Forget GDP - Use Big Data
No single number has become more central to society in the past 50 years than GDP — Gross Domestic Product. Throughout the world, it has become a proxy for success and for failure. It is a profoundly important indicator. It is also a profoundly flawed one.
This past Friday, the U.S. government released its revised estimate for GDP for the last three months of 2013. That showed growth to be less than was initially reported last month, with the figure falling to 2.4% from 3.2%.
That is a considerable difference, yet such revisions are hardly unusual. The number will be further revised in the coming months, and may be subject to alteration years, even decades later, as final bits of data get assimilated and as methods of assessing the nation’s output change over time. Last July, after years of work, the Bureau of Economic Analysis declared that the U.S. economy was, in fact, hundreds of billions of dollars larger than previously reported because of changes in the way intellectual property and research were counted.
The variability of these numbers should be a hint that they do not capture some sort of absolute reality. They describe this thing we call “the economy,” but the economy is not a physical entity with a set topography. It is itself a product of man-made numbers and statistics, and its contours change and morph. GDP very purposefully excludes whole swaths of human existence, from domestic work to volunteer activities to cash transactions not recorded by the government.
You wouldn’t know that, however, from most popular debates and discussions. While the creators of the national accounts that gave us GDP and Gross National Product understood that these numbers were inventions not intended to measure happiness, well-being, or all aspects of material life, that distinction has inexorably been lost as the number become the primary marker of political success and national greatness.
The limitations of GDP have long been recognized. In 1968, just before his assassination, Robert Kennedy made a passionate plea to stop using GNP (GDP’s older cousin) as an absolute measure of national greatness. As a metric of how much stuff a country makes, it performed its task. But “it does not allow for the health of our children, the quality of their education, or the joy of their play….It measures everything except that which makes life worthwhile.”
In the more than 45 years since that speech, there has been a steady chorus pointing out the limitations of GDP. The Kingdom of Bhutan was the first — and still the only — country to reject GDP as its primary measure and instead developed a Gross National Happiness index. The United Nations, drawing on the work of Nobel economist Amartya Sen, created a Human Development Index that weighted other factors such as education and life expectancy. In 2008, the president of France, Nicolas Sarkozy, convened a commission to go beyond GDP that recommended a broader “dashboard” of variables to measure the health of a nation.
Academics have also joined the post-GDP party. Innovative economists such as Erik Brynjolfsson of MIT have drawn attention to how the information technologies and services that now contribute substantially to economic dynamism just aren’t adequately captured by GDP. These “free goods of the Internet,” as Brynjolfsson and others have called them, may contribute hundreds of billions to national output but are essentially invisible in our calculations.
And finally there are the endless revisions and tweaking of the number itself. As British economist Diane Coyle has so astutely observed, GDP may often be treated as if it were a natural phenomenon, but it is not. It is an invention, created by all-too human economists and politicians in the crucible of the Great Depression and World War II. It shed light on what had been too mysterious, namely the output of a nation, and it helped the United States and Great Britain fight and win World War II by devoting massive amounts of domestic industry to making machines of war without unduly imperiling domestic economic life.
The largest problem with GDP, however, is not its limitations (however considerable they are) but the maximalist use of it by economists, politicians, and the general public who use it as a stand-in for national success. That is not the fault of the indicator. It is the fault of those who demand that it carry more weight than it can or should bear.
Few if any businesses will see their forward strategy meaningfully determined by GDP. Even large industrial companies such as Caterpillar and GE will find pockets of strength even when GDP is weak, and they will encounter issues even when it is strong. The traditional relationship between GDP and interest rates, inflation, and now employment has clearly broken down. A factory today might employ 500 people and 20 robots and add substantially to GDP, whereas the same factory 40 years ago would have employed thousands. Basing future plans based on those 20 century patterns is likely to be a grave mistake.
It would be an even bigger mistake for disruptive companies such as Amazon or Google. GDP might be weak, and overall advertising spending contracting with it, yet Google can still see massive growth as it disrupts a traditional industry. The same goes for Amazon, which can thrive even if GDP and consumer spending sag as long as that spending shifts away from malls and toward the mailbox.
In short, we are all becoming less dependent on this number called GDP. In an age of big data, companies have a wealth of information at their fingertips. That information — about customers and their behavior, about what clients need and where — matters far more than broad-brush national numbers like GDP.
It’s not that we need new national indicators. We need numbers that matter for the questions we have. No one will win a Nobel Prize for such bespoke indicators, but we will all prosper by using GDP less and using the other numbers around us more.
Zachary Karabell is Head of Global Strategy at Envestnet, a financial services firm, and author of “The Leading Indicators: A Short History of the Numbers that Rule Our World” (Simon & Schuster, 2014). This essay is adapted from the book and first appeared on the Harvard Business Review site.