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.