Measuring What Matters – A GDP Critic

What is the best way to measure the prosperity of a country? It is becoming increasingly clear that the scientific, political and media focus on GDP leads to an insufficient consideration of the development of prosperity. Nobel laureate Joseph Stieglitz is one of the leading economists who has long been involved in the development and optimization of welfare-measuring indicators.

In the Scientific American, Stieglitz has now renewed his criticism of GDP and his vision for a better indicator base. The miserable situation in the USA during the Covid-19 pandemic is a good example of this. Too little focus is being placed publicly on the health situation of the population in calmer times. The welfare of the US could not be expressed in terms of GDP at present.

Already since the 1990s, Stieglitz has been advocating that climate-damaging actions in economic activity should be compared as costs to GDP growth. This is a point that our academic partner, Maja Göpel, has also repeatedly and emphatically called for. Only if the entirety of the externalities of an action can be priced can its welfare effect be assessed. Inequality, for example, is another factor that is not captured by GDP growth and, as Stiglitz shows, can be correlated with GDP growth, although recent studies show that there is even negative causality.

The “Magisches Viereck” as a solution to the problems?

In addition to a more comprehensive measurement of GDP, Stiglitz calls for the assessment of welfare to be based on a dashboard of several indicators. These, the Nobel Prize winner argues, could even be different for different countries and be tailored to the specific situation of individual countries.

The Institute for “Makroökonomie und Konjunkturforschung” has also developed a model that depicts the situation of an economy better than GDP alone could. With the “Magisches Viereck”, the IMK is attempting a broader view of welfare development. In addition to social and environmental sustainability, the new model is also intended to assess the sustainability of government activity and public finances. It also takes into account the development of material well-being (click here for the “Magisches Viereck of the IMK“).

Read the full article of Joseph Stiglitz in the Scientific American here: GDP Is the Wrong Tool for Measuring What Matters