It's time to ditch GDP

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New York. Wall Street. Stock Exchange, Flickr image by Tomas FanoFrom any ethical perspective, the prime objective of economic theory, policy and practice needs to be the wellbeing of all individuals and households. That demands pursuance of 'the common good' whereby each and every person has the opportunity to achieve their potential.

Recent decades have witnessed the ascendancy of the neo-liberal or neo-conservative economic philosophy. It emphasises paramount principles of unfettered free markets, supremacy of the individual, self interest and the profit motive to maximise the common good.

It is claimed this approach will maximise production of goods and services and maximise national wealth for the benefit of all, so that and even the most disadvantaged will enjoy the benefits that will 'trickle down'.

This approach has been a major factor in spawning the current global financial crisis through the sub-prime debacle in the USA. A pure and unregulated profit motive driven by self-interest caused trillions of dollars to be loaned to often disadvantaged people who could not afford repayment.

Meanwhile, billion dollar corporations made huge profits, and their executives reaped multi-million dollar salaries and other rewards. Sensible and just regulation and oversight could have prevented this financial fiasco which should never have been permitted to develop.



While the 'trickle down' of wealth proclaimed by neo-liberalism is highly debatable, the hardships and problems of sub-prime activities descend on the disadvantaged with the speed and finesse of a freight train. Hence hundreds of thousands of low income Americans have lost their homes, many more are on the way to losing them, and millions of lower income Americans have seen their most important single asset decimated.

Millions of would be retirees have seen their forthcoming pensions wiped out or reduced to future welfare dependent levels. Credit has been severely restricted, affecting the production and sale of a wide range of goods and services. This in turn will have a wide and serious impact on employment levels.

Even in Australia there have been adverse impacts. Due to eagerness for short term profit and inadequately researched investment activities by some investment funds, hundreds of thousands of Australians face sharp declines in future superannuation benefits, particularly those on low incomes.

Some local councils in Australia have suffered losses from funds indirectly invested in the sub-prime debacle. In addition billions of dollars have been wiped off Australian share market values. This will cause financial institutions to demand the scaling down of existing company loans and strong restrictions on new loans, which will impact company activities such as training and education, workplace benefits, and donations to charities.

Governments in the developed world have poured billions of dollars into support of the financial sector in efforts to stem the crisis. This must in due course have an adverse impact on essential government expenditure and on levels of taxation. What will be the impact on transport, public housing, education, health and aged care?

Australia has one of the highest levels of consumer debt in the western world. It is far from the sub-prime debacle but may pose a serious problem depending on how many households can repay their debts. Yet TV advertising continuously promotes the purchase of goods for 'no deposit and no interest' for two to five years, with no mention that any glitch in repayments will result in a 30 per cent or more annual interest charge.

We need to ensure that Australia does not duplicate even on a much reduced scale the sorts of outcomes emanating from the sub-prime fiasco. The following are some suggestions worthy of consideration.

Disregard neo-liberal policy prescriptions: The self interested, profit seeking approach to almost all forms of economic activity is unlikely to promote national wellbeing. In the USA, the most conservative of world economies where neo-liberalism has prevailed, we have the spectre of the largest of government interventions and biggest nationalisation of private assets in western history in the name of 'the common good'.

Achieve a better balance between the free market and regulation: We need to bear in mind that unfettered free markets have severe drawbacks. They lack ethics, focus only on the short term, emphasise profitability whether it serves the community or not, and fail to address externalities whether they be dire health or environmental consequences of economic activity.

Restrict profit seeking: Undertake a comprehensive review of government policies as they relate to the finance sector to restrict or deter unproductive speculation. Already action is being taken to ban 'short selling'. There are numerous aspects of derivatives trading that should be banned or restricted and the taxation system could be used to greater advantage in restricting profit seeking activities that add little or nothing to national wellbeing.

Dump the all invasive but misleading GDP concept: In any macroeconomic analysis these days one can hardly miss the constant referral to GDP, its use to demonstrate gains, progress, benefits successful national governance and the like. In fact the GDP has so many fallacious aspects in the way it is used.

GDP is not, as so many proclaim, a clear indication of national advancement and wellbeing. Road deaths and injuries promote the GDP because of funerals, health services, motor repairs and the like, tobacco production increases the GDP but so does the costs of treating cancer patients. Damaging environmental outcomes which need to be rectified add to GDP. The faults in the concept and the way it is used go on and on.

For many years now, thinking economists have demanded a focus on concepts related to GDP but directed to data on the the production of goods and services that promote the common good, such as a 'general progress indicator', or GPI. It is not so much more difficult to calculate, but would remove negative aspects of the GDP to give a more realistic measure of real and beneficial economic progress.

It would have a major impact on forcing economic activity and government policies to focus on wellbeing.


John WicksJohn Wicks is a retired senior public servant who is voluntary advisor on social justice to the St Vincent De Paul National Council in Canberra. Read some of his papers here.

Topic tags: john wicks, ethics of economic policy, disadvantaged, sub-prime, superannuation, share market

 

 

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Agree wholeheartedly with the general thrust of the proposals.

However, GDP is a common internationally accepted benchmark. So there must be agreement on ditching it at an international level.

Blaming companies and its execs alone for profit seeking is forgetting the role shareholders play. Greed happens across the board but how do govts legislate against greed?

Have a great day.
Ninja | 23 September 2008


There has been, for many years i think, some confusion between 'standard of living' and 'quality of life'. Some of the happiest countries in the world have a low standard of living.

Also, it has been suggested that personal wealth should be capped. This means that no Australian family would be allowed to have money and assets above a certain level...say 50 million dollars. If this was the case it would be interesting to see how many people would be willing to work for the common good and not just for the financial security of their own families.
Andrew McAlister | 23 September 2008


Congratulations,John an excellent article;unbridled greed and excessive concentration on individualism has got us into this mess, with the gap ever widening between the haves and have nots both here and elsewhere.
Keep up your good work in Vinnies.
Patrick Durack | 23 September 2008


To 'ninja'

To drop the GDP Concept does not mean you have to stop calculating it for historical analysis or international comparison. The data you would use for a General Progress Indicator (GPI) is much the same as GDP except you "accentuate the positives and take out the negatives".

To Andrew

Yes I do blame the companies. I have shareholding in around 30 companies as a self funded retiree. My voice as a shareholder is worthless and I never ever get heard. Who does get heard as shareholders are the multi-billion dollar investment companies, pension funds, insurance companies and merchant banks who hold the bulk of shares – just another bunch of company executives!

A couple of extra points

1. There is no problem with the accumulation of wealth and there is little criticism of having wealth in the Gospels, it is what you do with it when you accumulate it. The problem is so little of the wealth accumulated, as the Gospels demand, is directed at the disadvantaged.

2. If historically we look at societies that permitted wealth accumulation with little if any control just look at the excesses of the Roman empire before, of course it collapsed. Is the sub-prime crisis the commencement of another fall? (due essentially to uncontrolled emphasis on wealth creation)

John Wicks | 23 September 2008


So the "trickle down" effect doesn't work ! Is that supposed to be some great epiphany ? It has never worked and the outcomes have been obvious for centuries>
nick agocs | 23 September 2008


I am interested in how one measures the GPI. If we clear a forest to build houses for the poor, is that progress? If we legislate to decriminalise abortion, is that progress? If limiting the access of remote Indigenous communities to alcohol results in less child sexual abuse, is that progress?

The GPI is a great idea in principle, as long as there is a clear consensus as to what it means in practice. But the prospect of such a consensus seems slim, which is why we have politics.
Ignatius Smyth | 23 September 2008


The British Institute for Social Inventions and the Australian equivalent have been working on alternatives to GDP since 1984 (see for example the Global Ideas Bank). What is needed also are some economists who can strip from the current GDP measure the negatives that at present contribute to it - the accidents, social problems, unnecessary waste etc, and come up with GDP-super. I would like to see that.
val yule | 24 September 2008


What is wrong with the gdp as a tool of measurement? … better balance between free market & regulations … no argument! Restrict profit seeking come on! Why not try to stop the sun rising. This article concentrates so much on greed and profit seeking that it has overlooked the politics! The basis for the current problems stem from Clinton’s promise to make house funding available to all and then interfering in the system in appropriately - greed then proceeded without appropriate regulation.
brian martin | 30 September 2008


I understand that GDP was first defined for use as a planning instrument by the US Government during the emergency that was World War 2. It was intended to be no more than a rough-as-guts measure that indicated how the war effort was going, by aggregating all money flows in the economy.
If you want to add to the GDP, buy a car, insure it, and crash it. The car is purchased by flow of money, the car is insured by flow of money, the insurance payout is a flow of money, the medical and funeral costs of accident victims if any are flows of money. All these flows of money add to the GDP, so we must be better off as a result of this car crash. Are we really better off?
Regarding tricklings down, J.K. Galbraith pointed out that if you let the horses guzzle enough oats, some will pass through for the sparrows.

David Arthur | 09 October 2008


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