Is GDP how we should be measuring success: A deliberately controversial post

Chacha and Linda commented on an earlier post that they didn’t like the way that success of a country is measured by GNP (gross national product) or GDP (gross domestic product), basically how many goods and services are sold in an economy.  Having more goods and services doesn’t mean a country is doing better and focuses on materialism as a sign of success.  [They also talk about the lump of labor fallacy, but that's the subject of someone else's post.]

Believe it or not, in economics we don’t assume that GDP is directly a measure of success.  We really care about happiness, or, as economists like to jargon it up, “utility.”  GDP does measure stuff, and stuff is something that we put into our utility functions.  Assuming free-disposal (which, admittedly, is a pretty big assumption), that is, that if you don’t want something you can get rid of it at no cost to yourself, then more stuff is better (or at least not worse).  We’re all about maximizing happiness, and stuff is just one thing that goes into that equation.

We would love to measure actual happiness.  But… it’s hard to measure happiness.  Even if we ask people, we’re not really sure if they’re telling us about relative happiness or absolute happiness, or if there are cultural differences in how to answer the happiness question that make differences in happiness not comparable across countries.

But we can measure stuff, so that’s what we measure.

We do also use other measures besides GDP: things like poverty rate, infant mortality rate, income inequality, literacy, etc.  These tend to give a measure of how a nation’s poorest citizens are doing.  Each of these captures a measure of a country’s success, but alone each cannot give a full picture.

What do you think?  How should we be measuring success of a country?  Is GDP a valid measurement?  Is happiness our end goal?  What would you measure instead?  (And should we even be comparing countries?  Why or why not?)

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35 Responses to “Is GDP how we should be measuring success: A deliberately controversial post”

  1. First Gen American Says:

    I think stuff can be a valid measure of happiness if you come from poverty. My mom is certainly happier in the US now that she has money to heat her house and buy food. The problem in western countries is that even poor people have access to lots of credit so buying stuff on credit sometimes causes more stress than happiness because of the debt burden.

  2. Thisbe Says:

    I accept that “amount of stuff” may be a reasonable proxy for happiness on an individual level, in certain circumstances. (First Gen American makes a great point about the limitation of this as it applies to for instance America.)

    I do think, though, that a refusal to actually attempt to measure people’s happiness is mostly due to the laziness of economists. You’re right, people might not give you a usefully comparative answer if you ask them “How happy are you on a scale of 1 to 10?” But there are many proxies that might be useful in getting at how content and successful a population of humans is. Some of these proxies might be questions you could ask people, and some might be observational measures about how people’s lives are going.

    I mean, if there’s an entire body of literature about maximizing the comfort and minimizing the lifelong stress levels of dairy cattle so as to maximize production at minimal costs (and I assure you that there is), at least some of the same observational concepts can be applied to humans.

    • nicoleandmaggie Says:

      Other disciplines do explore happiness and survey data. It’s my understanding that even they do not believe in direct comparisons across countries.

      Do results from cows carry over to people? Can cows think themselves into different states of happiness?

  3. Spanish Prof Says:

    Coming from Latin America, and not being an economist, I can only say Duh!!! Nine years of continuous growth in Argentina (sometimes 9% a year) in the 90s. And poverty rate jump from something like 10% of the population to above 20% at the same time. The cake may be bigger, but that doesn’t mean that the economy of the country is improving (or at least, the situation of a big slice of the population). The gap between the haves and have nots increased tremendously during those years.

    • Debbie M Says:

      We know people feel happier if they’re doing better than the people around them. So maybe income variability is another thing you can measure.

  4. Spanish Prof Says:

    There are reasons why clowns like Hugo Chavez keep winning elections, and it is not just “cultural differences”, or “Latin Americans like authoritarians leaders”.
    It is more about politics than about economics per se, but I highly recommend the documentary “Our Brand is Crisis”:

    Watching James Carville cuss the American ambassador in Bolivia is worth the entire movie.

  5. Spanish Prof Says:

    Sorry, I didn’t mean to post a picture link

  6. Comradde PhysioProffe Says:

    My understanding has always been that GDP–and especially per capita GDP–is a useful measure because it is proportional to economic activity, not because it is proportional to how much stuff people possess.

    • nicoleandmaggie Says:

      Why do we care about economic activity? http://en.wikipedia.org/wiki/Candlemakers%27_petition

      And by stuff, you’re right, services should be included in that too… I was using stuff as a short-hand for goods and services.

      • bogart Says:

        Isn’t it right that, besides excluding services, GDP excludes stuff-produced-and-consumed-outside-public-markets? So if I’m growing bananas, milking cows (happy or un-), or weaving elaborate silk tapestries from homebred silkworms that are consumed by my family (but not sold) or given away, those don’t factor into GDP? This does then seem problematic (on a large scale, not case-by-case) in that (e.g.) women joining the paid workforce creates an apparent bump in GDP that may just represent production moving from one sector (unpaid home laborers) to another (the market).

        I realize I’m grossly oversimplifying, and this may not make GDP a less useful measure, particularly relative to other options (which is really what we’re interested in, right? Not “is this perfect?” but “is this the best we can get, relative to time devoted to tracking the data and such?”) but it does seem somewhat problematic when looking across times or across cultures/nations.

      • nicoleandmaggie Says:

        You are absolutely right. Black market activity is also not measured.

        Though the home production part that’s missing may not be so much of a problem for GDP if you think that a woman may be more productive to the economy working as a doctor than vacuuming. So it undercounts home production but also does pick up that ppl are not necessarily in their most productive matches.

  7. Cloud Says:

    I think GDP for a country is like money for an individual- having more doesn’t necessarily assure happiness, but the lack of it can sure bring unhappiness. So it seems like a good starting place to me.

    • Debbie M Says:

      Actually a lot of these things are probably on a normal curve. So higher is better, but only to a point. This definitely makes it harder to compare across cultures (the peak of the curve may differ).

      • nicoleandmaggie Says:

        Do you mean this curve?: http://nicoleandmaggie.wordpress.com/2011/10/24/marginal-tax-rates-why-they-make-sense/

        (If you don’t assume free disposal, then you can get a negative quadratic instead.)

      • Debbie M Says:

        Maybe.

        I meant a normal curve, but you’re right, I should have meant a marginal utility curve. Except I do think that sometimes returns not only diminish but go negative. Too much money and you have to worry about security and the intentions of your friends and whether a charity is big enough to be able to put your donations to good use. Too many things and it’s hard to take care of them and even find them and store them. Too much literacy and the writing of regular people drives you bonkers with all of their errors.

  8. chacha1 Says:

    As you point out in your penultimate paragraph, there are many (and diverse) non-monetary or non-financial measures that are indicative of “success” by one or another definition … but I don’t think there is one single measure that can define it. For one thing, in a nation like the U.S. (immense and diverse) the population itself is not likely to agree on a single measure. That’s probably why we default to financial definitions.

    We do the same thing, here in the U.S., on an interpersonal level. Many (if not most) people define themselves, and are defined by others, based on a) their employment; b) their level of income; and c) their material possessions. Very few of us manage to successfully define ourselves without reference to our professions and all that goes along with same. If you ask someone “tell me about yourself,” 99% of the time you get a resumé.

    It’s not necessarily a bad thing. But I think it contributes to a very limited worldview.

    My own personal measure of success for a country would probably be a combination of some of the health metrics you cite, plus civil rights, plus public safety, plus freedom of mobility, plus a number of other progressive achievements that the U.S. has managed to make and hang onto, quite irrespective of economic cycles.

    • nicoleandmaggie Says:

      I’m not a developmental economist, but I think I have heard of a progressive index like the one you’re talking about (a justice index or something similar). I believe there’s also an index that is based on how the women in a country are treated.

      • bogart Says:

        Turns out there’s a QoL index that incorporates one aspect of how women fare, among other things. http://en.wikipedia.org/wiki/Quality-of-life_Index .

      • nicoleandmaggie Says:

        Hm, they must be using different weights for their overall index than I do in my mental index! (My guesstimate has Sweden in the top spot, for example.)

      • nicoleandmaggie Says:

        Maybe it’s the divorce rate. I don’t see that as a measure of quality of life since you can keep it down by forcing people to stay in bad matches. Marriage is correlated with happiness, but that doesn’t mean you have to be married to your first spouse. (Not that divorce is fun, but it’s better than an abusive marriage.)

      • bogart Says:

        Yeah, I didn’t examine the index too closely but did have the same thought re: the divorce rate. Not divorcing when you don’t want to: a good thing (ditto having found your way into a healthy marriage, or having the social support to keep your marriage healthy, or whatever); not divorcing when you do want to: a bad thing. Hard to distinguish those two, I suspect, in raw divorce rate …

      • nicoleandmaggie Says:

        I wonder just how much that cancels out the women portion of the index… since when women have more economic power the divorce rate goes up. And the divorce rate may go up with a better social safety net (I think the evidence on this is mixed in the US, but we don’t have all that great a social safety net by developed country standards, and I’m not up on the research on divorce in other countries).

  9. chacha1 Says:

    Going further … the ultimate “success” of a country might fairly be measured by how long it manages to stay out of catastrophic wars (conquests and genocides), mightn’t it? When you look at how short the lives of most governments are … . I mean, a whole lot of the countries on the world map today did not even exist as countries 100 years ago.

  10. Laura Vanderkam (@lvanderkam) Says:

    I was going to comment that this was an equal opportunity thing — that if a group of economists wanted to produce an index of national product that included non-market work, or with a properly weighted Gini coefficient, and gave updates quarterly, I’d be willing to report on it. But it sounds from some of the comments above like some people are working on such things. Fascinating. Of course, subjective measures are always head-spinning. For instance, if Americans can now expect to live long and healthy lives, most without serious material want, and yet people are unhappy at the moment of the query because they burnt their popcorn in the microwave, what are we to make of that?

    • becca Says:

      Also, whose happiness matters? For example, if “most” Americans live without “serious” material want, and yet 50 million Americans are food insecure, what are we to make of someone’s dismissal of them as “unhappy over the fact they burn their popcorn in the microwave”?

      • nicoleandmaggie Says:

        @Becca
        I think you need to reread Laura Vanderkam’s comment.

      • becca Says:

        To me “If Americans can now expect to live long and healthy lives, most without serious material want”
        sounds like “If we can now treat cancer and nobody dies from it”.
        It’s positing a hypothetical that is imaginable based on recent progress, but by no means achieved.

      • nicoleandmaggie Says:

        If most means more than 50%, then it is an accurate statement. Definition of long is subjective. Obviously not all are healthy all the time (and some are never healthy), but she also didn’t say “all Americans.”

  11. Linda Says:

    What about reporting on the health of the population through measures of disease? I’m sure no one is happy to have cancer or have a family member with cancer. Mortality just doesn’t cut it for me, since keeping someone alive is much easier now with medical advances, and people being kept alive aren’t by extension better off. For this reason I’m not sure if we can consider longevity or even a lower mortality rate an adequate measure of prosperity. So, lower disease rates would be a good measure of success since it would likely mean cleaner environment, better food, etc, right? (Of course the susceptibility to some diseases is hereditary, but there are also environment triggers.) Also, what about mental health measures? I may be biased but I think if a significant portion of the population is depressed or being treated with SSRIs and anti-depressants that’s not a measure of a prosperous, successful nation. I guess I think of different levels similar to Maslow’s hierarchy. But I’m not an economist.

    • nicoleandmaggie Says:

      There’s a measure that some folks use called a QALY– quality adjusted life years. I’m not sure if that has been used to compare nations, however. It’s difficult to collect information on it, though countries that have versions of the health and retirement study may be able to, at least for their older folks.

      • becca Says:

        QALY has definitely been used (to some success) to study disease burden (specifically, I’ve seen it with malaria and I think HIV/AIDS) across nations. I think I saw it in the cancer literature all over the place too.
        Of course, here too you have the problem of comparing the poor to the rich.

  12. Carnival of Personal Finance #383 – Capitol City Fall Edition! Says:

    [...] from Nicole and Maggie: Grumpy Rumblings of the Half Tenured presents Is GDP how we should be measuring success?, and says, “Should the success of a country be determined by the amount of goods and services [...]


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