The GDP paradox

Despite all theoretically and empirically motivated criticism of GDP as a social welfare and progress indicator, its role in economics, public policy, politics and society continues to be influential. To resolve this paradox, one has to recognize that many economists accept the criticism of the GDP indicator but deny its relevance. This paper evaluates the reasons for denial. This entails five steps: (1) a brief review is offered of the extensive literature showing that GDP per capita (growth) is far from a robust indicator of social welfare (progress); (2) the influence of GDP information on economic decisions by firms, consumers, investors and governments is examined; (3) behavioural explanations for a widespread belief in the relevance of GDP are discussed; (4) the customary arguments in favour of the GDP indicator are analysed; and (5) proposed alternatives to GDP are evaluated. The paper ends with outlining the implications of giving less attention to GDP information in policy and politics. It is argued that removal of the information failure which GDP represents, in monitoring economic progress and guiding public policy, will lead to decisions and developments being more in line with improving human well-being. Moreover, ignoring GDP information is consistent with a perfectly neutral stance regarding economic (GDP) growth. Indeed, an unconditional anti- or pro-growth imperative acts as an unnecessary constraint on our search for human progress. (C) 2008 Elsevier B.V. All rights reserved.