The whole purpose of national accounting is to give an indication of how the country is performing economically. From these accounts GDP has become the single most important measure, taken to represent aggregate national wealth creation. However there are many significant shortcomings in this measure, which taken together render it very misleading:
i. Perhaps the main concern is that it double counts wealth extraction. This is explained in detail in the Introduction to Part 2 but in simple terms it counts as wealth goods and especially services that are sold at inflated and unjustified prices, largely due to information hiding. The banking and financial trading sectors in particular are built on this practice and extract many billions of pounds from unwitting people, and convince governments that they are providing valuable services when in reality they are merely transferring vast amounts of money from the public and governments to themselves. Transfer payments are excluded from GDP because they don't represent wealth creation and these transfers don't either. It is double counting because it is counted first when people create wealth and earn income for doing so, then again when they transfer this earned money to banks, financial traders and other wealth extractors for the inflated products they provide. If all wealth extraction was deducted from GDP it would be very much lower, and since a great deal of GDP growth since financial deregulation has been growth in banking and financial trading practically all that growth was illusory. It was this apparent growth that fuelled government encouragement of banking and financial trading.
ii. It treats all wealth creation within the country as domestic, regardless of whether it is owned domestically or by foreigners. This makes a big difference because the bulk of profits from domestically owned businesses are spent domestically, whereas the bulk of profits from foreign owned businesses are repatriated to the owning country, thereby depleting the domestic money supply. If the wealth-creating capacity of foreign owned domestic businesses is balanced by domestically owned foreign businesses then it makes little difference, but if not there can be large discrepancies. The worst effects are for developing countries where since neoliberalism came to the fore much of the wealth-creating capacity is owned by investors in rich countries, yet the profits they make are counted as belonging to the country of origin when in reality they belong to and are returned to the investors. This is a quotation from a paper by Clifford Cobb, Ted Halstead, and Jonathan Rowe[109]:
Under the old measure, the gross national product, the earnings of a multinational firm were attributed to the country where the firm was owned - and where the profits would eventually return. Under the gross domestic product, however, the profits are attributed to the country where the factory or mine is located, even though they won't stay there. This accounting shift has turned many struggling nations into statistical boomtowns, while aiding the push for a global economy. Conveniently, it has hidden a basic fact: the nations of the North are walking off with the South's resources, and calling it a gain for the South. [My italics]
iii. It ignores wealth destruction from natural and man-made disasters and accidents, but counts as positive those clean-up and rebuilding activities necessary after they have occurred. We could generate good GDP figures by repeatedly knocking down buildings and rebuilding them. Even the money paid to people to knock them down would count towards GDP!
iv. It includes overheads, which are necessary to maintain the basic fabric of society and to allow normal production to be maintained - see chapter 26. They are necessary in order to maintain a properly functioning economy, but changes in them don't represent economic growth or decline, though changes in GDP are taken to represent one or the other.
v. It includes wealth creation whose purpose is destruction;
vi. It ignores all wealth that is created without payment such as caring for children or elderly relatives within the family and voluntary work. If two sets of parents care for their own children then according to GDP there is no wealth creation, but if they care for each other's children and each pays the other the same amount of money, then GDP counts both as wealth creation.
vii. It ignores depreciation and replacement of capital goods, necessary to maintain production at the current level. This is what 'gross' means. The Net Domestic Product (NDP) does account for these but isn't used because it's harder to measure.
viii. It ignores population growth or decline. The more relevant measure is GDP per capita, because if GDP grows by 10% and the population also grows by 10% then there is no change from an individual's point of view. This is easily corrected by dividing by the population.
ix. It doesn't count resource depletion, environmental damage or harm to people unless there are direct costs involved.
There are many more problems detailed in Lorenzo Fioramonti's book (Fioramonti 2013). In order to understand GDP and the severely misleading conclusions that are drawn from it, not least by governments in setting policies, I can thoroughly recommend it.
A quotation from his book (page 156) summarises very well the characteristics of GDP:
GDP is built on a great lie. This lie says that markets are the only producers of wealth. What is not priced, what does not involve a formal transaction based on money, does not count - no matter how important it may be for our social and economic wellbeing. Price tags are the ultimate symbol of GDP. Continuous production and endless consumption are its underlying values. Durability, re-usability and self-production are its worst enemies. Things that last are detrimental to GDP, because they only get priced (and thus counted) once. Things that we produce for ourselves are even worse, because they are not priced at all.
A US website run by John Williams[110] attempts to remove as many distortions as he can from US national accounting data. He gives a graph of US GDP as he calculates it from 1984 to 2012, showing that it is much lower than the official version.[111] Nevertheless as far as I can tell he doesn't deduct the double counting from banking, financial trading and other wealth extraction activities, so the true values are likely to be much lower again.
I have recommended measuring Aggregate Material Wellbeing (AMW) rather than GDP, but GDP itself first needs to be corrected for all these distortions - or as many as possible of the major ones. Only then will the value we want materialise with any accuracy. It would be an interesting exercise to see how this parameter has changed over the years, and in particular to see how changes in domestic investment have affected changes in AMW - which they are intended to do - in later periods.
But, importantly, AMW takes no account of the nature of consumed wealth, which may be good or bad and created sustainably or unsustainably. Therefore it is not presented as an aspirational measure, merely as a measure indicating more appropriately what GDP is currently understood to measure.