Gross Domestic Product (GDP for short) for those unfamiliar or just wondering about the specifics of its use, is the “The monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis.” Mathematically:
GDP = C + G + I + NX
Where “C” is equal to all private consumption, or consumer spending, in a nation’s economy, “G” is the sum of government spending, “I” is the sum of all the country’s businesses spending on capital, and “NX” is the nation’s total net exports, calculated as total exports minus total imports. (NX = Exports – Imports)”
GDP is seen as a macroeconomic indicator, a performance metric if you will used to compare total activity in a nation’s economy over time. You’ll often hear GDP figures in news report for this reason as its often the most salient indicator used by economists, the finance industry, politicians, etc. to judge the “health” of the economy.
Historical use of GDP
Like so many aspects of US culture and political policy, GDP, or Gross National Product (GNP) as what was used then, is largely a carry over of prewar and WWII era America. Not until Black Tuesday was our government ever in such a need to constantly measure the health and growth status of the national economy. The nation needed to get back on its feet from the depression meanwhile transitioning itself into a well oiled war machine to fight off our enemies in Europe. GNP offered the most comprehensive and effective way to measure our economic resurgence and defer resources to the war effort abroad.
Post Keynesian economic expansion and WWII, GNP was suddenly found to be fantastic comparative tool with the Soviet Union, which itself utilized Gross Social Product and Total Gross Output of Industries, until 1988 when it formally adopted the compilation of GNP statistics. Not until 1991 was GNP out-shined by GDP, which then took great international prominence during the 90’s economic boom.
Overall, GDP and GNP have played an instrumental role in our economy since the 1930’s. The creation of such a powerful and salient metric at economists and policy makers disposal, proved to really bring about an econometric revolution. While economic policy is nevertheless highly politicized, GDP was a profound catalyst in establishing the highly analyzed and quantitatively measured world of economics we now live in. In the 1950’s GDP “led to the development of official ‘input–output’ tables, capital stock estimates, and more detailed local personal income estimates. In the 1970s, accelerating inflation prompted the introduction of new measures of prices and inflation-adjusted output. In the 1980s, the internationalization of trade in services led to an expansion of this component into the calculation of national income.” (AtKisson 2013) We now have a greater ability to analyze the results of policy changes rather than theorize and fall back on political rhetoric to defend positions. It is arguably one of the more important economic advances in history.
The use of GDP however, is not without its negative consequences or sweeping assumptions of course. Economic discussions and analysis in the media rarely include the various subcultures and divisions of labor. We now focus on “producers” and”consumers” which many argue has lead substantially to the largely materialistic culture of today. It has also encouraged an economic trend dubbed by President Eisenhower as the “Military Industrial Complex”, where a substantial portion of the economy is now dependent upon military spending. There is a profusion of discussion relating to the dangers of an over-reliance on GDP and its short coming. Of greater relevance here is that GDP makes an inherent and somewhat audacious assumption that consumption is the true driver of prosperity. Is this necessarily the case however?
GDP vs. Happiness
As wonderful as GDP has proven historically speaking to demonstrate economic health, let us not forget that much like any other aspect of human civilization (culture, social acceptance, technology, etc.) , our economy has likewise evolved and should now serve a higher purpose. The original intent of an economy was to serve as an organized system of exchanges and divisions of labor which individuals contributed to and drew resources from to provide for their basic human needs. As Adam Smith, author of An Inquiry into the Nature and Causes of the Wealth of Nations, once said “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.”
Today however, an economy is more than a system of production and consumption but rather, a way of organizing a society itself whereby government plays an important role as a check on markets and to serve the needs which markets cannot (creating and enforcing laws for instance). In today’s world, we expect more than to simply have our lower level physiological needs met. We strive for ideas even higher up the chain of Maslow’s Hierarchy. This is where GDP has its short fall as I think was summarized well by then Presidential candidate Robert Kennedy’s remarks at the University of Kansas on March 18 1968.
Just as in any form of management, it’s important we as a society step back every once in a while and examine ourselves, our current path, and the ways in which manage ourselves chiefly our government and our economy. Pertaining to the later, how does our current economic system perform relative to many consider the only goal of life which is itself not a means to an end, happiness?
“And of this nature Happiness is mostly thought to be, for this we choose always for its own sake, and never with a view to anything further: whereas honor, pleasure, intellect, in fact every excellence we choose for their own sakes, it is true, but we choose them also with a view to happiness, conceiving that through their instrumentality we shall be happy: but no man chooses happiness with a view to them, nor in fact with a view to any other thing whatsoever.” – Aristotle
There have been a number of attempts in recent years to represent GDP vs. Happiness (or some metric designed to capture happiness/life satisfaction). Many of the most credible of these findings tend to illustrate fairly minimal correlations compared to what many economists expect. In 2011, the US was by far the worlds largest economy by GDP yet ranked 31st in the Quality of Life Index (QLI), and 29th in Mercer’s Quality of Living Survey. Even the Economist has demonstrated a fairly minimal relationship. Their results went as far as to gauge Mean Life Satisfaction versus GDP per capita at PPP (Purchase Power Parity). Only until plots are done in logarithmic scale does it approach anything near liner which by definition would indicate an exponential relationship between the two.
The Economist. Rep. The Economist Newspaper, 25 Nov. 2010. Web. 13 July 2015.
Although there are certain arguments to be made to the contrary and disputes are inevitable in any social scientific discussion, GDP as the reigning global economic indicator still stands despite its many critics. This then begs the question, if the relationship, while certainly present, appears fairly weak between the two, perhaps our idea of success should strive to be more comprehensive?
Social Success Metrics
The small Southeast Asian nation of Bhutan thinks so. In 1972 they actually went so far as to implement a new measure called Gross National Happiness (GNH), which still carries forward to this day, albeit with a few revisions. While my colleague Griffin Kearney and I felt GNH represents a fantastic starting point, it leaves much to be desired from a free market, democratic, and analytical perspective to truly serve well as a comprehensive indicator.
In keeping with these mathematical and philosophical constructs and as part of a greater research proposal we’ve been developing, spawned 6 key social success metric concepts, each design to represent a specific scope of societal success.
- Social Capital
Inspired by the Legatum Prosperity Index, it is our intent to develop a more concise grouping of economic based metrics designed to be analyzed by economic researchers and policy makers as a set. The individual metrics will themselves be made of indicating measures that have already been fairly well established in their respective fields. It is our intention that the inherent propinquity of the grouping of these metrics will inspire unique affiliations and a more cohesive societal aim. Keep tuned for developments on the specifics of these metrics on the My Current Research page.
While there is much still to be discovered about the best individual metrics best suited for this grouping, the methodology behind the grouping itself still stand. Much like the grouping of Maxwell’s equations, the foundation of each of these metrics is by and large well established independently but conceivably, when put into a greater, high-order context, they can have new meanings, interpretations, and inspire a greater connectivity. If it is our life’s aim to be: wealthy, healthy, safe, socially prosperous, educated, and free, perhaps that should be the new measure by which we judge ourselves then.
- “Gross Domestic Product (GDP) Definition | Investopedia.” Investopedia. N.p., 19 Nov. 2003. Web. 13 July 2015.
- AtKisson, Alan. “Chapter 1 The History of GDP: From Crisis to Crisis.” Gross Domestic Problem : The Politics behind the World’s Most Powerful Number. N.p.: Zed, 2013. N. pag. Print.
- Burton, Neel. “Aristotle on Happiness.” Psychology Today. N.p., n.d. Web. 13 July 2015.
- “Money Can’t Buy Happiness – or Can It?” The Economist. The Economist Newspaper, 30 Nov. 2010. Web. 13 July 2015.
- “Money and Happiness.” The Economist. The Economist Newspaper, 25 Nov. 2010. Web. 13 July 2015.
- Rothkopf, David J. “Redefining the Meaning of No. 1.” The New York Times. The New York Times, 08 Oct. 2011. Web. 13 July 2015.
- Frey, Bruno S. Happiness: A Revolution in Economics. Cambridge, MA: MIT, 2008. Print.
- “The 2014 Legatum Prosperity Index.” Prosperity Index 2014. The Legatum Institute Foundation, n.d. Web. 31 May 2015. http://www.prosperity.com/#!/explore-data?opts=2Ekxmx-UmA2y1