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.

2 Replies to “A new view on GDP and economic growth”

  1. The post has touched upon an intriguing topic about how we can measure or define the indicators of technosphere. I would like to go down the road and dig a little bit deeper. In general, I would argue technosphere neither could nor need to be measured.

    In order to measure technosphere we need to know first, what is technosphere exactly? What are the objects and categories included? Unfortunately, no one could give us an answer. Technosphere is an extremely abstract and broad concept defined by philosophers and ecologists. Everyone could perceive what it represents, but no one can clearly describe what it is. The concepts and fields it cover are all-encompassing: for engineers and scientists, it represents state-of-the-art science and technology, for entrepreneurs and economists, it is a mass-produced product, for biologists and ecologists, it is species extinction, global warming, air pollution, for physicists and geologists, it is the transformation of energy, for sociologists and philosophers, it is a theory that should be speculated and examined. In order to consider all aspects in detail we need to define infinite parameters to ensure that there are no omissions, which is a huge amount of work.

    In addition, technosphere inspects the impact of the development of technology on the above-mentioned various fields, and the interaction between these fields, such as the technological development for human beings, for nature, and for the change and operation of energy, which are often invisible and undetectable. We often discuss the advantages and disadvantages of quantitative and qualitative measurement methods. Qualitative advocates firmly believe that not all research objects can be quantitatively measured: the combat effectiveness of 1 soldier is 1, then 100 soldiers are 100? We cannot ignore the interactions, the morale of the soldiers during battle, or the bonuses brought by the tactics of the generals.

    At last, there are countless stakeholders in technosphere, you may say all human beings, all livings, and even non-livings are participants of technosphere. Taking all of them into consideration makes a quantitative measurement more difficult to achieve. We can even predict that technosphere could be just a vague concept that exists in the minds of philosophers. It could be described but can hardly be visualized or measured.

    Then it follows the question that does it deserve to be measured? I hope to make an analogy with China’s college entrance examination system. Almost all scholars are criticizing it as a bad system that determines the fate of eight million students every year through an exam: go to university, get a degree, become a member of the elite or work in a factory. However, this system has existed for thousands of years since the Tang Dynasty, and it will continue to develop because it has achieved its fundamental goal: fairness. It allows the poor to see the hope of rising among classes, thereby social stability is maintained. As for whether he can learn knowledge in university, it is not important anymore. Because a person who can truly become a scholar or scientist, even if he fails in such an examination, he will move towards this goal in the long life in the future (take a second exam or self-teaching etc., Afterall, many greatest scientists or scholars have never attended college). Therefore, the results of examination cannot be used as an indicator for judging whether a student can become a scholar or a scientist. A student’s talent, hard work, and luck may be indispensable, but which all cannot be measured. The college entrance examination can at least tell from a quantifiable result whether a student has the potential to achieve that goal, like the courage to overcome difficulties in academic or scientific research, namely measuring the measurable part of a complex object.

    Similarly, we cannot quantify technosphere, but through GDP and a series of other indicators, we at least know who, which country, which region has the potential to become the strongest stakeholder in technosphere (such as causes the largest environmental damage, the largest consumer swarm, or the highest carbon emissions). The results of these measurable components are often consistent with our subjective assumptions. As a matter of fact, even if there are tools or methods for systematically measuring technosphere, it may not be able to make any changes to the status quo, just as those who should be politicians will still be politicians, and those who should be professors will still be professors.

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    1. Fascinating thoughts! I am intrigued by the idea that GDP might measure the stakes a country has in the technosphere. That makes sense, as GDP measures market production and value added, and markets are the drivers of technosphere growth. That being said, I think that many of your observations relate to the question how to define the technosphere and how to determine its boundaries. For example, if you only include material and artefactual aspects, Material Flow Analysis https://en.wikipedia.org/wiki/Material_flow_analysis certainly is a good approximation. But you are right, this would not cover what might be called the habitus of the technosphere, that is, how far we are already a part of it.

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