Bill Gates: GDP Can Be an Inadequate Metric of Growth

BillGates2012Bill Gates’ Point

Bill Gates says “it is very difficult to compare the value of baskets of goods across different time periods”. One surprising conclusion, “that GDP understates growth”, notwithstanding, he also points to a book by Simon Fraser University prof Morton Jerven, “Poor Numbers: How We Are Misled by African Development Statistics and What to Do about It” and concludes that we should not focus on GDP in estimating “growth”, at least insofar as policy planning for poor countries is concerned.

I don’t know why this argument is limited to poor countries.

What Growth Is

Conventionally when one speaks of “growth” one is speaking of an increase in economic throughput.

In a growth scenario, the aggregate amount of economic transactions is not simply maintained year over year (which would be enough for wealth to increase). Rather, ongoing “growth” usually means an increase in the aggregate amount of economic transactions year over year, which means, presuming most of this activity is worthwhile, that wealth not only accumulates but that the accumulation always accelerates.

(Geeky elaboration: economic throughput is measured in units like dollars per year, so the growth is in dollars per year per year and the growth rate, which is what all the talk is about, is dollars per year per year divided by dollars per year which is dimensionally a pure rate. Since wealth is measured in dollars, the growth rate is dimensionally equivalent to the second derivative of wealth, which needs to be kept roughly constant. If this doesn’t give you a moment’s pause, you probably don’t understand what I just said.)

Alternative Definitions of Growth

Apparently, Mr. Gates is using the word “growth” in a different sense than the conventional one, and accordingly I don’t have grounds in the article for disagreeing with him.

That said, I don’t endorse the article either, as Mr. Gates is to my reading unclear on what he actually does mean by “growth”. Consequently I cannot evaluate whether his implicit goal that we *ought* to be making “judgments about which economic policies lead to growth” makes sense. He has rejected the conventional rigorous definition without providing an alternative.

“Nous devons admettre qu’une fois les besoins de base satisfaits, 

l’évolution de l’humanité n’est pas une question d’avoir plus,

mais plutôt d’être plus.”

(I think it’s one of those statements from the heart that sounds better in French. That’s from The Earth Charter: “We must realize that when basic needs have been met, human development is primarily about being more, not having more.”)

It is always possible to improve the extent to which a society is thriving. Humans in supportive circumstances, where a good balance between the cooperative and the competitive has been struck, generally do good things and occasionally do great things. Spiritual, artistic, intellectual growth, these pursuits have proven boundless. We can always “grow” in some sense.

The Conventional Version

By contrast, when we look at the conventional meaning of “growth” as an active goal for society, governments in thrall to economism believe it is their mission, indeed their key mission, to maintain a positive time derivative of economic throughput in units commensurable with dollars per year. Indeed, people expect this – it allows them to “invest” in the economy and thereby profit from its growth. It allows financial organizations as we understand them to exist.

Many people outside the governing elites deem it impossible to maintain an economy in which that quantity remains positive indefinitely in the long-term mean. In other words, we believe that no useful measure, specifically no medium of exchange, that reliably allocates crucial resources (water, food, shelter) can grow exponentially indefinitely.

Growth in the conventional sense is used as a proxy for the rate at which the rate at which wealth increases increases. That is, growing wealth is implicitly not enough. Our financial institutions are built around the idea of something like exponentially growing wealth. This in fact makes sense in less developed places  so it has been very useful. But its utility clearly fails when bumping up against natural limits.

The idea that meaningful wealth can have a constant “acceleration” on a finite physical domain forever is highly dubious. Such growth seems at first blush unsustainable in exactly the same sense as any growing exponential is unsustainable in nature.

No Longer Generating Real Wealth

It’s important to acknowledge that there is real progress in the poorest countries, and that we need more of it. Obviously, though in the economically dominant countries (which dominate the averages) we do not have anything like accelerating improvement in well-being, even though we continue to manage to have “growth”. SOmething else must be growing.

The reason we are still in business, then, is that the GDP does not distinguish between activities that are physically productive and those that are merely symbolic activities, that are in demand for some reason.

If there is any sense in which economic growth in the conventional definition can be maintained indefinitely, it must increasingly be focused on symbolic rather than substantive wealth. This doesn’t really solve the problem of burnt-in growth though.

In a symbol-based system, provision of actual physical goods like food and shelter becomes economically secondary and hence unreliable. Arguably we see this now, with far more resources being devoted to upgrading the Chinese diet to a meat-based one, than to feeding the countries which remain poor with the coarse grains that they need. As physical goods become cheap relative to symbolic ones, the winners of the symbolism game, mostly inadvertently and thoughtlessly, abuse the real, physical, biological world.

In order to participate in modern bounty, then, one must participate in the game of creating symbolic wealth. (Producing physical goods is increasingly unrewarding, as can easily be observed by comparing the lifestyles of lawyers and tax accountants with those of farmers and plumbers.) Thus, the “growth” in question must necessarily be a growth in wasted effort. We cannot be better off in aggregate in any material way because the world has no room further growth. We hide this by, more or less inadvertently, making an increasingly dominant fraction of the growth out of symbolic and nonproductive activities.

I suggest that in managing economic activity, what we really want to measure is wealth, not throughput. Capital, not GDP, and certainly not growth in GDP.

Not only is it quite possible for a high GDP scenario to destroy rather than accumulate capital, but it seems that this describes precisely what is happening, especially once you account for natural capital.

Nature Prefers a Steady State; Finance Doesn’t

Once a reasonable level of comfort is attained, I wonder if a case cannot be made that wealth is maximized in a quasi-steady state economy. That seems to be the lesson of ecology. A mimetic economy would be one that most resembled a healthy ecosystem – maximizing individual freedom of action subject to a constraint of aggregate limits. Nature shows us that natural wealth gradually accumulates in such circumstances. Could economies function like that?

The real trouble is that a transition to such an economy completely disrupts the bases for our financial institutions. The presumption that “growth” (defined as ever-increasing GDP) is the goal is so ingrained in economic, financial and governmental circles, that the constant hum of skepticism from those of us educated in other fields is easily dismissed. The obvious and widely held idea among intelligent people that indefinite growth is either meaningless or impossible makes no inroads while being met with no rebuttal.

This amazing circumstance traces back to how the idea is ingrained in the system; in the economic, financial, administrative and governance sectors any questioning of growth as the central goal of all activity is dismissed as nonsensical. To many or perhaps most of the rest of us, it’s obviously a fantasy.

Mr Gates’s Point Is More General than He Admits

It’s remarkable to see Mr. Gates challenge the growth shibboleth in the context of the poorest nations, where it makes the most sense, and ignore it in the most advanced countries where it does the most damage. Of course, Mr. Gates is among the world’s leading beneficiaries from the transition from a real economy to an imaginary, symbolic one. He’s hardly the one to challenge it.

Still, his point “it is very difficult to compare the value of baskets of goods across different time periods” is a very good one, and one I have made myself. It is still harder to compare these “baskets” across scenarios. There is no meaningful exchange rate between a dollar in the A2 scenario and a dollar in the B1 scenario. Hypothetical worlds cannot participate in inter-hypothetical trade.

Consider two future worlds, one in which the atmosphere is somewhat toxic in such a way that the toxins can be filtered out, and one in which it isn’t, in which individual consumption on axes other than breathing is the same. In the toxic world, a great deal of effort and expense is dedicated to atmosphere purification, fixed filters, mobile filters, masks, and disposal of the detritus. Otherwise everything is comparable; similar level of technology, similar housing stock, similar consumption. In the toxic world, GDP is higher, and everyone has to work harder to pay for the air filtration. They are more stressed, less happy, and wealthier. Between now and these comparable futures, the toxic one will have achieved higher growth.

We Need an Alternative to Growth

The absurd decisions that financial practice insistently foists upon us (and that the most influential part of our society appears to accept as axiomatic) seem to be leading us to the toxic world. We are destroying ourselves propping up the financial sector, whose insatiable greed is structural and whose demands are ultimately impossible. The trouble is that this all used to work very well, and we have a hard time imagining things being any other way. (*)


UPDATE May 9 Huh. Well renowned economist Joseph Stiglitz neatly makes a liar out of me, by saying pretty much exactly what I am trying to say, and much more clearly! But a day later. So insofar as I know I get precedence! (It’s almost certainly a coincidence; I doubt he needs to steal my ideas!)

If we have poor measures, what we strive to do (say, increase GDP) may actually contribute to a worsening of living standards. We may also be confronted with false choices, seeing trade-offs between output and environmental protection that don’t exist. By contrast, a better measure of economic performance might show that steps taken to improve the environment are good for the economy.

Recent methodological advances have enabled us to assess better what contributes to citizens’ sense of well-being, and to gather the data needed to make such assessments on a regular basis. These studies, for instance, verify and quantify what should be obvious: the loss of a job has a greater impact than can be accounted for just by the loss of income. They also demonstrate the importance of social connectedness.

Any good measure of how well we are doing must also take account of sustainability. Just as a firm needs to measure the depreciation of its capital, so, too, our national accounts need to reflect the depletion of natural resources and the degradation of our environment.

FURTHER UPDATE – In response to offline criticisms, let me hasten to point out that Mr. Gates’ actions in helping to develop Africa are enormously valuable and I join almost everyone else on earth in my deep respect and gratitude for his efforts. I am simply pointing out that his observations in the first paragraph have broader applicability. I disagree, though, with his claim that GDP underestimates growth in the advanced countries. I rather agree with Stiglitz that “In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens’ own perceptions.”


(*) = That’s what they said on Easter Island as well.
easterbunnyislandcolour1


 Portrait of Bill Gates from Wikimedia Commons by World Economic Forum is in the Creative Commons under CC BY-NC-SA 2.0. Mr. Gates does not necessarily agree with this article, though of course we’d be happy to hear from him! 

My all time favorite enviro-cartoon is used by permission of its author, Marc Roberts. A full sized version is here.


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Comments:

  1. That's excellent, Michael

    Especially this:

    " The presumption that “growth” (defined as ever-increasing GDP) is the goal is so ingrained in economic, financial and governmental circles, that the constant hum of skepticism from those of us educated in other fields is easily dismissed. The obvious and widely held idea among intelligent people that indefinite growth is either meaningless or impossible makes no inroads while being met with no rebuttal."

    How can you ever hope to have an intelligent argument with someone who believes that something (anything) can grow forever?

    Ecologists (or anyone who knows anything about it) know that living things obey logistic growth under normal conditions (limited food supply)

    Most economists just seem to look at the (early) "exponential" part of the curve and extrapolate.

    They don't understand that what they are looking at is necessarily embedded in a larger curve that eventually will level out. Nor do they even seem to care about what the curve actually represents. Nor do they ever stop to think (for even a microsecond) about what "unending growth" would imply in a physical sense (namely, nonsense).

    They are not systems thinkers, but merely curve fitters, which is precisely why so many of them fail so spectacularly when they apply their mathturbatory "expertise" to climate -- and why the vast majority of them even got things so wrong in their own field on the housing bubble, never once asking themselves what the astronomical inflation in housing prices actually meant (or if it meant anything)

    Bill Gates is a little better, but he still confuses growth and development.

    As Chilean economist Manfred Max-Neef (part of a rare breed of economists) pointed out on Democracy Now! a while back "development is about people and not about objects...growth is not the same as development, and development does not necessarily require growth."

    "[We need] an economics now that understands itself very clearly as a subsystem of a larger system that is finite, the biosphere, hence economic growth as an impossibility...a system that understands that it cannot function without the seriousness of ecosystems. And economists know nothing about ecosystems...that we depend absolutely from nature. But for these economists we have, nature is a subsystem of the economy. I mean, it's absolutely crazy. "

    "One, the economy is to serve the people and not the people to serve the economy. Two, development is about people and not about objects. Three, growth is not the same as development, and development does not necessarily require growth. Four, no economy is possible in the absence of ecosystem services. Five, the economy is a subsystem of a larger finite system, the biosphere, hence permanent growth is impossible. And the fundamental value to sustain a new economy should be that no economic interest, under no circumstance, can be above the reverence of life."

    Max-Neef pretty well sums it up when he says "for these economists we have, nature is a subsystem of the economy. I mean, it's absolutely crazy. "

  2. "Which means, presuming most of this activity is worthwhile, that wealth not only accumulates but that the accumulation always accelerates."

    This is interesting: I don't think it's how most economists or users of national accounts would view it, but it's an important point that's probably usually overlooked. There is - AFAIK and I could be wrong - no direct connection made between that throughput and other concepts of persistent wealth. We talked a while back about e.g. Diane Coyle suggesting a move to measuring wealth rather than GDP, but the connection between the two is murky and perhaps not as straightforward as we'd like.

    An obvious counter-example (if I'm understanding your main point correctly and I may well not be): a steady-state economy. Take just the food-production sector and assume two other things: renewable inputs/closed waste loops (that's two things!) and traditional econ101 Ricardian exchange. I make falafels and you make wine. We trade. Monies are exchanged, GDP is produced - but no additional wealth. Presuming the amount we make varies little, the goods are, literally in this case, consumed over time at a constant rate. Wealth remains static, goods and money flow.

    Now, that's obviously not what our current civilisation is doing at the moment: one would *hope* we were creating some form of wealth given the environmental capital we're spending. But I just wanted to make clear that it's possible to have GDP with zero-change wealth. Which, for me, makes your geeky elaboration a bit brain-hurty - possibly again because I don't get it, but also because I think you blur wealth and economic throughput and those things need more clearly separating.

    I think this is right: "Growth in the conventional sense is used as a proxy for the rate at which the rate at which wealth increases increases." In the example I just gave, if we found some technology that could maintain our little steady state food production system but increase output harmlessly, we'd be better off. (Note, here's a use for the idea of utility: without it, you've actually got no way to know you got wealthier. Though you might want to argue a larger quantity of falafels and wine automatically implies an increase in wealth, I don't think that stands up to scrutiny when a larger group of people who don't care for them. But that's another story.)

    "If there is any sense in which economic growth in the conventional definition can be maintained indefinitely, it must increasingly be focused on symbolic rather than substantive wealth. // Nature shows us that natural wealth gradually accumulates in such circumstances. Could economies function like that?"

    I mostly agree, but as usual want to note that atoms can be re-arranged in ways that can provide more value. I don't think that in a steady-state economy, development will stop. I don't think it's quite possible to separate the symbolic from the substantive. Probably being a stuck record now but I'm always reminded of Read Montague:

    All computations are not created equal. Some cost more to run, and some provide better long-term payoffs to the organism. For biological computations, efficient solutions have won the competition. How do we know? Because your brain is merely warm - you can safely touch your head - while the processor in your personal computer is so wastefully hot that it heats your office and you can’t touch it with a bare finger. Why is the brain so efficient? The why is obvious; life is hard and competition fierce, so biological computers could never afford to be grossly inefficient like our personal computers. But the question is, how do biological computers achieve such efficiency?

    Development in a steady state economy (and consequently wealth creation) will perhaps be equally algorithmic - not entirely physical or symbolic but the development of the link between those substrates. Cities are the prime site for that kind of development.

    Though that's all a bit stoned: I don't think we're anywhere near genuinely decoupling constant material throughput increase from development.

    "The obvious and widely held idea among intelligent people that indefinite growth is either meaningless or impossible makes no inroads while being met with no rebuttal."

    I've been reading Enough is enough which makes much the same point. Even gone to a meeting. I'm still sympathetic but extremely skeptical. The argument is being made by people with a constellation of views inimical to most of the planet's population. I struggle particularly with well-to-do liberal elites arguing that the problem is a culture of more. That is just so obviously a doomed political platform! And it only just occurs to me, it's kind of the mirror image of what the UK tories do when they accuse the poorest of having too much money (which they're doing A LOT). So there is a long way to go before the political problem is solved, even if the mathematical case is watertight.

    On finance: I'm actually a bit annoyed I have to concede this point as in lots of ways I think the link between interest and growth is misrepresented, but here we are - "when interest rates are close to the rate of economic growth/ you can run a budget deficit forever as long as the primary deficit is balanced. The debt load as a share of the economy won't increase over time. And if interest rates are lower than the pace of growth — as they are now — the load will actually shrink while you run those smaller deficits."

    Which is possibly fine for a period of, say, rebuilding your shiny new green infrastructure and works out OK: borrow to grow. But at some point, things have to balance out it would appear.

    Lastly: I'm just reading Red Plenty. It's AMAZING so far, a must-read. Two things strike me from it. First, steady-state folks (as well as anyone arguing that the entire economic structure of the planet must change to save us - not an unreasonable thing to claim) must not forget what all the biggest political and physical battles have been about over the last hundred years. We are discussing massive economic and political transformation. When did that ever happen consensually and without bloodshed?

    And relatedly, Red Plenty does an awesome job of showing how vital growth was to the cold war. Darn, haven't got it with me, there's a great quote... something like `economic growth is the main front in the war between the superpowers'. It's perhaps ironic that, as well as on purely material terms, that battle also ended up being played out through truly astonishing amounts of public spending on things like the space programme.

    But all that underscores the point: we shouldn't underestimate the scale of the stakes. The twentieth century was defined by exactly this kind of battle. Relatedly, I think it was in John Lanchester's book, he suggests (no evidence, but it's a nice idea!) that the end of cold war led directly to the financial crisis: the West no longer needed to maintain the impression for its citizens that its economic model was self-evidently superior. The economic battle for our souls was over and that changed more than we realised at the time.

    One line summary then: degrowth arguments that start with genteel profs pointing out how an exponential works can quickly end up full-on political revolution territory, with everything that entails. Many of those arguing for it are, as far as I've seen, insensitive to this point - though it's very early days for the idea as a political campaign, and those people I've seen working on it are consciously setting out to test their ideas in the realm of nuts and bolts politics, in the UK at least, so we'll see.

  3. Oops, contradicted myself! Your nesting confused me! I *don't* think this is right: "Growth in the conventional sense is used as a proxy for the rate at which the rate at which wealth increases increases."

    The example I gave (shifting from constant wealth / constant GDP throughput to a higher constant position through some technology) creates growth between those two points. Wealth is not increasing otherwise.

    Though it depends how we're defining wealth. Here I'm defining it as utility from consuming goods. Interestingly, one of the biggest indicators of wealth - housing - is actually assumed in national accounts to be a GDP throughput, regardless of whether you pay rent or a mortgage or own outright. You are assumed to be paying `imputed rent' to yourself. In theory it's meant to make comparisons meaningful across countries, but it flummoxes me a bit. Can I also claim economic throughput from the computer I own - why aren't I getting `imputed rent' from that? Or if you're more happiness-minded, why can't we just arbitrarily decide to stick imputed rent from sunny days into the national accounts?

    Answers on a postcard please. I can't get very far reading national account documents without wanting to gnaw my own leg off.

  4. "There is – AFAIK and I could be wrong – no direct connection made between that throughput and other concepts of persistent wealth. "

    GDP growth has the same dimension (in the dimensional analysis sense) as the second derivative of wealth vs time, i.e., the rate of increase of the rate of increase of wealth: dollars per year per year. If there is a net change in wealth, it presumably is a component of GDP. And the use of GDP as an index is, I suspect, justified in connection to wealth. But I agree that it is not the same thing. Indeed, I am specifically arguing that it could go the wrong way.

    ==

    "I don’t think that in a steady-state economy, development will stop."

    Clearly true. I hope you are familiar with the article linked under "becomes economically secondary" wherein that point is acknowledged. But suitably constrained growth is not going to give us the rates of return we have come to expect form our investments. This calls the entire financial sector into question.

    ==

    " But at some point, things have to balance out it would appear."

    I don't know about this. Consider:

    It is a slow day in a little Greek village. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit. On this particular day a rich German tourist is driving through the village, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night. The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher. The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer. The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel. The guy at the Farmers' Co-op takes the €100 note and runs to pay his drinks bill at the taverna. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit. The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note. The hotel proprietor then places the €100 note back on the counter so the rich traveler will not suspect anything. At that moment the traveler comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money, and leaves town.

    The link has the non-Keynesian's rather more cynical answer as well, but while almost as amusing I find it less interesting conceptually.

    Microdollars must be budgeted because that is what they are for. Macrodollars, though, are just a construct. We print or burn as many of them as needed to make the system work. The aggregate debt of the world is, in the Keynesian view, a totally meaningless quantity.

  5. Growth and development, absolutely. There's a lovely summary of Jane Jacobs' thinking on this. Some bits nabbed from notes:

    "Aggregate growth theory in economics does a disservice to the understanding of development by abstracting away from the difference between growth and development." [5]

    Development: not just 'growth' but 'differentiation, diversification, and transformation in the products and in the underlying processes of production - all of which might be hidden in the black box of 'total factor productivity'.

    Preformation (growth) epigenesis (development). Development: "more like the process of epigenetic transformation, not blowing up a small ballon - with more K and L - to make a big balloon."

    His summary of Jacobs' metaphor of economies as rainforests vs deserts (from her 'nature of economies') is well worth a read (and relates to MT's comment about what that $100 is doing.)

  6. Re. Stiglitz - interesting to hear about the French project. Ostensibly, something similar-ish happened in the UK (see Office for National Statistics: measuring well-being and this NEF report).

    There was always a suspicion that Cameron's motivation for saying "hey guys, let's not focus so much on crude wealth - some things are more important than money you know" was not entirely altruistic. I imagine a Hollande-commissioned report would be quite different.

    Stafford Beer's bag was all about measurement too, of course, but he was much more interested in timing of feedback. He quoted MacMillan on govt stats: "running the economy is like trying to catch a train using last year's timetable." Whether actually running it effectively requires algedonics I dunno. I like his example of a weather-vane as `intrinsic control': "it is the wind that is capricious; the measurement does not make mistakes." We have to deal somehow with a capricious social reality and a dodgy set of glacial measurement systems.

  7. Not sure if this relates, but couldn't resist pointing it out. To say the same thing twice: "In Praise of Econowonkery" from Krugman blog:

    http://krugman.blogs.nytimes.com/2013/05/11/in-praise-of-econowonkery/

  8. Pingback: Another Week of Anthropocene Antics, May 12, 2013 – A Few Things Ill Considered


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