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Big Idea | Is GDP a Broken KPI?

Masood’s critique of GDP has special force today because, in the wake of Covid and a near-recession, GDP will now likely be used to “incentivize the kinds of development that could be harmful.”
GDP in action

Big Idea is an occasional series in which we connect investors and businesspeople with new and emerging perspectives from academia and elsewhere.

Gross Domestic Product (aka GDP) — one of the most commonly used indicators of economic performance — is drawing increasing heat for its inability to capture the true welfare of a society. In a recent episode of the BBC Radio 4’s podcast The Spark, host Helen Lewis spoke with science journalist Ehsan Masood, who has written a book on the subject: GDP: the World’s Most Powerful Formula and Why It Must Now Change.

In the podcast, Masood — a physicist by training who also wrote Science and Islam: A History, and has held editorial roles at Research Fortnight and Research Europe —provided his perspective on the KPI and the trouble with using it as the sole measure of economic progress. He said the concern has special force today because, in the wake of Covid and an economic downturn, GDP will now likely be used to “incentivize the kinds of development that could be harmful.”

Masood argued that policymakers should instead take into account other factors such as social well-being and environmental sustainability when making policy decisions, and advocated for a more comprehensive metric.

With its roots in the Depression era, GDP was first introduced as an economic indicator after World War II and has since become the standard measure of a nation’s total economic output, and hence its economic well-being. But in truth, Masood said, “GDP is a political tool that governments use to measure their performance and make policy decisions.”

Economic growth is not the same as progress, Masood said, and in fact the opposite is likelier true: While GDP has continued to increase in many countries, social and environmental problems have continued to worsen.

One of GDP’s big limitations is that it “mostly measures things you trade” — but does not take into account factors such as inequality, environmental degradation and social well-being. For example, it would not accurately measure the relative performance or success of a nation like France, whose culture places higher value than others in the West on a balanced lifestyle and happiness. (On the other hand, Semafor recently reported that, despite efforts to prove otherwise, research continues to show that money can in fact buy happiness.)

Looking forward, new technologies and data sources are providing new opportunities to measure economic welfare more accurately, Masood said. He cited the Human Development Index and the Genuine Progress Indicator, both of which attempt to capture a more comprehensive snapshot of economic welfare.

Listen to the complete podcast here.

The astronomer Carl Sagan said, “It was easy to predict mass car ownership but hard to predict Walmart.”