Why GNP Growth Doesn’t Increase Welfare

What does the measure called “gross national product” express? This is not as easy a question as it sounds. Indeed, there is much confusion about what GNP (or GDP, in this context it doesn’t really make a difference) means – especially what its growth means. I shall argue here that how we usually interpret (growth in) GNP is not only wrong, but also bad for us.

If you listen to our politicians, especially the ministers of economic affairs, you will get the impression that growth in gross national product (or, for that matter, gross domestic product – it is by no means the same, but for the discussion here we can use both) is the same (at least nearly the same) thing as growth in welfare/well-being of citizens of the country considered. This is how GNP is mostly interpreted – as a measure of our welfare. But this misinterpretation is both wrong and, indeed, bad.

Many economists have in fact already recognized that GNP doesn’t equal welfare, let alone well-being. One of the first important economic papers containing a reflection on this problem was “Is Growth Obsolete?“, written as early as 1972 by James Tobin and William Nordhaus (you can find some other, more recent examples under “Further reading” below). Nevertheless, most economists have still been claiming that there is at least a strong correlation between growth in GNP and improvements in our welfare – the main reason why we still rely on GNP (which actually does measure only production and trade, or consumption, not welfare – nor does it contain any sustainability component) when we are eager to know how our welfare has improved over time.

As already mentioned, there is much criticism of this misinterpretation of gross national product even in the mainstream economic literature. But, although it often contains important remarks, it still misses the point: The point that GNP not only doesn’t measure welfare – indeed, the concentration on it and the economic presumptions out of which it arose are not only wrong, but also harmful for us as individuals and, especially, as communities.

Pioneers of the school of thought that recognizes these fundamental flaws of mainstream economic theory (by now this school is mostly called the New Economics) have been, among others, Nicholas Georgescu-Roegen and his student Herman Daly (a book by the latter actually inspired me to write this post).

The key feature of the New Economics is the recognition that the economy is a subsystem of the larger ecosystem of the Earth. Since the Earth doesn’t grow, economy cannot do – not ad infinitum at least. As it gets bigger and bigger, it approaches ever nearer to the frontiers of the containing ecosystem. Indeed, there is much evidence that we already passed the point at which the scale of our economic system were sustainable (one example: according to the Footprint Network, we exhausted our ecological budget for this year on 21th August – since then we live “on tick”). Why? Because we still believe that growth (in GNP) is the solution of all our problems – poverty above all -, and don’t want accept the fact that infinite growth is not possible.

One may claim that technological progress will enable us to grow forever. Indeed, the GNP combines actually two trends: the first, growth, is a quantitative one – when we use more resources, we produce more, so our GNP increases. The second, development, is a qualitative one – through technological improvement we can produce more using the same amount of resources.

But: we cannot substitute technology for resources. There is therefore a frontier to the scale of growth, which we cannot pass without making those who come after us worse off than we are (or believe to be). In contrast, development can go on for a long time, maybe even ad infinitum.

What we have to do is to decompose these two – growth and development – and abandon the former (indeed, we actually have to undo some of the past growth when we want to go back on a sustainable path). Technology won’t help us when there are no resources left. A nice example by Daly is: you cannot build the same wooden house with half the wood just because you have better (or more) saws. We cannot recycle ad infinitum as well – the law of entropy tells us that our waste has not the same value as “fresh” resources. Thus we cannot substitute waste for resources.

It is a matter of intergenerational solidarity that we don’t use all resources up so that those who come after us find an empty world. That is what we call sustainability. We already have recognized (the most of us) that the “invisible hand” (growth in this context) doesn’t solve problems of relative poverty – redistribution is needed. Now we have to recognize that there is no invisible hand assuring sustainability in the above sense. There is a need to find an optimal, sustainable scale of the human economy – beyond which we just cannot grow.

A first step in this direction would be to abandon GNP as an indicator of welfare.

Further reading:

By following the idea that growth in GNP expresses increases in our welfare we make ourselves worse off – and for sure we harm our descendants. We have to wake up and make our economies sustainable.

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2 thoughts on “Why GNP Growth Doesn’t Increase Welfare

  1. As an economists, I ask the author to refrain from sweeping generalizations. First, GNP and GDP should not be considered equal. It has generally been accepted that GNP growth does not imply growth in a nation’s wealth. GDP takes this into account and is considered a more robust measure of development. Do not criticize a field for using a metric which they have abandoned decades ago.

    Secondly, to assume that the field of economics strives towards maximization of one variable, GDP, is ludicrous. Economic theories are diverse. Many modern measurements of wealth subtracts environmental impacts from growth. Some measure median after-tax incomes while others measure wages or unemployment.Think of an economist as a doctor and the economy as a patient. Like a doctor, the economist uses a multitude of measurements and tests to diagnose the economy. As in medicine, there is no single measurement which directly determines good health except longevity. You are criticizing the doctors abilities based on the fallibility of one of their tests.

    Third, the author attacked the concept of Factor Productivity through the limitations of technological ability to replace resources. This line of reasoning cited from Daly, remains insufferably superficial: ‘When you don’t have wood to make your house, better saws will not allow you to build it.’ First technology relates to all levels of productivity, this means better saws, wood, and workmanship. As building techniques are considered technological growth, the development of a new building method which uses less wood. Unfortunately this negates your thesis.

    Finally, the author finishes with his more potent critique of GNP– a archaic measurement— which by its qualitative nature, cannot fully characterize a nation’s welfare. This is both true and redundant to state. Going back to the doctor analogy; wellbeing obviously cannot be judged in a single number. The field already analyses employment, family dependencies, life expectancy, air pollution, inequality, property, wages, education etc etc. These are combined with other fields to hopefully create policy.There is never pure GNP maximization.

    “A first step in this direction would be to abandon GNP as an indicator of welfare.” As a matter of fact, it has been abandoned for decades. Even now there is a new measurement called Green National Product which is quickly becoming mainstream. I suggest you google it and educate yourself before accusing economists of not doing the same.

  2. First, GNP and GDP should not be considered equal.

    From the perspective that is important here, there is no significant difference between GNP and GDP. In some cases, GNP may well be a better measure, as impressively shown in the recent Irish crisis – Ireland had a very high GDP, but a rather low GNP, since most of the money went to foreign investors.

    You are criticizing the doctors abilities based on the fallibility of one of their tests.

    I am an economics graduate student, so you haven’t to tell me what economists do. And I’ll maintain that while, as you rightly point out, economics is full of diverse metrics (GDP, HDI, inflation-adjusted median incomes, unemployment, etc.), most of the talk and focus is, alas, on GDP growth, which is in my opinion terribly unsuited for measuring well-being or even welfare.

    With regard to factor productivity: this notion often ignores natural capital and almost always ignores that it is hardly substitutable and limited (as I discussed here: You Cannot Just Define Away the Impossibility of Infinite Growth).

    the development of a new building method which uses less wood. Unfortunately this negates your thesis.

    It does not. This “thesis” (to be understood rather metaphorically) stresses the fact that only by having better man-made capital you cannot overcome limitations from natural capital. You may be able to build a house with less wood. But a wooden house with no wood (or any amount below a certain minimum) is impossible to build, no matter how much man-made capital you have and how high its quality is.

    wellbeing obviously cannot be judged in a single number

    You say that. However, as already stressed – the focus of most policy makers and also economists is on GDP. It may be also on employment or income, which are tightly related to GDP growth (due to the structure of modern capitalist economies) and also provide a rather narrow and short-term perspective.

    Green National Product which is quickly becoming mainstream

    Mainstream? You are kidding. There exist a lot of alternative measures, beginning with Nordhaus’s and Tobin’s from 1972. However, as the Report of the Stiglitz-Sen-Fitoussi commission 3 years ago has impressively shown, the problem of overemphasis of GDP and related measures is still profound and it is not easy to conceptualize alternative measures/systems of measures. While there are a lot of varying concepts out there, none has become mainstream so far. The main economic policy instruments are still devised to influence GDP.

    I wrote the above post some time ago. Since then, I have dealed rather intensively with the subject of well-being measurement. While there may be minor flaws in the text, I keep up the main message. For further arguments, you are welcome to browse my blog.

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