GDP is a misleading measure of national wealth and wellbeing. Many key goods, including peacefulness, environmental protection or family bonding, are not measured in GDP because they do not involve transactions. In fact, GDP includes pollution, crime, the health costs of cigarettes and environmental disasters as ‘growth’ because they generate spending.

The most ubiquitous measure of social progress is GDP. For most countries it’s the major measure used to determine social health or wellbeing. If it’s going up, then the general assumption is everything else is improving too. However, it has long been known that GDP is simply a measure of transactions and has severe limitations.

In the 1960s Robert F. Kennedy commented that it measures ‘everything except that which makes life worthwhile’. It only counts human activities that involve the exchange of money, without any consideration of the social value of those exchanges, or even the concept of a national capital account.

GDP first came into its own in the 1940s, when the economist John Maynard Keynes published a pamphlet, How to Pay for the War, arguing that there needed to be a proper calculation of what the British economy could produce with its available resources. This led to the first set of national accounts being published in Britain in 1941. Keynes, sensing the limitations of GDP as a measure, did not expect it to be continued after the war was over, but in 1953 the United Nations established the System of National Accounts, which gave a prominent position to GDP. What started out as a wartime measure became a universally applied yardstick of national output and standard of living.

Even Simon Kuznets, who led the postwar transformation of economics into an empirical science, warned against equating GDP growth with wellbeing. As the British social commentator George Monbiot puts it: The problem with gross domestic product is the gross bit. There are no deductions involved: all economic activity is accounted as if it were of positive value. Social harm is added to, not subtracted from it.

A train crash which generates £1bn worth of track repairs, medical bills and funeral costs is deemed by this measure as beneficial as an uninterrupted service which generates £1bn in sales. Cleaning up the 2010 oil spill in the Gulf of Mexico was ‘worth’ more to GDP economically than the carbon absorption provided by the Amazon rainforest. This highlights some of the faults of GDP, but it has become such a pervasive measure that societal happiness is equated to it. Probably its biggest flaw, after not counting what makes us happy, is that it’s only a measure of consumption; there is no capital account. If you had a car accident and went to hospital that would be good for GDP; you would have to buy a new car and spend money on doctors. But it would be a negative for you, physically, emotionally and financially. Nor does GDP take into account the sustainability of the resources used in the consumption or whether it’s even good for society.

As many have pointed out, if businesses used GDP-style accounting, they would aim to maximise gross revenue at the expense of profitability, efficiency, sustainability and flexibility.

GDP makes no additions to take into account the health of the population, the quality of education, the strength of social relationships, the intelligence of public debate or the integrity of public institutions, nor subtractions to account for social strife, inequality or environmental degradation. If a house burnt down, then a new house would need to be built. This would increase purchases of building materials and require labour to rebuild it, thereby increasing GDP. Viewed through this distorted lens, it would be considered a better outcome than if the house had not burnt down.

However, there is a net loss in the quality of life. In the same way, many of the elements of violence, such as expenditure on the military, jails, policing, the judiciary and security will show up in GDP as a positive indicator, a way in which the economy has ‘grown’. Because GDP is a measure of the money being exchanged, and not what it is being exchanged for, it creates a deeply distorted, materialistic picture of what a society is. When there is a heavy focus on GDP there is also a tendency to reinforce the status quo, the existing transactional system. This is especially obvious with the environment, where heavily polluting activities are seen as a benefit to GDP because there is already an established set of transactions related to them, such as income from electricity generated by coal-fired power stations.

More environmentally-friendly substitutes, especially if they are new, are seen as either a drag on GDP or irrelevant because of their negative effect on well-established, high-GDP-generating industries. Soaring economic activity has depleted natural resources and done inestimable damage to the environment; in many countries much of the newly generated wealth is being shared between fewer people than at any time in the past 80 years; and divisions within and between societies are becoming apparent. Yet GDP has nothing to say about any of this. It became important as a universal measure partly because its emergence coincided with an era in which far more of human activity became subject to recorded monetary exchanges.

At the end of the 20th century, 90% of the world’s population lived within a formal recorded economy, compared with only 40% in the 1970s and 10% to 15% at the end of the 19th century. Human activity continues to be absorbed into the formal economy, which has the effect of increasing GDP because the number of recorded transactions are increasing, even if there is little real additional economic activity.

The informal economy in developing nations, which until recently primarily consisted of barter or cash, is now being captured and recorded. For example, new technologies such as mobile payments capture transactions that would have formerly been invisible, thereby boosting GDP. This expansion of coverage helps to partially explain high GDP growth rates in the developing world.

It is important to be able to measure economic growth and transactions, but these indicators have become misleading proxies for human progress and fulfilment. The problem is that GDP and its associated measures leave out important and meaningful aspects of human experience.

The Indexes produced by the IEP are not intended to be a replacement for GDP. They are designed to be complementary: to give a broader and deeper view of the state of society when used alongside GDP. The transactional economy measured by GDP is just one element of a complex system. The singular pursuit of any goal to the exclusion of all others leads to imbalances.

Peace, and Positive Peace in particular, recognises that economic growth is just one measure among many in a system that has to be seen holistically if we are to arrive at an accurate view of what a thriving society looks like. The Global Peace Index and Positive Peace provide a sound base to attempt to arrive at an alternative view of what a thriving society looks like, but also one with better economic outcomes.


This is an excerpt from Peace in the Age of Chaos: The Best Solution for a Sustainable Future by Steve Killelea – IEP Founder and Executive Chairman. To order a copy, visit www.peaceintheagechaos.org


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Steve Killelea

Author, Businessman & Philanthropist

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Vision of Humanity is brought to you by the Institute for Economics and Peace (IEP), by staff in our global offices in Sydney, New York, The Hague, Harare and Mexico. Alongside maps and global indices, we present fresh perspectives on current affairs reflecting our editorial philosophy.