I have many good memories from my boarding school years.
The evening walks especially stand out. I’d let my nose’s curiosity and my tongue’s greed guide my direction. (Perhaps to the chagrin of my stomach.)
I can nearly taste the memory. A kerosene lamp faintly lit the vendor's pushcart. He stirred the hot pav bhaji mixture of butter, garlic, peppers, mashed potatoes, and of course spices with great care. Once ready, he served the filling with pillowy bread rolls slathered in butter and a lime wedge.
India’s street vendors have perfected the combination of cumin, coriander, and other spices over decades. How could I resist?
Let’s imagine the day of a street vendor.
At the crack of dawn, he wakes up and bathes. His wife prepares breakfast for the family and gets their daughter ready for school. He wishes his wife and daughter a good day. After breakfast, a friend comes over to help fix the wheel on his food cart, which broke the day prior. Once the cart is fixed, he begins making the food he is going to sell that day.
With the food safely packed, he leaves his home and makes his way to his first stop. He sells his savory treats in a busy intersection near several shops. The morning rush proves fruitful. He takes a break under a tree and counts the cash and coins that rattle in his tin. Pushing his cart to the next stop, he continues his day.
Neither his, his wife’s, nor his friend’s activities contribute to India’s gross domestic product (GDP). Not for any nefarious reason. The metric simply doesn’t account for informal work, domestic labor, or volunteer work.
What is GDP? For our purposes, think of it as the value of all finished goods and services made within a country during a specific period.
But how well does it capture this? And is it the right metric to guide our behavior as a society?
In Utopia for Realists, Rutger Bregman critiques our use of GDP as a proxy for prosperity.
For example, GDP fails to account for the nature of the activities it measures. If your car window was smashed and you had to pay someone $1000 to replace it, you’ve just increased GDP.
Additionally, environmental pollution can actually increase GDP. One company produces waste as a byproduct, while another company makes money by cleaning it up.
It doesn’t measure inequality either. GDP goes up equally whether one person buys a $100,000 car or if a thousand households each buy $100 of groceries. This seems problematic. Especially if we're going to use this measure to gauge the health of the economy or as a proxy for prosperity.
Bregman notes others flaws in our reliance on GDP:
- It doesn’t include “informal” or “shadow” economy activities. These can form a major share of a country’s output. For example, Greece’s GDP shot up by 25% in 2006 after accounting for their shadow economy. Over 60% of Zimbabwe’s economy is informal.
- Unpaid work, domestic labor, volunteering aren’t accounted for at all. Making a nutritious meal for your family doesn’t increase GDP.
- Advances in knowledge and technology aren’t included. Think of Moore’s Law. Though the cost of computing power has decreased rapidly over the past few decades, we don’t account for these technological advances.
As we see from the flaws above, GDP is a poor metric for well-being. In fact, the person who laid the foundation for what would become GDP agrees.
In 1932, the US economy was in trouble. But no one knew how much trouble. President Hoover had anecdotal data, but Congress insisted on getting hard numbers. It appointed economist Simon Kuznets to come up with a measure of the economic state of the nation.
Kuznets clearly explains the limitations of such a measurement within the first pages of his final report:
Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined...
Spoiler: we didn’t heed the warning. Fluctuations in GDP still make front page headlines. But Bregman and others contend that GDP no longer accurately describes the texture of our national economy. And I agree.
So what are the alternatives to GDP?
Before we get there, Bregman contends that we must understand an idea known as Baumol’s cost disease.
The economist William Baumol first observed that the prices of “labor-intensive sectors” (e.g. healthcare and education) rise faster than the prices in sectors where much of the work can be automated (e.g. manufacturing physical goods).
For example, we find all kinds of ways to eke out efficiency gains in our production of clothing, cars, and furniture. But the same idea doesn’t necessarily work for healthcare, education, music, and other labor intensive services.
How would you make a doctor significantly more productive? A doctor can only care for a limited number of patients in a given day. What about an elementary school teacher? A teacher can only teach so many children in a classroom at a time. How about an orchestra? Each piece must be played at a certain pace for it to be pleasurable to the ear.
As countries become wealthier, they spend more on doctors, teachers, and musicians, and less on t-shirts, Toyotas, and tables as a percentage of their incomes. Simultaneously, as the services get more expensive, the manufactured goods become cheaper.
And as I’m sure you’ve deduced, spending on these labor-intensive services doesn’t increase GDP as quickly as gains in manufacturing prowess. Even if we were to ensure that no doctor, teacher, or musician were ever idle, we can only afford so much of their time. But with manufactured goods, our appetites are insatiable.
Following this to its logical extreme, the prices of manufactured goods stabilize at some low point. But the price of the “low productivity” services that resist efficiency gains continue to increase.
Because of this, in the most developed countries, governments play an increasing role in supporting these service sectors. This could take the form of an inclusive healthcare program, a strong public school system, or grants to support the arts. As Bregman sees it, rather than a disease, perhaps we should call it “Baumol’s cost blessing.”
Why? As our manufacturing processes become more efficient, our society can choose to focus less on squeezing efficiency gains out of healthcare and education systems. That is, we can afford for them to be less efficient. Doctors can take more time in each visit. Teachers can focus on ways to individualize the curriculum. Musicians can worry less about how to make ends meet.
That’s not to say that there isn’t waste in healthcare, education, and other labor-intensive service sectors. And I wish Bregman spent a little more time discussing this issue in his book, but his point stands. The guidance here is that once we have accounted for that waste, it is foolish to simply focus on costs and assume that we cannot afford higher quality services as a society.
However, this spending will not increase GDP as rapidly as our other options. But as I’ve come to realize, concern over production output during times of peace, often at the expense of the environment, doesn't make sense.
Nor does it make sense to exclude the efforts of street vendors, homemakers, or volunteers among others.
Rather than GDP alone, we should look at it alongside other metrics. This could include: wealth distribution rates, educational attainment rates, labor underutilization rates, crime rates, community service hours by organization, and leisure hours just to name a few.
Metrics that make life worth living.