Book Title: The Growth Delusion – The Wealth and Well-being of Nations
Author: David Pilling
ISBN: 9781408893715
The Gross Domestic Product (short: GDP) is the for most of the planet THE economic measure of all things. At least if governments as well as the economic newscasts are to be believed. While it grows year-on-year, preferably fast and furious, all is well in and the various heads of central banks sleep peacefully. In any other case, the sense of catastrophe and failing economic prosperity is never far: politicians careers are questions, and ‘revival packages’ quickly are drawn up to reheat the ‘the race for growth’.
Despite its prominent role in the global economic discourse, few are aware that the GDP as we know it, is barely 100 years old. And maybe worse: the original effort that gave birth to what later would be become the GDP was by all intents and purposes not design to measure economic prosperity, but rather to ensure the US could sustain in its war efforts, without overly detrimental on the homeland. From that original design, the three simple letters that mean the world to most economists and politicians, have come a far way.
With ‘The Delusive Quest for Growth’ David Pilling has written a biography-cum-history of the GDP: from humble beginnings as an effort to draw up national accounts through the present day incarnation and significance. How it evolved from being a quantification of ‘war readiness’ post the Big Depression, to being the measure of national success and prosperity abundantly used in this first quarter of this 21st century.
To trace hence this trajectory, the author – for decades an economic journalist for the Financial Times – is not afraid to ask unashamedly what seem at the outset simplistic if not to say ‘stupid’ questions: What is the GDP? What exactly does it mean? Where does it come from? Why and how did it become what we know and use it for in the present day? Why to measure at all? Does it measure the ‘right’ thing? Does its use make common sense? What does it do successfully, and where does it objectively fail? What is the impact on the John Smiths’ of this world? What about alternative approaches that are periodically hitting the news such as the Global Happiness Index?
The book is structured into 3 main parts, each of which looks at the topic from a specific perspective while adding facts and figures to the historic and cultural background.
Part One: The Problem with Growth
This first part covers the fundamentals of understanding of what the GDP delivers, and maybe more importantly what it does not deliver. To achieve the first, its history is traced from the very first ideas of national accounts through to the early 1930s and the quantification of war readiness.
Economic Activity = Any monetary activity in which parties willingly consent to take part (Eurostats, European Systems of Accounts).
In continuation, and with the above definition in mind, the book outlines a number of fundamental truths inherent in the GDPs definition, as well as their consequences:
- Activities such as prostitution, dealing of drugs and stolen goods considered illegal in many jurisdiction are included in GDP calculation.
- A sick patient generates more spending than a healthy person, and hence contributes more to the overall number.
- Lending and credits are a good thing as they fuel spending and thereby contribute to GDP growth.
- System inefficiencies (transaction costs) contribute in a ‘good’ way to economic activity: paying someone to do a terribly job at planning your holiday is considered contribution, whereas your own booking effort is considered valueless.
- Innovation – progress in colloquial terms (think of anti-biotics while still in the lab) have no value at the outset. Only once innovation becomes mainstream and starts to generate spending and income it is considered valuable.
- It remains unclear what the value of public services (schools, public health, roads) or natural resources is, and they are not included in the calculation, unless the money is spent on paying a 3rd party for their delivery. Academic as well as governments keep struggling to put even an estimated number on the value of those services.
- This applies also to activities such as child rearing, community work or caring for the elderly which only become economically valuable once a 3rd party service provider is paid for their delivery. The value of this ‘invaluable’ activity though has at least been calculated, and is estimated around GBP1000 billion pa in the UK alone …
The 2 key conclusions of this part are:
- The GDP does not pass value judgement.
- The GDP is not a proxy for well-being: it is unrelated to distribution of wealth and therefore with the well-being of individuals in society or even society at large.
Part Two: Growth and the Developing World
This second part of the book focuses on 2 key aspects:
- Statistics are imperfect. To make sense of them, one needs to understand how they came into existence to start with, and what their limitations and trustworthy data base is.
- Just accounting for transactions – spending – does at current time re-inforce also ‘bad spending’ (remediation of damage) as well as not account for lasting damage crated. Ideally calculations should account for ‘negative impact’ spendings.
Most economic indicators we know today, and the GDP particularly so, have been designed by developed countries for developed countries. Applying their well-defined methodology, if not always flawless logic, to developing countries result more often than not in imperfect, patchy data sets, and inaccurate conclusions.
Developing economies have as a key characteristics that many economic activities are never measured, for one reason or another, the way it is done in developed countries.
For one, the subsistence livelihoods as well as the informal economy are much wider spread. As for the first: this is an economic activities that never generates any ‘value’ as per GDP calculation, but nevertheless may well generate a certain extent of wealth in terms of agricultural and material goods needed to live a (good) live. The second then encompasses for one non-monetary transactions – e.g. bartering or exchange of goods – as well as the ‘kiosk economy’, which generates the cash required for basic such as tooth paste or petrol, but has a relatively limited applicability.
The two components taken together illustrate how active an economy may well be even if the GDP statistically may give a different impression. But also how difficult it invariably is to measure any of these types of activities even approximately reliably.
This means that developing economies – at this point still – have to be more inventive to estimate the size of their economic activities, as the school book approach taken in developed economies does – at best of times – not work well.
At the same time, the question of ‘beneficial’ and ‘detrimental’ economic activity does pose itself with more urgency. While creating damage and cleaning damage up both create ‘value’ in GDP terms, there are first thoughts – notably so in China – that suggest that maybe the growth, wealth and economic statistics should be adjusted by adjusting (discounting) for waste, environmental destruction and social disharmony.
Part Three: Beyond Growth
There have been barely any efforts, never mind successes, in measuring nations’ assets (as opposed to income), and as a consequence its wealth.
Hence, this third part is about looking at and scrutinizing alternative measures of economic prosperity that are either experimented with or potentially in use in some geography or other of this planet. It departs on the statement that
‘Our standard growth measurement tell us everything about income and nothing about wealth. ‘
Yet measuring wealth is indispensable in order to get an idea of the true picture of the (economic prosperity) of the world.
To make more sense of the above, the following needs to be kept in mind: They key word in Gross Domestic Product (GDP) is the word ‘gross’: the measure does not account for depreciation or diminution of the underlying assets that the gross income is generated from. Therefore, taken to extreme, this could lead to a collapse.
GDP is but a partial rear mirror of how income as evolved, yet it says very little about how citizens feel at present, or how they think what ‘good’ means.
The alternative measures to the GDP looks at are:
- Natural Capital Accounting: in essence, giving a monetary value to the natural resources (likes, rivers, …) in the hope that it will ‘give them a voice’ in the economic game. The challenge is that it may be both meaningless (what is the worth of a glass of water really?) as well as reckless (legitimisation). What is known however, is that the higher physical capital (i.e. infrastructure) is valued, the lower its natural capital’s value is typically perceived and valued.
- Gross National Happiness index. A Buthanese version to define how a the values of happiness based on culturally Buddhist undertones. While often cited as the prime example for a GDP alternative, its actual outcome (both factually with literacy rates that remain low; as well as in the eyes of population scored through the respective UN surveys) is not quite living up to its claim and aspirations.
- Genuine Progress Indicator (GPI). Is often seen as GDP2.0, hence in essence is a refined version of the GDP, with 26 component measurements in three categories: economic, social, environmental. As a stand alone number – just like the GDP – it says very little, and only year-on-year comparison gives an idea of the development trajectory.
- Human Development Index (HDI). Consisting of 3 components (income, life expectancy, education). Its big fault is that in essence it measures ‘how close to Scandinavia’ a country has evolved to be, and does not necessarily take into account cultural and other diverse aspects.
- Canadian Index of Well-being (CIW). Was created by surveying Canadians to identify what factors influence their subjective and perceived state of content (‘happiness’) with life,. The results are 8 dimensions: community vitality, democratic engagement, education, environment, healthy population, leisure and culture, living standards, time use. The interesting thing that can be observed is, that ever since the 2007/8 financial crises the gap between the Canadian GDP (i.e. its national income) and the CIW is broadening considerably. In other words: while in GDP terms Canada should be doing really well, the perception of its citizens is quite the opposite
In Conclusion
This book has been one of the most educational reads in many years. And also – strange enough – one of the most fun ones. Not only is it filled to the brim with facts and figures, but the author has used his journalistic acumen to pack the data into meaningful and truthful stories, accounts of interviews and research, and occasionally cynic-sarcastic commentary.
For an as dry sounding topic as the GDP seems at the outset, it is a book that is a fluid, smooth read, and yet leaves one with an entirely different perspective on the global discourse in the business news and their factual (read: scientific, data) fundament.
Video: London School of Economic – Lecture by David Pilling on ‘The Growth Delusion’
