The Ash Twins Blog

This 2009 paper by Jeroen C.J.M. van den Bergh discusses “the GDP Paradox,” which refers to the popularity of GDP as a measure of social welfare. GDP, which stands for “gross domestic product,” is defined as “the monetary, market value of all final goods and services produced in a country over a period of a year.” There are two main problems with using it as a measure of happiness, however, as I explain briefly:

1. GDP measures the money paid to purchase a good rather than the benefit accrued for using the good. This means that the relative happiness (“social welfare”) gained from different goods might not be equivalent to the relative prices paid for them. GDP only measures the latter. For example, my dad, brother, and I only had to pay $10 each for Civ 4, but that has given the three of us many many hours of happiness. Meanwhile, a relative spends $10 on a shitty gift that gives you zero happiness. These goods have different welfare value, but GDP treats them as equivalent.
2. GDP excludes externalities. Pollution is a good example. Two countries might have identical GDP in terms of how many manufacturing goods they sold, but they might have different levels of pollution. In the polluter country, people get cancer more often, which by most accounts significantly reduces happiness. But that difference is not included in GDP. In fact, purchases of the medical gizmos used to help the people with cancer would count toward GDP. So the less-happy country would have higher GDP.

Two other examples:

1. The military-industrial complex.The USA’s massive arsenal doesn’t really generate happiness for anyone, and generates death for thousands of others. But the $~1 trillion a year in our defense budget is counted in most measures of GDP.
2. Public vs. private media. Frontline is the best news show and generates immeasurable happiness in entertainment as well as sociopolitical effects. But it counts zero toward GDP. Fox News is ruining everything but its ad sales count toward GDP. (By the way, Fox is the most trusted source by Americans, according to opinion polls.)