A new view on GDP and economic growth

Ecological economists have criticized GDP for decades, yet progress is slow in switching to another measure of growth. We have plenty of alternatives, and government agencies worldwide have adopted a set of additional indicators relating to environment and human well-being. But GDP remains the key indicator of economic growth. One reason is that GDP offers the great advantage of allowing for aggregation. This is mainly seen as a technical property, but I think there is a deeper meaning which must be taken seriously.

GDP aggregates the production of value added in the economy as measured by market prices. Hence, there are two principled limitations: First, GDP covers only what is traded via markets, and second, value added depends on what is included as costs. Both aspects work together, as what is not traded on markets, is not assigned a price and can hence be included as costs. So, what does it mean to refer to market prices? I consider the ideal-typical market of economics here. Markets are institutions of the complex social division of labour in which individuals ‘vote with money’. In such complex system, nobody can know what to produce and in which quantities. Hence, they are guided by price signals: That’s Hayek’s story about markets as knowledge creating and processing social institutions. Now, why does that work, in general? The condition is that exchange is voluntary. If exchange is voluntary, the votes of individuals mean that they express a preference about what they get in exchange over what they give away: And we don’t need to know their preferences, and they are entirely free to choose them. That is the Pareto-principle invoked by economists as a measure of efficiency. However, we can also interpret this as an expression of human freedom of choice, recognizing radical subjectivity. That’S what make GDP special: It measures what otherwise remains deeply subjective.

In that perspective, the true meaning of GDP growth is expanding the realm of human freedom of self-realization, given economic constraints. This raises the intricate question whether we can measure freedom otherwise. One specific limitation of GDP is that it only measures realized choices. What is lost is a key aspect of economic growth, even in the narrow sense: This is the growing scope and range of choice, the expansion of the product space, and the corresponding increasing variety of individual lifestyles. However, we might argue that this is what is reflected in growth of GDP, because growth is driven by innovation, while keeping past achievements: We continue eating pasta, but use a smartphone.

Hence I argue that we should redefine GDP as a measure of the growth of individual freedom in determining one’s way of living, insofar as this must rely on material conditions. That means, for example, in a growing authoritarian regime political freedom does not increase, yet GDP growth reflects a growth of freedom in determining individual lifestyles: The Singapore model. After all, an important factor leading to the demise of socialist planned economies was that they also failed to expand economic choices as manifest in material prosperity.

This interpretation emphasizes two aspects: subjective individualism and freedom. Therefore, GDP is indeed a kind of ‘classical liberal’ indicator. GDP does not cover any aspect of collective and public goods. Yet, if someone sticks to values of classical liberalism, GDP must be seen as much more meaningful than being just a measure of ‘economic performance’. Now, notice that these values have influenced much of what are the values of global modernity: Human rights, to a large extent, are based on enlightenment liberalism. Many indicators that supplement GDP actually reinforce this aspect, such as Human Development indicators that mostly look at individual well-being. In that sense, GDP is a necessary component of a more general HDI.

In an even wider sense, GDP is an anthropocentric measure. Accordingly, radical alternatives to GDP cannot be indicators that keep that perspective (such as the ‘Genuine Progress Indicator’). I think this is the reason why most alternative indicators fail to substitute GDP in practice: If you keep with anthropocentrism, GDP remains the best choice, precisely because it is market-based, for the reasons explained. Convincing alternatives must be geocentric.

Geocentric indicators refer to the growth of the human appropriation of Earth system resources, and they would not include human well-being at all, apart from biological indicators such as population growth, growth of organismic metabolism, and expansion of individual lifetime. What is most essential is measuring the growth of the technosphere, including material artefacts and all parts of the biosphere appropriated for human use, hence including forestry, animal husbandry, or renewable energy, such as claiming territory for windfarms. There are plenty of measures already at hand, such as material flow analysis, human appropriation of net primary productivity, and so on. Still, there is a long way to go in measuring the entire technosphere. A key point is that in doing so, we remain neutral concerning all kinds of ‘greening’ the economy. Even a zero-emission economy grows the technosphere.

Therefore, I suggest the following. A simple measure of economic growth would combine two numbers: First, GDP growth, and second, technosphere growth including human growth in biological terms. The former is the anthropocentric measure, the latter the geocentric measure. Both measures would suggest questions about the appropriate degree of inclusiveness of valuation. Regarding GDP, we would ask how far markets sufficiently include what is considered as collective and public goods by humans, and how far they genuinely operate according to the principle of individual freedom and autonomy. Regarding technosphere growth, we would ask how to judge relative growth of technosphere and biosphere, for example, in assessing the effects of technosphere growth on biodiversity and hence the evolutionary potential of the biosphere.

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