On Friday, in a back-and-forth tweet with Daniel Finkelstein, Zack Polanski wrote:
When you interviewed me – you asked me repeatedly and I told you repeatedly GDP is a terrible way to measure health & well-being. As a Tory peer who also is a radio host – you seemed confused by that. It’s also a position held btw by Simon Kuznets who designed the idea of GDP.
Polanski seems not to be a fan of GDP, which is our tool to measure growth, and he’s not alone.
People have forgotten how vital growth is. Just as a simple example, if the United States had grown one percentage point less per quarter since 1980, it would be about as poor as Mexico today. Yet the fashion of the day is to be ‘sceptical’ of growth, especially among progressives. But this backlash against GDP isn’t progressive at all.
Growth itself is a modern phenomenon. Angus Maddison’s historical estimates show that from the birth of Jesus to around 1820, global growth was about 0.11% a year – just 11% per century. The idea of progress is a new thing. Mainly we are indebted to French physiocrats like Turgot, who defended the idea of progress and influenced the father of modern economics, Adam Smith. But perhaps it’s time to revision our definition of growth.
Growth is not important for some vague thing called ‘the economy’. It’s about everyday life. A good example is code scanners. The Bureau of Labour Statistics estimated that bar code scanners at checkout counters increased the speed at which cashiers could ring up payments by 30% and reduced the labour requirements of cashiers and baggers by 10 to 15%. That wasn’t the work of labor unions, but of entrepreneurs and growth. Growth is progressive, necessary and good – and we measure it with GDP!
GDP is, in fact, a damn good measure. Across the world, wealth and well-being still move closely together. Countries with higher GDP per capita almost always enjoy longer lives, better education and healthier citizens. Richer nations tend to be cleaner, freer and more democratic, even if the link isn’t perfect. Infant deaths fall as incomes rise, and happiness surveys show that people in prosperous countries report greater life satisfaction.
But why is GDP highly correlated with life expectancy, satisfaction and health outcomes? There’s a simple intuition behind that: you can invest in your mental and physical health when you have money. Above all, GDP is common sense. If you want to research whether to live or invest in a country, you don’t say, ‘let’s check their carbon footprint’. Should I invest in this country based on its Gini coefficient or not? We have other indexes where the results aren’t correlated with GDP, but those results are, in most cases, comedic at best.
Take the Happy Planet Index, for example. The New Economics Foundation, where many of Polanski’s ideas originate, introduced the ‘Happy Planet Index’ in 2006. It’s calculated as life satisfaction multiplied by life expectancy, divided by ecological footprint. Sounds clever – but look at the results: Vanuatu is first, Costa Rica fourth, Romania 20th, Switzerland 48th and the United States 102nd. So according to this, we should all move from Switzerland to Romania for a better life!
The main objection of environmentalists to the idea of what they call ‘endless economic growth’ is that we will run out of resources. That’s inherently getting growth wrong – which isn’t surprising. As Hayek said, ‘if socialists understood economics, they wouldn’t be socialists’. Growth is about having better things at cheaper prices. It isn’t only about the use of resources, but about learning how to use them better – more productively and efficiently. We don’t need 40% of society working in agriculture anymore, and resources didn’t change this; it was the methods of production and distribution that changed the course of history. Indeed, the ultimate resource is human creativity.
My first reaction to the rhetoric of ‘GDP isn’t everything’ is usually: so what? Because this mindset usually comes with a political doctrine rather than a sound economic argument. Indeed, long-term growth is every society’s most important goal. As Robert Lucas, the Nobel laureate in economics, said, once you think about growth, ‘it is hard to think about anything else’. But growth itself doesn’t fall from the sky. It’s the product of a set of institutional and cultural arrangements working well together to produce it. Some legal systems are pro-growth, like common law, and some cultures are pro-growth, like the bourgeois culture.
Are there things more important than money in life? Absolutely. But they can’t be easily quantified like GDP, which makes it a good thing for politicians to focus on rather than vague social goals. We should care about growth because, it is both progressive and necessary.
June 4 marked the 37th anniversary of the Tiananmen Square massacre. It has been a long time since the China of reform and opening-up gave way to one of the strangest regimes of our age: a country with the political freedoms of the Soviet Union but economic power approaching that of the United States, capable […]
After the Government’s timid attempt to slow the growth of welfare spending collapsed under pressure from its own backbenchers and disability activists, ministers needed a way out. Their answer was to agree to the Timms Review of Personal Independence Payment (PIP) ‘co-produced’ with disability groups. It never stood a chance. With a steering group overwhelmingly […]
Sweden is often held up as a role model for those wishing to expand the size of government around the world. But rather than being proof that socialism works, the Swedish experience is in fact evidence for the benefits of free markets, limited taxation, strong societal norms and robust financial institutions. Sweden historically pioneered many […]
