Rethinking the Utility of GDP as a Measure of Economic Prosperity

I belong to an ethnic group, Igbo, in Nigeria where we have built a reputation for commerce. People ascribe value to individuals not just by the wealth they have created but also by successful individuals they have established in society. This is perfectly illustrated by the Igbo Apprenticeship System (IAS), a communal enterprise model for facilitating wealth redistribution in society, where established businesses cede parts of their capital and customer base to new businesses that have served them for an ex-ante agreed term. As Ndubuisi Ekekwe succinctly explains the model in his Harvard Business Review article, “Accumulated market competitive advantages are constantly weighted and calibrated out, via dilution and surrendering of market share, enabling social resilience and the formation of liveable communities.”

Gross Domestic Product (GDP) attempts to measure economic prosperity of a country, yet it turns a blind eye to the fundamentals that make up economics as a science: human behaviour and opportunity cost. A particular aspect of human behaviour, as Lionel Robbins described: “… the form imposed by the influence of scarcity.” We identify this form of behaviour in the culture behind the sustainability of IAS, “onye aghala nwanne ya,” as Ndubuisi Ekekwe writes, which means, “none should leave his or her brethren behind.” Does GDP reflect this behaviour? Or does it take into cognizance the opportunity cost of not promoting this practice—which is the rabid pursuit of wealth that is oblivious to the common goal of shared prosperity? Such questions add complexity to the construct of GDP. And given that society has scarce resources for production, it is correct—or is it not? —to say that both quests for shared prosperity and profit maximization via absolute market dominance are useful economic considerations.

Renowned British economist, Lionel Robbins, challenged this thinking in his defence of his definition of economics: “We do not say that the production of potatoes is economic activity and the production of philosophy is not. We say rather that, in so far as either kind of activity involves the relinquishment of other desired alternatives, it has its economic aspect.” Economists and scholars have argued on the exclusion of certain aspects of the economy in GDP calculation. And if we were to accommodate their theories in the definition of GDP, we would have an endless list of activities that make up GDP, going by Lionel Robbins’ assertion above, creating chaos. We do not want that.

Instead, we should focus on evaluating the criteria for choosing which system activities to include in GDP calculations. When this is known, and the cost of a choice is compared to an expected outcome, we could have GDP estimates that are in the best interest of people and the planet. Another benefit of this is that it could help economists to know if specific system activities are even worth monitoring in the short term.

But the value of a system first needs to be acknowledged.

As an enthusiast of human capital development for young people, I like to think of value from the Human Development Index’s philosophy of development, which emphasizes that “people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone.” Given the correlation between people and productivity, I like to think that people development and economic growth are—or, in theory, at least, should be—mutually inclusive. Hence, I will use people (talent) to explain the determination of this value concept.

I attempted to describe here the economic value of a talent, which includes both functional capabilities and relinquished ones, besides other opportunity costs. In that working description, there may be certain capabilities possessed by a talent that, although is useful, could be disused because of the use of specific capabilities for an employer. The general capability of the talent depreciates or appreciates with time, depending on how we look at it—the disuse or functional use of a set of capabilities, based on available opportunities to use specific capabilities and the career goal of the talent in mind.

Similarly, when GDP is used to estimate production in a country, there are trade-offs that may result in the underestimation or overestimation of GDP. As mentioned before, the goal should not be to include all costs and benefits of all activities in a given system in GDP calculation. In short, only activities that are deemed reasonable in the context of the prevailing circumstances of a country should be prioritized in GDP calculation. Consider a case where a country’s economy is at halt due to covariate risks like the Covid-19 pandemic; do we say that burial rites in the funeral industry is economic activity and shock-responsive mechanisms created and adopted by households ex post to stay alive is not? No. But while the former activity system may meet several needs (environmental, psychological, etc.), the latter supports the realization of a higher need based on prevailing circumstances—the preservation of life.

So, what we should address as priority is not the functioning of activity systems but formulating criteria for choosing which activity systems to recognize in GDP calculation.

Adapting strategic guidelines from the Framework for Strategic Sustainable Development, I propose that in calculating GDP, priority should be given to system activities that are reasonable: flexible to support nesting of other system activities that, collectively, are likely move society towards a desired future, while striking a good balance between pace of progress towards that future and trade-offs made along the way. As progress is achieved towards the desired future, priorities may change; hence, a framework to value what counts beyond GDP should be flexible to allow changes in the criteria for selecting system activities.

To conclude, our future will see a change when we are able to establish clear relationships between outputs and impacts. GDP calculation prioritizing production systems over others in a reasonable way could achieve this. And this could enhance decision-making. So that whether the goal be “none should leave his or her brethren behind” or even profit maximization, we know that the freedom to make better choices resides with us at all times.