Introduction
For decades, the Gross Domestic Product (GDP) has faced criticism as a measure of prosperity and social well-being, much like how Open Society (Karl Popper) has its adversaries. The 21st century presents GDP with rapid-fire challenges, including accelerated global warming, increasing natural disasters, deteriorating natural capital, and aggressive advancements in artificial intelligence. Manufacturing and agriculture lose economic relevance, while services dominate employment and value creation. Labor relations evolve, progress notions change, and consumer preferences shift towards intangible things. Birth rates decline, populations age, families shrink, and women work with limited childcare options. Life expectancy rises alongside the ratio of dependent individuals to working-age people, making pension systems unsustainable and fiscal space narrower. Important unpaid care work at home for the elderly and children, as well as other domestic productive activities, remains uncounted. In Mexico, public services and goods deteriorate (healthcare, medications, childcare, full-time schools, environment), while the shadowy informal economy expands and illicit wealth circulates.
Criticisms of GDP
Many argue that the GDP metric is increasingly limited and outdated in this scenario. It underestimates personal services, digital economies, and app-based services while assuming that medical spending contributes to wealth creation. GDP excludes numerous activities, assets, and public goods from its accounting. Designed in the early 20th century, GDP only reflects consumption, savings, investment, government expenditure, and external trade arising from monetary markets and transactions.
GDP measures prosperity through a basket of typical 20th-century goods: food, clothing, housing, furniture, personal care, transportation, recreation, energy, and communications. It fails to accurately measure productivity increases, such as replacing bank tellers and supermarket cashiers with machines or workers with robots, even if displaced workers don’t find productive roles in other sectors or activities. GDP also neglects to account for natural resources, biodiversity, and environmental public goods. It assumes an infinite supply of natural resources and ecological services at zero cost, including clean air and water.
Moreover, GDP doesn’t consider the social costs of global warming or assign a carbon price reflecting its impact through natural disasters, public health, ecosystems, sea-level rise, agriculture, and water scarcity. Ecological economists have proposed integrating GDP with natural capital, its components, and services, estimating their “prices” or values. However, this is methodologically controversial and often impossible due to the lack of reliable monetary valuations for most.
Relevance of GDP Despite Limitations
Despite its limitations, GDP remains highly relevant as an analytical tool, macroeconomic compass, and valuable guidance for social well-being, happiness, environmental sustainability, and even liberty and democracy.
There is a strong correlation between per capita GDP and the Human Development Index (HDI) published by the United Nations Development Programme (UNDP). This correlation ranges from 0.7 to 0.9, considering that HDI includes education, health, and life expectancy metrics.
Furthermore, per capita GDP has a robust correlation (0.75) with population happiness according to the World Happiness Report. The correlation between per capita GDP and a country’s environmental performance, as measured by the Environmental Performance Index (EPI) developed by Yale and Columbia Universities, is also very high (0.8). This relationship aligns with the inverted U-shaped Kuznets curve.
Lastly, per capita GDP is closely linked to freedom and democracy. The correlation between per capita GDP and democracy, as estimated by Freedom House, the World Bank, and Polity IV, is equally high, reaching 0.7.
Key Questions and Answers
- What is the correlation between GDP and other measures like HDI and happiness? There’s a strong positive correlation (0.7 to 0.9) between per capita GDP and the Human Development Index (HDI), which includes education, health, and life expectancy metrics. Per capita GDP also correlates strongly (0.75) with population happiness, as reported in the World Happiness Report.
- How does GDP measure environmental performance? The Environmental Performance Index (EPI) developed by Yale and Columbia Universities shows a high correlation (0.8) between per capita GDP and a country’s environmental performance, aligning with the inverted U-shaped Kuznets curve.
- What is the relationship between GDP and democracy? The correlation between per capita GDP and democracy, as estimated by Freedom House, the World Bank, and Polity IV, is very high (0.7), indicating that higher GDP per capita tends to correlate with more democratic societies.
