In praise of GDP: Why the search for wellness needs to start with wealth

Speaking in Edinburgh to the TED global summit (the initials stand for Technology, Entertainment and Design), the First Minister told delegates how GDP “is often seen as the most important measurement of a country’s overall success. And my argument today is that it is time for that to change.

“You know, what we choose to measure as a country matters.

It really matters, because it drives political focus, it drives public activity. And against that context, I think the limitations of GDP as a measurement of a country’s success are all too obvious … GDP measures the output of all of our work, but it says nothing about the nature of that work, about whether that work is worthwhile or fulfilling.”

On the internet, this is being billed as a manifesto for the concept of wellness, as opposed to growth-obsessed conventional economics. But I don’t think many economists would dispute the basic argument. GDP is no more than statistics at a certain level of generality.

It is more specific than a description (say, “worthwhile or fulfilling”) which is so sweeping as to be platitudinous, yet less precise than one so detailed as to become inaccessible to non-specialists. Instead, GDP measures what is readily measurable in a degree that can be grasped by everybody, expert or punter, willing to understand a few facts and their connections.

Actually, there are three measures of GDP. They date from the Second World War when the Allied governments wanted to fathom what was going on inside their economies to an extent they had never done before because they did not need to. For the sake of victory, they had to up their statistical game. Mundane number-crunching played its humble part in the defeat of fascism.

During the 80 years since, the three measures’ deviations from one another have been minor and temporary. On the whole, they mutually confirm that they are meaningful and accurate. This is of huge importance to policy-makers. They want to be as certain as they can be that what they try to do will bring about the intended effects. Reliable GDP figures help.

Nicola Sturgeon wants to drive focus towards a wellbeing based measure

Nicola chose to talk about GDP as measured in output, that is to say, how our inputs of capital, labour and technology are transformed into finished goods or services by the private or public sectors. A second possible basis for GDP is income, in other words, the nation’s wage bill, the profits that companies earn and the taxes collected by government. A third possible basis for GDP is expenditure, or the value of goods and services purchased by consumers, plus the sums that companies are investing, plus public spending by government.

GDP is not a narrow concept, which was what Nicola implied, but a broad concept, as broad as we can make it. Indeed of all the statistical series available in modern states, it is absolutely the broadest.

Since over their history the three different measures of GDP have on the whole confirmed one another, we have no reason to suppose that, so far as they go, they have been misleading. Almost every country in the world now deploys them in the same way. International comparisons serve as another mutual check.

READ MORE: Nicola Sturgeon pushes use of 'wellbeing economy' over GDP

They let us see which policies are working so we can borrow those that do – a frequent practice in the Scottish government, among others. It helps us all because GDP is a valid measure of economic activity, and one of great practical utility.

This is not to say it gives us perfection in measurement or forecasting. But those are not the right things to look for.

Economics is a human, not a physical science. Its pretensions to mathematical certainty were hopelessly compromised by the great financial crisis of 2008, which economists were able neither to predict nor to correct, in the way a physical science would allow its practitioners to predict and correct. Nowadays we have to guess about the future as best we can, and often out of behaviours for which there is no precedent. It makes the search for what is “worthwhile or fulfilling” even harder.

Ex-MP Roger Mullin, who was also a member of the Sustainable Growth Commission, wrote recently in The National that just because we know anyway that GDP has its flaws, “a mere critique is not enough”. Any replacement would need to be “something that both works better and has sufficient rigour to command widespread respect.” Nicola’s effort falls at these hurdles.

Ex-MP Roger Mullin

What are the units of measurement by which we could start to put numbers on the “nature of our work”? Or on how “worthwhile” it is, or on how “fulfilling”? The way to initiate policy is by gathering information, organising it, evaluating it, drawing conclusions from it. If we cannot find a suitable unit of measurement and start to put numbers on it, what possible basis for comparative policy-making do we have? We are left with mere verbiage.

Roger referred also to a recent book, Replacing GDP by 2030.

It is the work of Rutger Hoekstra, a senior official in the Dutch statistical service. Hoekstra is a GDP sceptic. He lists a thousand different measures that have been tried out in various countries to break the dominance of GDP. None has succeeded in winning wider acceptance.

For all the faults in GDP, already conceded by everybody who uses it, it is the best we have. Hoekstra advocates an “entirely new strategy”. He hopes it can be worked out by 2030. But it’s not here yet.

GDP tells us about the material side of our lives, which is important though not uniquely or solely important. The original rise of the SNP rested on a materialistic slogan: “It’s Scotland’s oil”.

It gave Scots confidence that the nation could achieve a fresh start without relying on the government in London, as Labour and the Tories told us we would always need to. Instead, we could make ourselves more prosperous and confident through our own efforts.

At the referendum of 2014, the most telling arguments were again about whether independence could render us richer and happier – they were materialist arguments.

That did not mean other arguments were negligible, but they grew stronger with a materialist supplement to them. Most of us think in materialist terms when we worry about our families or our mortgages or how to pay for our holidays. That does not mean we forget about other aspects of our lives, but we would not get far with them unless we gave some attention to their material basis as well.

And when we do that we may be led on, if we are public-spirited enough, to worry over the economy of our country, and how it can be run better. GDP offers us the categories in which we can organise our thinking on these lines.

One thing it would be good for us to worry over is that Iceland and New Zealand, two countries named by Nicola as Scotland’s closest allies in the worldwide wellness crusade, do so much better economically than we do. Both of them achieve growth rates of more than 3% a year, against our miserable 1.4%. If we can aim to match their wellness, why can’t we double our growth rate too?

That’s what I’d like to hear about in the First Minister’s next big speech.

READ MORE: Wellbeing economy in New Zealand paves the way for Scotland