are two good reasons to have such an interest in growing wealth:

  • There is a link, though only partial, between financial prosperity and well-being.
  • GDP offers an agreed, rigorous, widely available and frequently updated measure of   relative progress.

As survey work has shown, there is a clear, but not universal, link between wealth  and well-being for  both individuals and  nations. Well-being increases with income in certain circumstances:

  • When countries are moving from extreme poverty, where the basics of life, such as food and shelter for example, are still not reliably available to the majority of the population.
  • Within a country the very rich record more happiness and well-being than the very poor.

When the system of national accounts that became GDP started to be introduced in the 1930s the link between wealth, income and happiness would have been considerably stronger than they have now become as most countries with advanced economies are now much more affluent. Thus, while the problems associated with GDP as a measure of social welfare have been recognised since its inception, its benefits considerably outweighed its disadvantages. As long as there were real problems with malnutrition, poor health, poor housing and lack of education in the first half of the 20th century then increases in income were always going to improve social welfare, regardless of whether this captured the full richness of what such gains might include. In addition, having a standard that could be compared across nations was also very useful in attempting to judge which nations, and the economic and social policies that they pursued, were the most successful at delivering high growth in income and wealth.

However, with time and rising national wealth the problems inherent in GDP are more difficult to ignore. For example, the connection between income and well-being appears to have broken down. While national and individual wealth, in real terms, (i.e. adjusted for inflationary gains which deliver no real gain) has doubled, trebled or even quadrupled in the second half of the twentieth century, survey data for most rich nations show that happiness has been flat over the same period. This suggests that after basic needs and wants, which allow for personal and family security, are met, further wealth is spent on upgrades of basic needs that do not deliver much, if any, additional life satisfaction.

In addition, GDP is no longer adequately doing the job it was originally designed for– judging the output of a market based economy. While in the 1930s production industries, e.g. manufacturing and agriculture, accounted for up to 75% of employment, by the 1990s this had fallen to under 30%. Meanwhile, services share had risen to over 70% and the public sector’s share of GDP had risen from under 20% in 1920 to over 40% by the end of the 1970s. These changes have a huge impact on the reliability of GDP as a true measure of welfare.

In terms of service industries there have long been arguments about whether spending on areas like policing or the prison service should be seen as a positive contribution to welfare. Also the problems of identifying the output associated with a nurse or a teacher are complicated (you can use income as a proxy, but this might be a very poor proxy for the gross social benefits or for the personal benefit of a patient or pupil). If we consider that the health sector now accounts for over 10% of the economy in many countries we begin to understand the scale of the problem.

So does this mean that GDP as a measure of welfare or well-being is a waste of time and should be abolished? The short answer is ‘no’. While it has significant faults it still has strengths, especially in comparison to alternatives. Despite its faults it still captures the most easily identified aspects of wealth and it does so in a way that allows fairly accurate comparisons to be made across countries. That being said, it is clear that GDP should not be used as a stand-alone measure of social progress and that, in addition, we must find other more robust, and direct, methods for assessing individual and national well-being. 

 Copyright: John McLaren, 2006

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