- Joseph Stiglitz received the Nobel Prize in 2001 for work on asymmetric information in markets.
- The economist and professor at Columbia University called for an end to using GDP as a measure of national economic performance.
- He argues it does not capture information needed to fight crises we currently face, including the climate crisis and inequality crisis.
In an op-ed for the Guardian, Nobel laureate Joseph Stiglitz argues that it is time to do away with the gross domestic product (GDP) as a measure of national economic performance. The acclaimed economist points out that the GDP metric fails to capture important information, leading policy makers down paths of complacency in the face of urgent societal threats.
The GDP measures the total amount of goods and services created in an economy during a set period of time, usually a year. Formally, the GDP (Y) is the sum of consumer goods (C), investment (I), government spending (G), and imports minus exports (X – M) within an economy.
Y = C + I + G + (X – M).
These values are recorded at the monetary value at which they are exchanged in the market, their value in money currency. The rate of a country’s GDP growth is often used as a barometer of that country’s economic health.
But this number misses crucial information, argues Stiglitz. For one, GDP says nothing about the distribution of wealth within an economy. It is quite possible and quite common for a nation’s GDP to increase but only benefit certain portions the population.
For instance, Saudi Arabia has a higher GDP than does Switzerland, but few would argue the average Saudi worker is better off than the average Swiss worker. Stiglitz points out that it is the same for the US. “In the first three years of the so-called recovery from the financial crisis, about 91% of the gains went to the top 1%,” Stiglitz notes, “No wonder that many people doubted the claims of politicians who were then saying the economy was well on the way to a robust recovery.”
GDP also fails at accurately accounting for environmental damage brought on by economic activity, Stiglitz points out. Because GDP only accounts for the monetary value of goods and services, it does not capture what economists call “externalities,” negative consequences not taken into account by market participants.
“But because GDP didn’t include resource depletion and environmental degradation, we typically get an excessively rosy picture,” Stiglitz writes.
Because these costs are not included in the GDP measure, policy makers are much less likely to take decisive action to solve the crisis. Stiglitz notes, “even worse, our metrics frequently give the misleading impression that there is a trade-off between the two; that, for instance, changes that enhance people’s economic security, whether through improved pensions or a better welfare state, come at the expense of national economic performance.”
Unless the way we measure economic success is changed, Stiglitz worries, our policy makers will not take action to solve the many crises we currently face.