What's Wrong with the GDP as a Measure of Progress

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Since its introduction during World War II as a measure of wartime production capacity, the gross national product (now routinely measured as gross domestic product—GDP) has become the nation's foremost indicator of economic progress. It is now widely used by policymakers, economists, international agencies and the media as the primary scorecard of a nation's economic health and well-being.

Yet the GDP was never intended for this role. It is merely a gross tally of products and services bought and sold, with no distinctions between transactions that add to well-being, and those that diminish it. Instead of separating costs from benefits, and productive activities from destructive ones, the GDP assumes that every monetary transaction adds to well-being by definition. It is as if a business tried to assess its financial condition by simply adding up all "business activity," thereby lumping together income and expenses, assets and liabilities.

On top of this, the GDP ignores everything that happens outside the realm of monetized exchange, regardless of its importance to well-being. The crucial economic functions performed in the household and volunteer sectors go entirely ignored. The contributions of the natural habitat in providing the resources that sustain us go unreckoned as well. As a result, the GDP not only masks the breakdown of the social structure and natural habitat; worse, it actually portrays such breakdown as economic gain. Because GDP fails to properly distinguish between welfare enhancing and welfare degrading expenditures and ignores non-monetized costs and benefits including all informal sector exchanges, using GDP as a barometer of overall well being leads to some perverse results. Consider these:

• GDP increases with polluting activities and then again with clean-ups. Pollution is a double benefit to the economy since GDP grows when we manufacture toxic chemicals and again when we are forced to clean them up.
• GDP is boosted by crime. Each year, Americans incur nearly $40 billion in crime related costs in the form of lost and damaged property and expenditures on locks, alarms, and security systems. GDP counts these needless expenditures as an economic gain, implying that crime is good for economic growth.
• GDP is oblivious to gross inequality. If a billionaire spends $10,000 more of her income on aphrodisiacs made from endangered seals it counts the same as $10,000 spent by a New Orleans flood victim on bare essentials as far as GDP is concerned. As long as overall expenditures are increasing, GDP will grow even if the increase is entirely attributable to conspicuous consumption habits of the wealthy.
• GDP plummets as communities become more self reliant. If a community decided to decrease its reliance on imported food, energy, and financial markets by expanding rooftop and community gardens, farmers’ markets, local currencies, and solar energy and promote social cohesion by expanding the number of goods and services exchanged by friends and neighbors GDP analysts would call for drastic measures to save the community from impending economic collapse.
• GDP grows when we deplete or degrade natural resources. Clearcutting and sprawl are good for economic growth since GDP assumes unlogged forests, farmland, and wetlands have relatively little economic value if left alone.