Is Gross Domestic Product (GDP) Running on Empty?

Is Gross Domestic Product (GDP) Running on Empty?

An opinion piece from Tony Dennis, CEng MCIBSE

18 March 2018 marks the fiftieth anniversary of Robert (Bobby) Kennedy’s speech about the pitfalls of using Gross Domestic Product (GDP and GNP) as a proxy to measure a nation’s success and wellbeing. He stated

….It does not allow for the health of our children…..or the intelligence of our public debate….or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything, in short, except that which makes life worthwhile.’[1]

Before the United Nations required countries to collect data to report GDP, mid-20th century, the economist and chief architect of GDP, Simon Kuznets, had himself already warned against equating its growth with wellbeing,

 ‘The welfare of a nation can scarcely be inferred from a measure of national income’ [2]. 

Evidently both men considered GDP to be an inappropriate measure of national wellbeing. GDP largely accounts for market transactions, but does not consider the social cost of decision-making or its impact on the environment and income inequality [3]. Consider that the devastation wrought from a hurricane, arguably induced through climate change, would boost GDP.

Using GDP is similar to having a fuel gauge permanently reading full when driving a car. A reality check with the first and second laws of thermodynamics tells us that perpetual motion is not possible and energy degrades in quality, disintegrating irreversibly with use and time (entropy being a measure of disorder) e.g. the first law would be false if work could be generated by an adiabatic, closed system, without a diminution of its internal energy. Little wonder then that patents globally are now closed to the consideration of all such machines!

By having GDP as the benchmarking economic metric aren’t we claiming the laws of thermodynamics are false? Using the earth as a perpetual motion machine with infinite bio-capacity? Assuming it can keep on producing without limit, with economic growth at all costs? Equating wellbeing with increased consumption and detached from the biosphere and ecosystem? These notions are seemingly the very antithesis of sustainable development? We hear that the West over-promotes material consumption when looking for success and satisfaction. The measure of GDP growth perhaps drives over-exploitation of earth’s natural capital, and diminution of its biocapacity, breaching fundamental ecological and planetary limits (the notions of Planetary Boundary Analysis and Ecological Foot-printing are explored in the upcoming revised Guide L). If everyone lived as the developed nations, we would need three planets to maintain our lifestyles [4]. As Robert Kennedy added,

 ‘Too much and for too long, we seem to have surrendered personal excellence and community values in the mere accumulation of material things’ [1]. 

Despite GDP’s indications, a glance in the analogous fuel tank can suggest we’re running on empty?

How might we address the anomaly? No other scientific law has contributed more to the liberation of the human spirit than the second law of thermodynamics. This is not surprising as it is the central law in science, and hence in the rational understanding of our universe, because it provides a foundation for understanding why any change occurs [5]. Even though the law’s natural default setting is for order to descend into disorder it nevertheless allows us to harness the flow of disorder to create new order and structure on our planet. As it also explains how life on earth is possible, our wellbeing necessitates that we shape our global social and economic policy around its boundary conditions. As engineers we know about harnessing energy flow to create new order, such as creating a living, working building system. By minimising entropy’s increase we uphold the quality of energy available to help sustain life. Perhaps this helps define sustainability and offers insight into the adventure that is engineering.

What could a new economic metric (or working fuel gauge) look like? It would weigh up the environmental impact and the social costs of economic production and consumption; in line with thermodynamic boundaries. In balancing market transactions against external costs, it would capture their negative or positive influence in overall health and well-being e.g. accounting for the costs borne by society to repair or control pollution and poverty. It would capture the cost-benefit of getting more energy from renewables; increased energy efficiency from our building systems; a circular economy; reducing the income gap; putting more durable products on the market; using mediation rather than adversarial litigation, volunteering in the community; preserving wetlands, forests, and farmland; shorter commutes – and all expressed in monetary units. Such metrics are taking shape, such as the Genuine Progress Indicator (GPI) [3]. If aligned with ecological footprinting and planetary boundary analysis, it would help bring more precision to the metric; helping in the process to identify a ‘Global Sustainable Development Quadrant’ for all sectors of society to target. See the UN’s Human Development Index combined with the well-being measurement index (HPI, New Economics Foundation), plotted against Ecological Footprint per person (see figure 1) [6].

Figure 1: The UN Human Development Index (HDI) measures a country’s average achievements in the areas of health, knowledge, and standard of living (0.8 is considered “very high human development”). The Happy Planet Index from the New Economics Foundation measures who gets the best lives per unit of renewable natural resource. The Ecological Footprint tells us how much of the earth’s bioproductive areas are needed to provide for that development (if less than 1.71 global hectares per person (GHA/p) then a country’s resource demands are globally replicable). The UK’s Ecological Footprint is 5.05 GHA/person (2013).

Do we want a metric that will help to sustain life or one that will continue to profligate its demise at the expense of our wellbeing? Do we want a metric that will support the uptake of sustainable practice or one that will continue to oppose it? As the Nobel Prize-winning economist Joseph Stiglitz pointed out to the World Economic Forum in Davos (2016), in relation to the shortcomings of GDP, 

“What we measure informs what we do. And if we are measuring the wrong thing, we are going to do the wrong thing”.

 Necessity would therefore say that the sooner GDP is replaced with a metric fit for purpose the better – and perhaps Robert Kennedy would have approved of that.

References/Further Reading

[1] Kennedy, R. F. Remarks at the University of Kansas, March 18, 1968. [For full speech see http://www.jfklibrary.org and search the above].

[2] Simon Kuznets in report to the Congress, 1934; Cited in: Gernot Kohler, ‎Emilio José Chaves (2003) Globalization: Critical Perspectives. p. 336

[3] Time to leave GDP behind; Costanza, R, et al (Vol 505, Nature 285, Macmillan Publishers Limited. 2014)

[4] One Planet Living - The case for Sustainable Consumption and Production in the Post - 2015 development agenda, Schoon, N., Seath, F., Jackson, L. 2013

[5] The Laws of Thermodynamics; a very short introduction. Atkins, P. Oxford University Press 2010

[6] Sustainable development: two indices, two different views, The Global Footprint Network. See https://www.footprintnetwork.org/2016/07/20/measure-sustainable-development-two-new-indeces-two-different-views/