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Why is GDP widely used as indicator, knowing its limitations, while better indicators for social progress are available?

The limits of GDP as indicator for well-being in a society are well known for decades. Simon Kuznets, one of the founders of national accounting, emphasised its shortcomings early in the twentieth century. Two other Nobel laureates – Joseph Stiglitz and Amartya Sen – together with Jan-Paul Fitoussi, scrutinized GDP in their seminal 2009-report ‘on the measurement of economic performance and social progress’.

Not only is the limited value of GDP well known, but better indicators for well-being are available. A simple step is to use nett national income, instead of gross domestic product, leaving out investments, which do not directly add to the well-being of people. The indicator should reflect income for people and not production of industries. A small extension is to use median available income per person as economic indicator for well-being. This corrects partly for increases in inequality. A more fundamental indicator for well-being in a society is annually presented in the World Happiness Report. Some countries, as the Netherlands, developed and use their own methodology to assess social progress. Research shows that GDP-growth in wealthy countries is hardly reflected in growth in well-being since the nineteen eighties.

This brings us to the key question: why is GDP so stubbornly used as indicator for social progress, knowing its limitations and having better indicators at hand? GDP-growth reflects mainly growth in value added of private companies. Better education and health care, clean air and a safe climate, social cohesion and rule of law, are all not reflected in this indicator. Because GDP-growth roughly equals growth of the commercial sector, it is not surprising that industries promote GDP-growth, and convince politicians, journalists and the electorate that this is the way forward. Additionally, governments also have a direct interest in GDP-growth because tax receipts grow proportionally with GDP. In conclusion, it is in the interest of industry and governments to use GDP as main indicator for progress.

The strong interests backing GDP as indicator, require an equally strong democratic opposition. The crucial change is that businesses need to be regulated for the common good. People’s well-being should no longer be confused with business interests.

12 July 2023

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