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Pilling event

Event Report - The Growth Delusion – Time to re-think GDP

15 February 2018

Together with the EPC, the EU-Asia Centre hosted a discussion with David Pilling, associate editor of the Financial Times, and author of The Growth Delusion, on 14 February.

Piling said that politicians love nothing better than claiming credit for economic growth. The media bombard us with every new statistic about the rise and fall of GDP. President Juncker notes that the Eurozone had a remarkable 2.5% growth in 2017, the highest for a decade. President Trump’s boasts about the rise of the stock market. President Xi Xinping heralds the prospect of China becoming the number one global economy.

But could our obsession with economic growth, measured by increasing Gross Domestic Product (GDP), be a danger to our democracy? This is just one of the issues raised by David Pilling in his fascinating tour d’horizon of the origins, development and implications of our worshiping at the altar of GDP. Pilling argued that economists and their cult of growth have hijacked our policy-making and infiltrated our thinking about what makes societies work. We should measure our economic successes and failures using different criteria. We should try and analyse what makes our economies better and not just bigger.

Pilling said that all concepts used in economic measurement are creatures of particular policy objectives, devised with specific uses in mind. The basis of modern economics is continuing production and consumption. As Pilling explained, ‘we live in a society where a priesthood of technically trained economists, wielding impenetrable mathematical formulas, sets the framework for public debate.’ Politicians have jumped on the GDP bandwagon and debates are full of references to one country outpacing another at GDP. If only we can grow faster, argue politicians, then we will be happier (and the politicians more likely to be re-elected!). But as GDP has steadily risen in most of the developed world, why do we not feel happier? Populism is on the rise throughout the world and wealth inequality is as stark as ever.

Pilling said he is not declaring war on growth but rather showing what was wrong with the measurement of growth. He suggested we need to broaden our perspective so that the image we capture is more reflective of our lives. So much of what is important to us, from clean air to safe streets and from steady jobs to sound minds lies outside its range of vision.

For centuries there was no measurement of the economy. People did not discuss or agonise over economic growth. Countries became richer if they conquered other countries. Rulers raised taxes to fund armies to try and extend their wealth through conquest. This only changed in the 20th century.

The concept of GDP was devised by Simon Kuznets, a Soviet émigré economist, who with a small team of statisticians, surveyed American industrial and agricultural activity in the 1930s. His findings were used to justify President Roosevelt’s unprecedented government action in the New Deal. The concept was further refined and developed by two British economists, Richard Stone and James Meade, in order to maximise wartime production in the UK. They, in turn, built on pioneering work by John Maynard Keyes to include government spending in national income.

But this 50 year old model has not been updated to take into account technological changes or work done on the Internet. Pilling describeed some of the absurd ways in which GDP is and is not measured. The work of a woman who cares for her elderly parents is not counted. But if the same woman was to carry out the same activities in a care home then it would be counted. Baby formula milk is counted as it is sold over the counter but breast milk is not. Prostitution, drugs and handling stolen goods are good for GDP. The Office for National Statistics calculated that prostitution and drug dealing added £9.7 billion to UK GDP in 2009. But childcare, voluntary work and household activities are ignored in GDP assessments. American researchers estimated that if household cooking, cleaning, washing were counted it would add a staggering 26% to the US economy.

In essence GDP is mercenary. It does not count transactions where money does not enter the equation. It can count the sale of bottled water inn a supermarket but not the economic impact of a girl fetching water in an African village.

The delusion of growth was revealed in the following tale illustrating the absurdity of numbers. ‘Bill Gates walks into a bar. On average everyone in the room is a billionaire,’ he jokes. The distribution of growth, income and wealth, what we call inequality, is at least as meaningful as GDP itself.

Pilling concluded that he was not arguing for the abolition of GDP as a measure but suggested that it should take into account measures that might better reflect welfare and wellbeing. By relying solely on GDP, politicians are accepting the basic value judgement of the growth juggernaut. A useful corrective would be to consider GDP per capita as a better measure as this puts people at centre. We also need to take into account measures that make our planet fit for habitation, such as curbing CO2 emissions. There must be a system that gives more priority to health and sustainable development.

Fabian Zuleeg, Chief Economist at the EPC, agreed with much of Pilling’s analysis and added a number of other criteria that should be taken into account. But he did not see the political will to move away from the priority of economic growth.