In Defense of GDP

Commentary, Taxation, David Seymour

Measuring what makes life pleasant –a decent community or time off– sounds like one of those things that’s almost impossible to be against. After all, an index that could integrate “community vitality,” “time use,” and environmental indicators to produce a single, national measurement of quality of life sounds bold and promising as the creators of the new “Canadian Index of Wellbeing” no doubt believe it to be.

However, as with many such attempts to measure “well being,” this new index–the brainchild of the Canadian Institute of Wellbeing– it produces little better information than what it is supposed to replace, and introduces an elitist template for living a good life.

In the gun sights of the Index is Gross Domestic Product (GDP), a measure of the value of everything bought and sold in an economy. Advocates of the “Wellbeing” index argue GDP fails to capture things that really matter, and is overused as a measure of national success. By introducing the Index, their avowed aim is to refocus the political discourse in Canada–which is about where the difficulties begin.

The new attempt at a non-GDP Index rests on at least one elementary economic fallacy: It contends that undesirable events like natural disasters, smoking, car crashes, and pollution inflate GDP. They do not. While flood clean-ups, heart by-passes, and towing cars from ditches might be activities whose value is counted as GDP, none of these inflate it. Any resources used for such remedial activities must be diverted from some other use that could otherwise have generated additional wealth. By the logic of the Index, crashing cars would be a get-rich scheme, but they forget to count the car that is lost to GDP in their haste to count new one that crashes necessitate.

The Index appears to be on more stable ground where it is possible to increase GDP while degrading the environment, but GDP does have a way of capturing environmental degradation too. It may be possible to profit while polluting, but to the extent that pollution is bad, it reduces the prices people will pay for goods and services that rely on a healthy environment, and this is reflected in GDP. Take overfishing or air pollution.

Want to make short run profits by destroying the fisheries? You can, but you would go out of business as a fisherman, and future GDP would reflect that lost production. Air pollution diminishes the prices people will pay for services like tourism that rely on clean air, an effect which is also captured by GDP. The framework of GDP already motivates governments to introduce such things as fishing quotas and pollution ordinances to curb such harms.

It’s true that not everything worthwhile is measured directly by GDP–but that’s a banal point and doesn’t argue for attempting to quantify that which cannot be quantified; that actually pretends human happiness is subject to complete scientific verification. Besides, whatever else may be said of GDP per capita as a measure of national success, it has one very appealing feature in a free society: Every dollar counted towards GDP is the result of a voluntary transaction between a willing buyer and a willing seller and it is measurable; GDP is agnostic bout how anybody earns or spends their money. If you choose to sit at home, smoke and watch Survivor after working overtime at a confectionery marketing company, that’s your choice and the dollar values of your activities are counted as GDP.

According the Index, you would be a blight on Canadians’ “shared destiny.” No matter that you like your job, people choose to pay for your candy or that you choose to pay for reality TV, you produce the wrong stuff and you are unhealthy and isolated; you have dragged down the aforementioned national scores for health, time use, and community vitality. You should be volunteering, making more friends, and marketing tofu or at least something healthier than confectionery. That’s fine as a private opinion, but to the extent the Index succeeds in its goal of refocusing Canada’s political discourse, it becomes a matter of national importance to be pursued with the full force of government.

Because GDP is the sum of what individuals will pay for things in their communities, GDP is the most democratic reflection of well-being. The voluntary financial transactions that people engage in every day are all counted by GDP, and they reveal far more about peoples’ nuanced preferences than any statistical exercise could ever anticipate. If anything, the new Index demonstrates the best alternatives to GDP as a measure of national success involve imposing an elitist template for good living on everyone else.