Economist: ‘GDP is misleading a measure’

THE MOST commonly used measure of overall economic output is misleading and inaccurate, according to an international economist from Manchester.

Professor Sir Partha Dasgupta, from The University of Manchester, says Gross Domestic Product (GDP) ignores the value of natural ecosystems – an essential component of wealth.

Aquifers, ocean fisheries, tropical forests, estuaries and the atmosphere should, but are not used to estimate nations’ wealth, he wrote in a new paper published this month.

Professor Dasgupta also criticises the Human Development Index (HDI) – used by the United Nations to say if a country is developed, developing, or underdeveloped for the same reason.

To support his argument, Professor Dasgupta produced a series of figures from 1970–2000, showing that sustainable economic development for most of the third world – other than China – was negative – despite official figures showing GPD and/or HDI as rising.

Though the crude data leaves out the deterioration of ecosystems and improving health-  among others – by using population, the calculations provide a strong indication of the mismatch between official GDP figures and real wealth, he said.

“Adam Smith did not write about the GDP of nations, nor the HDI of nations; he wrote about the ‘Wealth of nations’,” said Professor Dasgupta who is based at the University’s Sustainable Consumption Institute.

“As Smith would surely have agreed, the international community needs to routinely estimate the comprehensive wealth of nations which includes natural capital. This is not happening.

”One way to determine whether a country’s economic development has been sustainable over a period of time, is to estimate the changes that take place over that period in its wealth relative to growth in population.

“The figures I produce are a rough and ready estimation of natural capital, but they show how accounting for it can make a substantial difference to our conception of the development process.”

In the paper published this month in the Royal Society Journal ‘Philosophical Transactions B: Biological Sciences’, Professor Dasgupta argues that twentieth-century economics has been ‘inexplicably’ detached from the environmental sciences.

“As long as we rely on GDP and HDI, we will continue to paint a misleading picture of economic performance,” he said.

“We economists see nature, when we see it at all, as a backdrop from which resources and services can be drawn in isolation.

“So successful has this enterprise been that if someone exclaims, ‘Economic growth!’, no one needs to ask, ‘Growth in what?’—we all know they mean growth in GDP.

“If economists take into account natural capital, then it is clear that some of the world’s poorest people are subsidizing the incomes of importer rich countries.”

He added: “Leading economics journals and textbooks take nature to be a fixed, indestructible factor of production.

“The problem with this assumption is that it is wrong: nature consists of degradable resources.

“Agricultural land, forests, watersheds, fisheries, fresh water sources, river estuaries and the atmosphere are capital assets that are self-regenerative, but suffer from depletion or deterioration when they are over-used.”

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6 Responses

  1. […] Go here to see the original:  Economist: 'GDP is misleading a measure' « Manchester Mouth […]

  2. Adam Smith (and nobody else in the 18th century) wrote about “GDP” because the measure was not invented until long afterwards.

    Smith wrote about a nation’s wealth in his “Wealth Of Nations” (1776), which he formulated as the annual production of “the necessaries, conveniences, and amusements of life” (others at the time had a similar construction). Wealth was most definitely not the amount of gold, silver, or money held within the country (Wealth Of Nations, Introduction, p 5, and passim throughout the book – see Index).

    However, he did identify what was instrumental in transforming a country from “savagery” (living off the forest) during the first Age of Man, into a “civilised” state, in Moral Sentiments (1759) and in his Lectures on Jurisprudence (1762-3), specifically its transformation into a “commercial society” in the 4th age of man.

    He discusses (Moral Sentiments IV.1.8: p181) his parable of “The poor man’s son, whom heaven in its anger has visited with ambition, when he begins to look around him, admires the condition of the rich” and what happens to him over a lifetime of toil and trouble to acquire riches – the great “deception” Smith calls it:

    “And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants.” (Moral Sentiments IV.1.10: 183-84)

    This puts a different slant on assertion that Adam Smith “would surely have agreed” that wealth should be measured by an indicator that contains the value of “natural capital” (however that is measured).

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