The Complex Relationship Between GDP and Economic Welfare

The link between GDP and living standards is one that is increasingly questioned. A raft of books, from Richard Layard’s “Happiness” to Richard Wilkinson and Kate Pickett’s “The Spirit Level” and beyond, argue that there is more to life than the pursuit of economic growth. Indeed there are many other measures of welfare that have been compiled, all of which offer alternative indicators of well-being.

Listed below are two of them – both offering insights into the complex relationship between growth, living standards and sustainability.

UN Inclusive Wealth Report 2012

Legatum Prosperity Index

However, for the sake of balance: it might be worth returning to first principles. Yes, life is complex; yes, other things impinge upon welfare, but actually GDP still does a reasonable job in indicating the average level of economic welfare in a country. This point is argued forcefully in Daniel Bel-Ami’s “Ferraris For All” which makes a cogent case for the continued significance of GDP whilst also accepting its drawbacks.

Equally, compelling though “The Spirit Level” might appear, “The Spirit Level Delusion” by Christopher Snowden offers a feisty rebuttal of a large number of the arguments, and highlights the issue the difference between causation and correlation. These are excellent evaulative points. Snowden goes further, arguing that monocausal explanations of social/health outcomes are highly unlikely. Both are excellent counterpoints to the current fad for deconstructing GDP and well worth a look.

It’s ironic that argument appears to have gone full circle: a decade ago, the Left argued that the disconnect between GDP and economic welfare was a reason for looking for alternatives to GDP to measure welfare. Today, the Right are almost using the same argument – it is the obvious complexity of the relationship between GDP and welfare that means that GDP might still be the best, and certainly simplest, measure of economic welfare.

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