Two Important Points on GDP and Economic Growth

In his latest Financial Times column, “Undercover Economist” Tim Harford reminds us of two important points about GDP per capita and economic growth: they are not a measure of welfare (think about Middle East oil plutocracies), but they are highly correlated with individual welfare. Individual welfare is of course the only thing we should, or even can, be concerned with. While voicing some proper caveats, Harford expresses the two important points as follows (“Liz Truss’s Growth Delusion,” September 30, 2022):

Gross domestic product is not, and never has been, an attempt to measure the wellbeing of a society. …

Nevertheless, it is striking how countries with a high GDP also have flourishing citizens. Pick your issue, from life expectancy to child mortality, from opportunities for women to the protection of basic human rights, cleaner streets, lower crime, even better-quality art, from TV to opera. Somehow, people who live in richer countries are likely to be enjoying more of the good stuff.

Having much command over goods and services is not a sufficient condition for individual happiness, but it usually helps.

Note that Harford does not criticize Liz Truss, the new British prime minister, for focusing on economic growth, but instead for neglecting some of its essential and constituent conditions:

Her rant about the “disgrace” of cheese imports suggests someone who hasn’t appreciated the importance of free trade in goods to a prosperous modern economy. …

Her vast and open-ended energy price cap is a kick in the teeth for market forces. By some measures the largest fiscal event in living memory, it feels closer to Mao than Thatcher. And it is unnecessary: a truly pro-growth government would have achieved the same social goal by letting prices rise, but giving an offsetting cash grant to each household.

On the benefits of trade—whether domestic or international does not matter—remember James Buchanan, who was expressing a very Smithian idea (James M. Buchanan and Richard A. Musgrave, Public Finance and Public Choice: Two Contrasting Visions of the State [MIT Press, 1999], p. 245):

If I observe someone with apples and somebody else with oranges, I don’t want to try to say a particular allocation of oranges and apples in a final position is better than in the other allocation. If I observe them trading without defrauding each other, whatever emerges, emerges, and that is the way I define what is efficient.