Traditional growth measures give a false account of economic health

[dropcap]S[/dropcap]ure, Planet Earth’s growth rate, as defined by gross domestic product, is expected to edge up to 3.1 per cent in 2018 after a much stronger than expected 2017. But this could be merely “a short-term upswing”, the report issued by the World Bank warns. Demographics, falling productivity, slower investment and a closure of the output gap could put that figure at risk in future years. The potential growth of Earth may be lower than currently experienced. In short, the era of “Peak GDP” may be upon us.

Although this is perfectly acceptable economics-speak, my overriding reaction is that this is gobbledegook. It is as though the very mission of people living on Earth is to push GDP growth faster and faster — presumably because we are in a race with aliens living on other planets who might outdo us on the GDP league tables. Although there are some noises in the report’s accompanying publicity about the role of growth in “reducing poverty around the world”, the overriding impression is that we are in an undeclared race in which the goal itself is to produce as fast growth as possible.

The bank says it expects growth in advanced economies to slow from 2.3 per cent last year to 1.7 per cent by 2020. Meanwhile, says an FT news story, “emerging and developing economies, which grew by 4.3 per cent as a group last year, are also likely to hit ceilings and contribute less to global growth”.

In the past, pessimists couldn’t contemplate a future with more people. These days, economists panic at the first sign of population slowdown

This is pure tautology. Surely, we should want economies to grow for their own sake. If emerging and developing economies grow, the object should be to improve the living standards of the people living there, not to contribute to some abstract measure of global economic progress.

Similarly, we learn that the overriding obstacle to higher growth is demographics. Outside Africa, most of the world’s population has stopped growing, contributing to the “ageing of the global workforce”. In the past, pessimists such as Thomas Malthus couldn’t contemplate a future with more people. These days, economists panic at the first sign of population slowdown. Low population expansion is only something to fret about if our goal is high GDP growth for its own sake. Changing demographics will always present challenges. But it need not impact on what should really matter: growth per capita.

The backwards logic of this thinking is the result of assigning too much importance to a useful, but hardly sacrosanct, man-made configuration — namely GDP. Invented in the manufacturing age as a way of totting up mainly physical production, GDP is less and less useful for measuring the innovation, quality improvements and low-carbon output of today’s digital economy.

Of course, a rise in GDP can be a useful proxy for all the things we really want: better health, better education, better prospects, better experiences, more and better things. But that is decidedly not the same thing as saying that, as a species, our goal in life is to push planetary GDP ever faster.

The bank may prove correct in saying that growth as currently defined has peaked. Whether it is right or not, technological progress and innovation most certainly have not yet crested.

If we have hit peak GDP, my response would be this: “So what?”