Current Economic System - Capitalism and Gross Domestic Product (GDP)

Our current economic system is a capitalistic economic system. Capitalism is a system in which private actors own and control property following their interests, where demand and supply therefore freely sets the price in the market in a way that serves the best interest of society. The system is rooted in a theory of self-interest in making a profit. Further, that competition where companies can enter and leave the market is maximising the welfare of the society, where people can choose to consume, produce and invest freely improves the market and the role of the government should be limited to maintain a functioning market.

Gross Domestic Product (GDP) is the common economic measure used globally today. It is the sum of the value of all goods and services produced in a country each year. After the Great Depression and the Second World War, it became the main tool for measuring a country’s economy. It was developed by Simon Kuznets as a way for policy-makers to know if their inventions in the economy worked and if the economy was getting better. GDP is commonly measured as Consumption + Government Expenditure + Private Investment + Exports – Imports. In the following decades, GDP could rise by 10% or 5% inflation-adjusted and it gave people, businesses and countries hope for a new time after the war. But in 1934, Kuznets did warn the US Congress not to focus too narrowly on GNI or GDP: “The welfare of a nation can scarcely be inferred from a measure of national income”.

GDP does not measure individual wellbeing, it measures consumption. It tells us about production but not about the negative effects such as natural resource depletion, pollution or slavery. It does not tell us about the quality of government expenditure or investments, only about the sum. GDP has several shortcomings economically too. Since the 1970s, when the oil shocks happened, when the government invested in unprofitable businesses instead of education and housing, GDP has not had the same stable growth. Ecologically, activities such as cutting forests and overfishing the oceans shortly lead to growth but in the long term it increases the costs when human health is impacted, people lose their means of living and so on. In the West, the quality of GDP has decreased and improvement in wellbeing stopped a long time ago. It is therefore time for a reformation, transition and establishment of a new measure of economic development.

Source: IMF and World Economic Forum

Photo by Roman Wimmers on Unsplash

Alternative measures

• Gross National Happiness Index (GNHI)

• Genuine Progress Index (GPI)

• Inclusive Wealth Index (IWI)

• Environmental Performance Index (EPI)

• Social Progress Index (SPI)

• Sustainable Society Index (SSI)

• Better Life Index (BLI)

• Doughnut Economics

• Happy Planet Index

• Humankind Index

  
  

New Economics movements

• Positive Money

• Economy for the Common Good

• The Common Transition Primer

• PostGrowth Institute

• Degrowth

• Rethinking Economics

• Wellbeing Economy Alliance

• Institute for New Economic Thinking

• Green Economy Coalition

checklist Economic impact

• Join a network and organisation working for a different system and economic reforms

• Vote and/or join a political party that wants economic reforms

• Check your pension and make sure they are invested in a sustainable future

• Vote with your wallet, consume products and services better for people and the planet

• Invest in businesses working for a sustainable future

• If possible, make a living from a business or organisation doing good to nature and society
  
  

speaking

Welfare economics - what is GDP and what can we measure instead?

Visit Tillväxtparadigmet

Tillväxtparadigmet is a podcast and public opinion network with the ambition to increase common knowledge about our current economic system, alternative economic models, theories and measures for sustainable development. Swedish listeners can tune in to episode 4 where Sophie talks about Measuring Welfare beyond GDP.