Is GDP the Best Measure?

As a counter-weight to my post from yesterday on Europe, The Economist this week discusses alternative measures to GDP (see here). The problems with GDP measures are well-known, chief among them is that they only take into account monetary aspects of life and they don’t even do it well. Alternatives to GDP are: Gross National Income (GNI) and Net National Income (NNI), both of which are still based on monetary transactions.

What about if we try to include leisure and other issues such as how people feel about income inequality and the environment? This is what the OECD tried to do in its Going for Growth report (that I still haven’t seen). For instance, by adjusting GDP for leisure, the Netherlands becomes richer than the US. Curiously France is still poorer—even though the French spend their time on vacation. Adjusting household income for inequality, France becomes richer than the US, Britain, and the other OECD countries.

While finding alternative measures to GDP is a good idea, it rests on assumptions about the value people place on non-monetary transactions. Since we can’t read people’s minds, this is likely to provide spurious results. With all its imperfections, it seems difficult to come up with an alternative to GDP (or GNI). More importantly, it doesn’t change the fact that unless Europe reforms itself, Europeans may be too poor to afford any desirable leisure in the future. As Ludwig von Mises remarked, the choice is not between a free economy on the one hand and a social democracy where people have more leisure but are a bit poorer on the other; the choice is between prosperity and poverty.

Comments

[Peter Boettke]

Fred,

There are major issues with all national income statistics, even those that try to account for other issues, which if pursued consistently and persistently would lead to the rejection of the use of national income statistics in economic analysis of well-behing.

See my earlier post on this entitled "The Datea of Development" ... http://austrianeconomists.typepad.com/weblog/2005/08/the_data_of_dev.html

[Rafe]

I was going to say something ysterday about the pitfalls of GDP as a measure of prosperity, you can boost GDP by driving your car with the handbrake on to increase petrol consumption, with a bonus when it has to be repaired.

[CMB]

The EU services directive was approved today. That means that there will now be more cross-national-border competition within the EU. Although it is a watered-down version of what was originally on the table, its approval is another sign that Europeans "get it" - something you suggested in your previous post that they don't. Sure, attitudes are still generally not very market-friendly in Europe. But the idea that things are going to be allowed to deteriorate until Europeans can no longer afford any leisure time or activities just isn't realistic--Europeans are surely cleverer than that!

[Frederic]

Pete and Rafe, agreed. I have no doubt that GDP is not a good measure of the sum of all the psychic profit generated by the actions of everyone. My point was that even using the GDP-improved argument, one doesn't escape the problem Europe (or at least some of its countries) is facing.
CMB. Policy change is taking place for sure, but I don't think this is enough to be sure that Europeans 'get it'. What is needed is a change of paradigm rather than tinkering about within the same paradigm.