FROM GDP TO WELLBEING: THE FUTURE OF PRODUCTIVITY

Gross Domestic Production is not a term that rolls easily off the tongue. It sounds like what it is – a technical construct. Almost no one, including many in government, understands how GDP is derived. Yet it is arguably the most powerful piece of ‘political arithmetic’ in the world today.

The way we measure GDP was born, almost literally, in the fires of war. Necessity and pragmatism drove its design. A debate between those seeking a measure of ‘production’ and those seeking a broader measure of ‘welfare’ was won decisively by those on the side of production. The ramifications of this, both good and bad, echo through the entire globe.

Ultimately, the value of GDP lies in how well it represents what society (really, really) wants. GDP, and its efficiency focussed derivative, productivity, only have meaning if GDP captures this reasonably well.

No one pretends GDP is perfect. It is a short cut we use to measure something too complicated to calculate precisely. Even those involved in its establishment saw a gap between what can be measured and what should be measured. The size of this gap size and how it is changing is of real importance.

Where GDP gets it wrong

Throw a rock into a group of economists and philosophers (not that you should, no matter how tempted) and you have a high chance of hitting a critic of GDP. Joseph Stiglitz, Marianna Mazzucato, Kate Raworth and Michael Sandel – to name a few – have written compelling modern critiques. Even The Economist has got in on the act.

Defenders of GDP exist. Like Inigo Montoya from The Princess Bride, they say “you keep using that word. I do not think it means what you think it means”. The defence is based around what GDP does measure rather than what it does not. And what it does measure over time (albeit imperfectly) is whether society is producing more than before.

The problem is that our human desire for more is complicated. Hugh McKay describes it as only one of a suite of things that make us tick. Adam Smith’s concept of better involves more nuance than generally recognised. We do want more, but what we (really, really) want is more wellbeing. Production helps, but only when it involves producing the right things.

GDP has no view on what is right. Declaring war is a great way of boosting GDP. Production created from car accidents (hospital treatments, car repairs, taxi trips, phone calls to the insurance companies) has the same value as providing nutritious meals for people in aged care. Robodebt provided a much bigger boost to GDP (Royal Commissions involve a lot of production) than would have come from a well-designed and administered welfare compliance scheme.

GDP also misses things critical to wellbeing. A nurse holding the hand of a dying patient has the same GDP value as one who walks past to do other things. Arguably worse still, a parent staying home from work to support a child who had a bad day at school (if unpaid) reduces GDP. In a world where high quality care is more demanded, this matters.

Further wrinkles exist.

One is that GDP is agnostic about how the benefits of production are distributed. Admittedly, distribution is a difficult topic. Views on how societal production (or wellbeing) should be distributed vary widely and are debated fiercely. But, for most of us anyway, what happens to other people matters. To stretch Smith’s concept, better also needs be fair. 

Another wrinkle is that GDP pays no inherent regard to environmental capacity. Activities which damage the environment have the same value as those they do not. Economists have sought to address this by designing systems to ‘price’ environmental impact. While conceptually neat, these systems have proved difficult to put effectively into practice. The translation of these efforts into GDP (with its focus on more) remains at best clumsy and at worst provide false comfort.

These wrinkles caused Kate Raworth to conceive the economy as a doughnut. It’s true. Perhaps it was morning teatime.

Raworth’s argues that economies need to operate in the space between two constraints – a distributional constraint which ensures everyone receives a fair share and an environmental constraint which ensures human activity remains within the carrying a capacity of our planet. The space between is the doughnut. It is (ahem) a sweet concept, even if it might not be Adam Smith’s cup of tea. That said, the absent-minded Smith once placed a slice of bread and butter into a brewing tea pot before drinking the result – so who knows.

A growing gap

GDP was largely conceptualised in a period from the Great Depression through to the aftermath of the second World War. At the time, economies were dominated by agriculture and manufacturing. Material comforts were hard to come by. Care was provided by families, not markets. Rachel Carson was only beginning to warn us of the harm environmental damage human activity can bring. Producing things mattered more than producing services, even in so-called advanced economies.

While imperfect, the GDP was very well suited to the time in which it was created. The tight focus it brought on economic growth (more) and production-based productivity (more using less) has enriched the lives of billions. It is no coincidence that standards of living have risen dramatically since GDP was first conceptualised.

An argument exists that these benefits came with large costs. The focus GDP brought, as the world’s most important number, has undoubtedly biased government decision making. It is interesting to imagine what our world might be like, for example, had the value of unpaid ‘production’ within the home had been recognised. Or if better distinctions were made between bad GDP (car accidents) and good GDP (well-designed welfare compliance systems). Or if environmental impact was properly considered.

Look forward and the future suitability of GDP seems far less certain. Advanced economies today are very different from those of the 1930s, 40s and 50s. People are richer and older. Government funded care services (the quality and value of which GDP captures poorly) increasingly dominate economic activity. Travel and entertainment are a bigger part of most people’s lives. Material comforts (housing aside) are easier for most people to come by, despite wildly increased expectations. The importance of remaining within the gooey space depicted by Kate Raworth’s doughnut is better understood.

As time goes, the gap that has always existed between what GDP does measure and what it should measure is growing larger. Franklin Delano Roosevelt, if he was around today, would be much less likely to point to GDP as the ultimate measure of government performance. He would be right not to do so.

New Beginnings – From a single statistic to a wellbeing dashboard

None of this is new. Attempts have and continue to be made to complement (if not replace) GDP as the primary way of assessing societal progress. Indeed, Australia was an early leader. Between 2002 and 2013 the ABS produced Measures of Australia’s Progress and The Treasury developed a wellbeing framework to guide its policy development. Both fell into disrepair.

New Zealand, Canada, Germany, and Bhutan all have wellbeing frameworks. Even the ACT government has one. The OECD has developed a Better Life Index which allows comparisons across countries. Australia has recently (re) joined the throng with the release of Measuring What Matters – Australia’s First Wellbeing Framework.

The focus of these wellbeing frameworks differ. Some emphasise individual wellbeing, while others (like Australia’s new framework) emphasise national wellbeing. New Zealand’s framework steps beyond measuring the past, to assessing future wellbeing. Scotland and the UN have leapt the measurement boundary by including targets as well as measures.

How well the 50 measures anointed by the Australian Treasurer describe what we (really, really) want remains to be seen. The framework is developmental in nature. Some chosen indicators are vague, and many are incomplete. Tensions exist between indicators and trade-offs between them are needed. Not every paradox with GDP has been solved.

Back to productivity

The weakening ability of GDP to describe what we (really, really) want provides another explanation for why governments seem so reluctant to pursue productivity-enhancing reforms. Government may well be short-sighted, and productivity may well be harder to find. But it may also be government has concluded (implicitly if not explicitly) that GDP-based measures of productivity are not telling us what we need to know.

The significance of this should not be underestimated. There is no serious sign that our human desire for more is waning, even in rich nations. For poorer people and nations, the desire to catch up is as strong as ever. This, combined with finite environmental capacity and a growing population, make the pursuit of productivity critical. The power of GDP may be eroding, but it still points to something important.

The real purpose of measuring productivity is to assess how efficiently we are creating what society (really, really) wants. If this is not GDP, then an updated approach to measuring productivity is also needed. Without it, the managers of our economic cauldron are in for a very tough time. Even worse, those hoping to have the income needed to see Tay Tay’s farewell tour might end up really disappointed.