It is fashionable in certain circles these days in Malaysia to question the reliability of GDP as a measure of welfare. They say they do not feel GDP growth and they prefer something like household income or wage statistics to a measure that is hard to understand. The more extreme criticism goes to claim GDP is worthless.
A journalist recently called me up for a crash course in GDP, just after the release of the third quarter statistics. “Why would the GDP matter to the man on the streets?” She asked me in a combative tone, as if I was lying about GDP, as if I was part of a conspiratorial system.
But GDP has functions that wages and household income cannot fulfill, just as wages and household income play roles GDP cannot properly fit in.
Wages and household income describe individualized statistics. Its appeal to personal welfare is also its weakness: it does not describe much beyond the individuals.
If the world were all about the individuals and the things happening within the four walls of our homes, then wages and household income would be sufficient. But there are entities that exist outside that do not contribute to our incomes and wages directly. And yet, those extra-household activities bring benefits to us (and sometimes, not so).
For instance, if a robot owned collectively by a community of humans provides a service to the neighborhood for a nominal fee (or perhaps even at market price), and that the robot income is used for community improvement instead of being paid as dividend to individuals, it is not clear to me wages and household income would increase as a result. But that income would definitely be counted under GDP.
Or if you are a Luddite and dislike the example, consider a more traditional case. If a government-run business — like operating the trains — makes profit and pays dividend to public coffers while the government itself is running a fiscal surplus, that income would not translate into wages or household income. But GDP would take care of that income, taking it as income for the whole economy.
Granted, GDP has its issues but we have to be careful about making false dichotomy when in truth GDP, wages and household income (along with other statistics) play complementary roles within multiple contexts. There are times GDP is more useful than wage stats and there are times the reverse is true. A widening productivity-wage gap, for instance, can be worrying within the current system and headline GDP figures might not be as illuminating as wage/household income statistics. And there are times all are useful. A complete picture of the world would use all measures available.
To kick GDP out as worthless in favor of a more restrictive statistics centered purely on the individuals is to develop a worldview of selfishness, that the world is all about me, me and me while discarding the fact we live in a society. The society can be larger than a collection of individuals. And I say that as a libertarian.
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