GDP and the illusion of growth

17th January 2012

The Metro story asks whether the focus on GDP– Gross Domestic Product – is ruining the economy. Against a backdrop of economists expecting GDP to fall, heralding a new recessionary chapter – see this report from the ITEM club, the paper wonders whether economic growth is all it is cracked up to be.

The article questions whether growth can continue indefinitely – given the limited nature of global resources, whether it adds to human happiness, and poses whether other economic routes are possible or desirable.

It's clearly not a new theme as this 1997 essay makes clear. But it's one which has achieved greater clarity recently with an increasing number contending that the growth, if achieved, ends up with a few, not the many.

And as this Huffington Post article suggests, that is self-defeating. The greater the level of income disparity between rich and poor becomes, the harder it is to achieve GDP expansion. The very rich cannot spend all their money – they may lock it away in tax havens – while the poor increase in number.  The so-called "middle" becomes more squeezed, smaller and more cautious, one of the problems of UK high street stores such as Tesco, losing out to both downmarket discounters and upmarket rivals.

This site – one of many – questions the validity of GDP as a useful economic concept. GDP is "ethics-free" so an increase in pornography or armaments or derivative trading of a certain value has the same validity as an increase in life-saving medicine, bicycle production or education of the same value. 

This 15 year old paper shows how ambulance chasing lawyers increase GDP – despite their cost to the rest of us.

And the Green Change site shows a wide disparity between happiness and notional income measured by GDP.

The illusion of gain

The New Economy Working Group asks "why restructuring the economy to shrink the manufacturing sector and grow the financial sector could appear to make us richer as a nation, when in fact it reduced our capacity to produce real things in favour of giving priority to generating profits from the exchange of worthless financial assets."

It continues: " It (GDP gain) is why the World Bank can celebrate moving people from subsistence farming communities in which they have no need for money to urban slums in which they struggle to survive on minuscule incomes of a dollar a day as progress even though it means people are giving up lives of marginal sufficiency for lives of desperation and violence."

Professors against growth

Two tomes by academics set the baseline for those saying growth is not good.

Prosperity without Growth by Tim Jackson, professor of sustainable development at University of Surrey posits that UK growth since the serious economic setbacks of the early 1990s was a "kind of illusion".  He believes the UK has slept-walked into a broken economy where the main reaction from government and orthodox economists is to try to recreate the illusory state.

He wants a focus on "prosperity" or "well-being" rather than chasing GDP, which he calls "a meaningless indicator which everyone knows is flawed".  You can find him talking about his version of economic reality here.

Peter Victor is an economist at York University, Toronto, Canada. His

Managing without Growth posits that if we all worked less, our increased happiness would than compensate for the lower salary – many people have volunteered to take a salary cut and work a four day week, for example.  Working less means consuming less.  A two-part  interview with Victor on the Transition Culture website updates his thinking.

Growth proponents disagree

But many take the view that growth is good.  Blogger Daniel Ben-Ami believes in the conventional wisdom . He wants more growth, not less because growth has been the driver of our better lifestyles.

He says: "Take the example of climate change. The conventional green-tinged view is that we need to limit economic growth to stop us destroying the planet. From this perspective the emphasis must be on individual consumers making sacrifices by consuming less.

"Such an approach could not be more wrong. To tackle climate change, to the extent it is a problem, we need more resources and better technology rather than less. For example, we can construct more nuclear power stations, build higher sea walls to resist flooding and investigate more high technology solutions. We need an investment in practical engineering-based solutions rather than cheap mo
ralising by politicians and pundits."

He is perhaps not alone.  This 1930 essay by John Maynard Keynes looks ahead to 2030 and a little beyond. He correctly predicted the economic slowdown of the 1930s but railed against pessimism. As now, his era was suffering from "the growing pains of over-rapid change".  He ascribed human progress from the 1600s onward to the effect of the accumulation of capital, leading to advances in science.

He added: "For at least another 100 years, we must pretend to ourselves and to every one that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight".

Where does all this leave investors?

1.     A growth standstill or negative growth will cease to be a disaster once investors chose to concentrate on other factors.

2.     GDP growth is not always contingent with stock market success.  The German "economic miracle" from 1950 to 1990 was not matched by share price gains. The UK with its far more sluggish economy scored higher on the share price indicator over the same period.

3.     Bottom up techniques where individual shares are the driver rather than the top-down approach of investing in economies become more important.

4.     A no-growth or gently declining GDP would see lower market volatility.

5.     Quarterly growth figures would become less important – investors would spend less time stuck in front of screens waiting for economist to guestimate the figures – and more time enjoying their money.

6.     Returns would become more stable as the economy would lose the ability to surprise, either up or down. During much of the Victorian era, investors accepted a 5% annual dividend on their investments.

7.     Sustainable investments, making the best of limited resources, would prosper.

8.     Lower growth rates would reduce pressure on commodities.

9.     Prices would be more predictable – as they were for most of UK history until the first world war.  Inflation would be lower and easier to manage.

10.  There would be fewer takeovers and mergers.  Companies could take a longer term view without worrying about producing quarterly growth for investors.

 

More on Mindful Money

Are we in another Great Depression? Not yet

The UK Economic Outlook

UK slips 'back into recession'

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