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Time to say goodbye to GDP? 5 alternative economic models (to our current neoclassical model)

Updated: May 6, 2022

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[Our current economic model – neoclassical economics – has ever-growing GDP as its single goal.

It takes resources, e.g. trees, water, air, minerals, habitat, but the taking is invisible, it isn’t priced.

Then it puts any unpriced inputs through the economic machinery and converts them into outputs.

At the end of the year, it counts the total $ value of goods and services produced within that year.

That’s it.

It sees economic activity as a closed, self-contained, and self-sustaining system, independent of and isolated from the environment and society on which all life depends.

It isn’t just myopic, wilfully blind … but blind by design.

Is it any wonder we have environmental problems when none of our economic activities value the environment to start with?

This article looks at neoclassical economics and other economic models.

We should ditch the GDP as a measure of “progress.”]

GDP (Gross Domestic Product) is outdated and belongs to dinosaurs, like the coal we’ve now decided to leave in the ground, after centuries of addiction.

The green energy transition (not revolution) proves that we can reshape even big, old, and somewhat fixed systems, such as energy generation.

Even these big systems can change. So why not also change the old-school economic metric we know isn’t working?

Before I criticize it, let’s first describe it.

GDP - Gross Domestic Product is defined as “the total monetary value of all final goods and services produced (and sold on the market) within a country during a period of time (typically 1 year).”

Countries have been using GDP as a measure of economic activity since the 1940s.

What’s wrong with GDP?

It’s only concerned with immediate – within a year - accumulation of material assets and money. The higher the increase in the production and consumption of goods and services, the better.

Everything else is excluded. It doesn’t price environmental services its growth depends on. It doesn’t value nature.

Yet, even today, it’s still THE metric universally used by 99% of countries to demonstrate how they’re “performing”. It’s a shorthand for “progress.”

For example…

· If you mine coal (gas, oil) and sell it locally or overseas, the country’s GDP will grow but the greenhouse gas (planet-warming) emissions are not factored in that growth, they’re considered externalities.

· If you cut down rainforests and sell the timber, the country’s GDP will grow but the damage to the environment, biodiversity loss, impact on the Indigenous ppl, etc. isn’t factored in. Only the higher GDP is “visible” on the country’s books. That destroyed primary rainforest is considered an externality.

· If you make petrol cars and sell them, the country’s GDP grows but the emissions released from cars over the years are not accounted for.

· If you clear mangroves and build a tourist resort, the GDP will grow (from tourism and development). The destruction of mangroves isn’t factored in. Mangroves store up to ten times more carbon than forests, which makes them powerful carbon sinks. But that damage won’t be “seen”, only the growth of GDP.

· If you take advantage of people, e.g. by paying low wages, or employing them under the table, you could beat your competition by making cheaper products, e.g. clothes in a garment factory. You’ll sell more and the GDP will grow but none of the practices that contributed to this growth are visible.

· If you employ children, e.g. in a cobalt mine in the Congo, paying them $3/day but earning $50/bag for a bag of cobalt, the country’s GDP will grow but none of the practices contributing to the growth are visible. Children often die in these mines.

Neoclassical economics has been our current model since 1980s, after it superseded the Keynesian model (1940s-1970s, whose main focus was full employment, the welfare state, and a strong role of the government).

This model favours competitive liberalised markets and minimal role of governments. It views the economy as moving towards equilibrium – markets do the balancing.

Individuals are behaving rationally and logically, maximising their utility, and businesses their profits.

It assumes that ‘the liberalisation of markets would generally improve their efficiency in allocating resources, and would therefore tend to optimise overall economic welfare’. The role of governments is justified only to correct ‘market failure’.

This model is pragmatic. It only sees the environment through the optic of ‘what’s in it for us’. Nature and people don’t have any intrinsic value.

For some reason, we’re still clinging to this blind-by-design model.

Why? Perhaps because until recently, the natural environment was generally perceived as a limitless source of inputs.

But we know better now, don’t we?

We understand, don’t we, that it’s not just about GDP growth, that there’re other variables to enter the equation.

There are other schools of economics,

each having a different take on how to value the environment.

For example…

· Environmental economics branches off the neoclassical economics. Both are primarily market-orientated, both are technocratic, and both assume that the quality of life increases with economic growth.

But at least the env. economics takes the environment into the equation by including any negative impacts caused to it by the economic activity (whereas the current model simply ignores them as externalities).

· Ecological economics goes further. It fully acknowledges that nature has intrinsic value, without necessarily having to ‘serve’ humans for their benefit. It considers the economy as the subsystem of society, which is the subsystem of the environment.

The economy is nested within society and the environment, like this. It states that the outputs of an industrial activity MUST match the carrying capacity of the environment; and that the decision-making process must be focused on long-term goals, at least to the next generation.

· Steady-state economy is a subsystem of ^^ ecological economics. It aspires for growth to be, you guessed it, stable. Not growing, not in recession but more or less constant. It’s operating within the Earth’s ecological limits, not outside them (whereas neoclassical economics simply ignores any limits).

· Marxist economics. Marx was a materialist, who put material production (=technology) at the root of everything else. The mode of material production determines social relations, which in turn determine principles and ideas in society (Vranicki 1994).

Technology -> Institutions -> Worldview

Marx didn’t refer to the environment at all (but no one did until the 1960s). Before, the natural environment was generally perceived as an inexhaustible source of material inputs to the economic machinery and therefore did not enter into economic models.

· Institutionalist economics recognizes the role and value of organizations, institutions, values, rules, and habits.

People are less of ‘rational economic individuals’ and more of ‘cultural beings’ – shaped by society, not just by the pursuit of economic growth. Their cultural habits are shaped by institutions. Peoples’ preferences are learned and change with the scientific and technological changes.

Similar to ecological economics, it considers the economy as the subsystem of the environment. State intervention is important for controlling large corporations and other powerful lobbies who’d like to damage the environment in pursuit of profit.

This system is dynamic, holistic, and non-linear, as opposed to the more static and linear neoclassical model.

But enough theory – let’s go to China!

For the past 15 years, its economy has grown nine per cent per year on average.

And if you look at GDP rankings, China is “doing well” when compared to other countries.

High five? Not so fast.

Sure, the rapid economic growth has lifted millions of people from poverty.

But it also polluted air, rivers, and fertile soils.

We have a little paradox here. People who left their villages in the country to pursue “modern” life in the city – a sign of the country’s development, can’t breathe the air in the city, because the air is polluted by the coal power plants making energy needed to fuel this development – building cities, highways, power plants, and infrastructure.

So they end up in a modern city but their kids can’t play outside due to toxic air.

Developing countries are challenged by balancing economic growth with social and environmental health. They’re rapidly industrializing, motorizing, and urbanizing now. And that requires lots of energy, materials, people’s movement, digging, and general commotion.

They don’t want to be stuck in the mud growing rice.

Who can blame them?

In that sense, it’s a bit unfair for the West to point a finger at China and India and lecture them on their higher-than-the-typical-western emissions.

They’re doing what the US, France, and the UK have already done back when no one knew about greenhouse gas emissions or cared about deforestation.

But that’s exactly why the move away from GDP is needed now.

The scale of industrialization, motorization, and urbanization in the developing world is so huge, and its hunger for resources, energy, and water so big that the reliance on GPD growth could be lethal.

Luckily, there’re seismic GDP shifts across the continents.

In the next article, we’ll look at one major global organization and how it’s looking at the neoclassical model and ‘growth-above-all’ approach.

Then, we’ll focus on one tiiiiiiny country that has been using an alternative measure to GDP for more than 50 years.

It’s a unique example of what’s possible if you want to integrate the economic, environmental, and social areas of society into a sustainable whole.

Catch you later.


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