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GDP is misleading measure of wealth, says top economist
04 January 2010
Sustainable Consumption Institute
The most commonly used measure of overall economic output is misleading and inaccurate, according to one of the world’s leading economists.
Professor Sir Partha Dasgupta, from The University of Manchester, says Gross Domestic Product (GDP) ignores the value of natural ecosystems - an essential component of wealth.
Aquifers, ocean fisheries, tropical forests, estuaries and the atmosphere, should but are not used to estimate nations’ wealth, he wrote in a new paper published this month.
Professor Dasgupta also criticises the Human Development Index (HDI) - used by the United Nations to say if a country is developed, developing, or underdeveloped for - the same reason.
To support his argument, Professor Dasgupta produced a series of figures from 1970–2000, showing that sustainable economic development for most of the third world – other than China - was negative - despite official figures showing GPD and/or HDI as rising.
Though the crude data leaves out the deterioration of ecosystems and improving health - among others - by using population, the calculations provide a strong indication of the mismatch between official GDP figures and real wealth, he said.
“Adam Smith did not write about the GDP of nations, nor the HDI of nations; he wrote about the ‘Wealth of nations’,” said Professor Dasgupta who is based at the University’s Sustainable Consumption Institute.
“As Smith would surely have agreed, the international community needs to routinely estimate the comprehensive wealth of nations which includes natural capital. This is not happening.
”One way to determine whether a country’s economic development has been sustainable over a period of time, is to estimate the changes that take place over that period in its wealth relative to growth in population.
“The figures I produce are a rough and ready estimation of natural capital, but they show how accounting for it can make a substantial difference to our conception of the development process.”
In the paper published this month in the Royal Society Journal Philosophical Transactions of biological sciences, Professor Dasgupta argues that twentieth-century economics has been ‘inexplicably’ detached from the environmental sciences.
“As long as we rely on GDP and HDI, we will continue to paint a misleading picture of economic performance,” he said.
“We economists see nature, when we see it at all, as a backdrop from which resources and services can be drawn in isolation.
“So successful has this enterprise been that if someone exclaims, ‘Economic growth!’, no one needs to ask, ‘Growth in what?’—we all know they mean growth in GDP.
“If economists take into account natural capital, then it is clear that some of the world’s poorest people are subsidising the incomes of importer rich countries.”
He added: “Leading economics journals and textbooks take nature to be a fixed, indestructible factor of production.
“The problem with this assumption is that it is wrong: nature consists of degradable resources.
“Agricultural land, forests, watersheds, fisheries, fresh water sources, river estuaries and the atmosphere are capital assets that are self-regenerative, but suffer from depletion or deterioration when they are over-used.”