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Human Well-Being and Economic Goals

Critiques of National Income Accounting and GNP
Overview Essay Page 1

Jonathan M. Harris

It is often said (generally by economists) that economics is a cumulative science. Economic practitioners of today, in this view, select the best of all previous economic thought, build on what is most valuable, and discard what has been found wanting. As we have seen in earlier sections, many of the complex issues of what truly constitutes human welfare have fallen by the wayside in modern economics. The field of welfare economics itself has all but disappeared. Dollar valuation has become the single criterion for inclusion of any aspect of human experience into economic analysis.

Most of the arcane theoretical issues involved in this evolution of economic thought are, of course, unknown to the general public, as well as to researchers in other academic fields. But everyone is familiar with GNP. Both to professional economists and to laypersons, Gross National Product and its variant, Gross Domestic Product, represent the most readily available index of how "well" the economy is doing. Expressed as GNP per capita, it tells us how "well" the average citizen is doing -- a higher per capita GNP is the prime measure used to distinguish a rich economy from a poor one. To judge by the widespread success of the GNP measure, it has become the single criterion which replaces all that obsolete theorizing about how to measure welfare.

Clearly, the implications of this widespread acceptance of GNP as "the" measure of economic success are profound. A few may protest that GNP is really a measure of production, not of welfare. But lacking any other comprehensive measure of welfare, GNP fills this role by default. It therefore governs not only the thinking of economists and of the general public in this area, but also the shaping of economic policy on a variety of levels.

In addition to the absolute level of GNP, the rate of change in GNP over time is a crucial economic indicator. In the short term, the rate of change in GNP is carefully monitored as a guide to macroeconomic policy. In the United States, if GNP declines for two successive quarters, the economy is considered to be in recession. Despite the preachments of monetarist and New Classical economists to the effect that government policy is ineffective, we typically see a rapid response on the part of the Federal Reserve Bank, and sometimes a more delayed response by fiscal authorities, to such a "slowdown" in the economy. On the other hand, if GNP grows too rapidly, the Federal Reserve Bank will be quick to apply the monetary brakes to avert the risk of iinflation. Thus we have come to accept the principle that GNP should be not just at a high level, but should also be growing continually at a steady rate, to maintain economic welfare.

Long-term growth is of even greater importance to economists than short-term macroeconomic fluctuations. Modern economic growth theories stress that the determinants of long-term growth, such as savings and investment rates, technological diffusion, and investment in human capital, are the most fundamental factors in the welfare of nations. GNP is the universally accepted measure of long-term growth. The idea that a nation with a lower per capita GNP might be better off -- perhaps due to greater equity, an unspoiled environment, or more leisure time -- is completely foreign to theories of economic growth. This perspective, of course, powerfully determines the actual policies followed by the world's developing nations, under the guiding hand of such transnational financial institutions as the World Bank and the International Monetary Fund.

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