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The use of GDP as an indicator of economic performance gets a lot of criticism, though. It is pointed out that the GDP counts up things that cost money, even if those things didn't actually contribute to sustainable human progress. If gang violence puts people in the hospital, the price of their hospital care is part of the GDP. But, if people do volunteer work, that work is not part of the GDP, no matter how important it might be -- because no money changes hands. And, if a tire factory creates acid rain, which kills a forest full of trees and destroys aquatic life in a lake, the sale of the tires adds to GDP -- but the loss of the forest and the fish is not subtracted from it! These deficiencies in the GDP as a measure of economic progress has led many to call for a new measurement: a "Genuine Progress Indicator" that would assess the costs as well as the benefits of economic activity.
Perhaps we can get some insight into our quandary about economic growth if we recall the real purpose of economic activity in the first place: people seek to satisfy their desires with the least exertion. Note that we did not say "people seek to produce stuff with the least exertion". People do desire stuff, it is true -- but not just any stuff, stuff that actually satisfies their desires. And, some of our desires are not for stuff at all -- we also desire breathable air, drinkable water, security and peace. A growing economy, then, is one in which more human desires are satisfied with less overall exertion.
It is clear that if we satisfy our desires in a way that creates other problems -- consider the tire-manufacturing example stated above -- then it is costing us more exertion in the long run. It may be less exertion for the maker of tires, but the effects of pollution create more work for the entire society. Therefore, it's not really accurate to say that our economy has grown by the value of those tires. In fact, it has grown by the value of the tires, minus the cost of cleaning up the pollution that their manufacture caused. The term economists use for this kind of cost, which is imposed on society in general, but not on the ones who create the problem, is negative externality. One clear example of this is acid rain -- because the damage it causes might not even be in the same country as the source of the pollution that caused it.
Once we factor in all the negative externalities of production, we might find that economic activity might be creating more work, overall, than it is saving. In that case, economic growth would actually be negative: the economy would have provided less overall satisfaction than it had the previous year.
One problem with tallying up this more accurate accounting of economic growth is that many external costs are not easy to evaluate. We know, for example, that acid rain destroys forests and the living things in them -- but it is hard to be certain how to quantify these effects. It is not easy to determine the value of natural resources that is lost by environmental damage of that sort, because the ecological relationships involved are complex, and the time frame of the damage is not fully known. Nevertheless, ecological economists are making strides at quantifying the economic effects of various kinds of pollution.
When we understand the real nature of economic growth, it becomes clear that we do indeed need economic growth to solve our social and environmental problems. However, the standard measuring tool for economic output, the Gross Domestic Product, is not suitable, because it merely tallies up things that people spend money on, regardless of whether the overall level of satisfaction is increased. In order to measure whether our economy is actually growing, we must understand that the true goal of economic behavior is to satisfy human desires -- and, we must do a better job of counting up the external costs of production and charging them to those who are responsible.
Background Questions
- Why is it important that only the final cost of goods and services be included in the GDP?
- What are two examples of how the GDP fails as an indicator of economic progress?
- What is the true measure of economic growth?
- Give two examples of things that people spend money on, but which do not add to overall increase of satisfactions.
- What is a "negative externality"? How would a "Genuine Progress Indicator" deal with negative externalities?
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