The GDP myth: What it really shows, and what it doesn’t

## The GDP Myth: What it Really Shows, and What it Doesn’t

The GDP myth: What it really shows, and what it do...

We hear it all the time: GDP this, GDP that. It's become the go-to barometer for national success, but is this economic yardstick truly measuring what matters? The truth is, this frequently cited metric of economic success often reflects desired narratives, particularly those favored by the West, rather than a complete picture of societal well-being.

Consider the Russia-Ukraine war. Weeks after the conflict began, I remember reading an article by Belgian economist Paul De Grauwe arguing on the London School of Economics website that Russia was destined to lose. His reasoning? Russia's GDP was roughly equivalent to the combined output of Belgium and the Netherlands, branding Russia an "economic dwarf in Europe." It seemed a bit simplistic, even then, and, well, history has proven him wrong. The more pertinent question is whether relying so heavily on GDP remains sensible, and if not, why this indicator, whose influence far outweighs its explanatory power, persists.

GDP emerged in the 1930s as a tool for policymakers grappling with the Great Depression. Russian-born American mathematician and economist Simon Kuznets is credited with formalizing GDP, but he explicitly acknowledged its limitations: "the welfare of a nation can scarcely be inferred from a measurement of national income." And that was when national income primarily reflected *real* productivity, not the complex web of financial instruments that dominate today's economy.

Around World War II, with largely industrial economies and low debt levels, GDP served as a reasonable proxy for capacity. Post-war, it became entrenched in the Bretton Woods system, the IMF, and Keynesian macroeconomic theory. Keynesianism views the economy as a thermostat, advocating government intervention to stimulate demand through fiscal spending when output falls. This policy hinges on measuring, managing, and stimulating aggregate demand – precisely what GDP purports to quantify. Governments could thus monitor the economy via GDP, injecting stimulus when demand faltered and withdrawing it when inflation threatened.

However, the Keynesian consensus fractured in the 1970s due to stagflation – the combination of high inflation and high unemployment that Keynesian models couldn't explain. Neoliberalism, with figures like Reagan, Thatcher, and the Washington Consensus, emerged in the 1980s. Deregulation, privatization, and financial liberalization were promoted as growth-enhancing reforms, with GDP serving as proof. Rising GDP figures were touted as evidence of the reforms' success.

GDP transitioned from a diagnostic tool to a legitimizing symbol for otherwise questionable policies. Keynesians used GDP to fine-tune the economy; neoliberals used it to justify their ideology. By this point, GDP tracked fewer productive outputs and more monetary transactions fueled by leverage. Yet, policymakers, investors, and the media continued to treat it as the definitive measure of prosperity, its symbolic prestige increasing even as its empirical validity declined. We really need to start questioning its dominance.