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Gross-out

April 29th, 2003

Ken Parish has had a go at Clive Hamilton over an extract from his new book, Growth Fetish, published at Online Opinion. I think a lot of the debate is either at cross-purposes or misses crucial distinctions.

In essence, Clive restates a critique of growth, as measured by Gross National Product, that goes back to Galbraith’s Affluent Society. The link is sharpened by the fact that Clive, like Galbraith, refers to Gross National Product (GNP) rather than, as is more usual in Australia, Gross Domestic Product (GDP). Ken makes some good points but, in large measure, offers a restatement of the arguments that were put forward in rebuttal to Galbraith and, even more, to 1970s critics of growth like the Club of Rome.

On balance, I agree more with Ken than with Clive, so it’s only fair to begin with a point on which I agree with Clive.

GDP growth is a lousy measure of how well a country is doing, even if we are only interested in relatively narrow economic assessments of welfare, as opposed to social, cultural or spiritual issues. The name gives three reasons why Gross Domestic Product a bad measure of economic welfare.

It’s Gross because depreciation is not subtracted. If we are concerned with measuring economic welfare, even from a narrowly materialist viewpoint, the net measure is relevant and the gross measure is not.

It’s Domestic because it measures the amount produced in Australia, including that which accrues to foreign owners of capital and is paid out as interest or dividends. National Product which is the output accruing to Australian land, capital and labour is more relevant.

Finally, it’s Product, that is, a measure of output that takes no account of inputs. If we increase our product by working harder or longer hours (a point Ken notes), or by consuming more natural resources, we are not necessarily better off. What matters in the end is productivity, not product.

Why then do economists pay so much attention to GDP? The answer is that it’s useful primarily as a measure of economic activity, for short-run macroeconomic management. If GDP is declining, this is a good indication that the economy is in recession and that macro policy needs to be more stimulative. Taking account of things like depreciation, international income transfers and work intensity would reduce the precision of estimates of short-run growth because all things are hard to measure, and would make GDP less useful for its primary purpose. (Of course, this is a Keynesian view – national account statistics like GDP are essentially a product of the Keynesian revolution).

This is a big subject and I’ll try to post more on it as I get time.

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