The Cult of G.D.P.

Will free-market economies ever pay due respect to the non-market resources that enable them to function? The atmosphere’s role in making life possible; the ocean’s role in generating fish and biodiversity; the role of bees in pollinating crops; the role of stay-at-home parents in raising the next generation — all of these “services” are invaluable, but because they exist outside of the market, and thus have no price tags associated with them, they have no value in market theory. They are treated as “off the books” — leading companies to regard them as infinite and free.

It may be a warped way of regarding the world, but….welcome to mainstream economics!

That’s why it is such a pleasure to encounter an important op-ed in today’s New York Times by Eric Zencey, a professor at Empire State College. Zencey describes the fallacy of measuring economic activity as if it were synonymous with human well-being. Grow the economy, improve human welfare? That’s the simple-minded equation that economists, politicians and corporations regard as a self-evident truth.

But listen to Zencey:

In general, the replacement of natural-capital services (like sun-drying clothes, or the propagation of fish, or flood control and water purification) woirh built-capital services (like those from a clothes dryer, or an industrial fish farm, or from levees, dams and treatment plants) is a bad trade — built capital is costly, doesn’t maintain itself, and in many cases provides an inferior, less-certain service. But in gross domestic product, every instance of replacement of a natural-capital service with a built-capital service shows up as a good thing, an increase in national economic activity. Is it any wonder that we now face a global crisis in the form of a pressing scarcity of natural-capital services of all kinds?

This points to the larger, deeper flaw in using a measurement of national income as an indicator of economic well-being. In summing all economic activity in the economy, gross domestic product makes no distinction between items that are costs and items that are benefits. If you get into a fender-bender and have your car fixed, G.D.P. goes up.

Zancey’s piece is a welcome reminder of something that has been pointed out since 1934, when the first report of national income was made to Congress. The economist Simon Kuznets then pointed out that “the welfare of a nation can….scarcely be inferred from a measure of national income.” More recently, my colleague Jonathan Rowe developed this theme — the fallacies of G.D.P. as a measure of national well-being — in his landmark 1995 piece in The Atlantic, “If G.D.P. Is Up, Why is America Down?”

But if the deficiencies of G.D.P. as a measure of national progress has been well-known and prominently criticized for decades, then why does G.D.P. still hold such sway over the public imagination? Because it is in the political interests of leading market players to equate their success with national well-being. G.D.P. fulfills that role perfectly — and the news media and captive politicians are happy to play along.

But so long as this increasingly lame charade continues, the actual value of the commons will go ignored — and the pathologies of unfettered markets will persist and expand. Which is why it’s time to demand an economics that gives us a full-cost accounting of actual costs, including the hidden subsidies provided by the commons and the despoliation of the commons by market activity.

Originally published by David Bollier at Onthecommons.org under a Creative Commons Attribution license.