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How Do We Know How Rich (or Poor) We Are?

01/04/2014 13:10 BST | Updated 31/05/2014 10:59 BST

"We could be poorer - or richer - than we think. We don't really know how wealthy we are." That is the opinion of Vicky Price, economist and one-time joint head of the government's economic service. Her sense of disquiet is sparked by the fact that the standard measure of a country's wealth - GDP - in fact leaves out so much.

"We don't measure capacity, for example. We measure the number of laptops manufactured but have no way of capturing how much more powerful they are today than five years ago. We don't measure anything meaningful in the NHS. We focus on the wrong thing."

As I describe in my book A Bigger Prize, GDP was originally created by the American economist, Stanley Kuznets as a way of measuring and planning for wartime production. Kuznets himself, however, wasn't entirely gratified by the global adoption of his work. A meticulous econometrician, he believed that a true measure of national output ought to include unpaid work--like housework. It made no sense that a parent cooking dinner for the family contributed only the ingredient costs to the economy, while a business executive dining alone apparently contributed more. The US Commerce Department didn't take the distinction seriously and refused to incorporate the value of unpaid labor, so Kuznets moved on to study inequality--but not before warning Congress that "the welfare of a nation can scarcely be inferred from a measure of national income."

Pryce agrees that there are faults with GDP and that unpaid work remains a problem. If you were going to include it, how would you value it - by the income sacrificed or the cost of getting the work done in the labour market? And what kind of contribution does the family meal make to the economy: is it work or leisure?

As a nation, therefore, we know only where we stand relatively: relative to last year, relative to other nations. And there's the rub: one reason GDP - for all its recognized flaws - is still with us is because it allows governments and politicians to assess where they stand in the global pecking order. Politicians are like many of us: addicted to rankings, to one-upmanship, deriving comfort and solace from the knowledge that at least others are worse off. We know that, as Robert Kennedy said, GDP measure everything except what makes life worth living - but as long as it keeps us in the top tier, we loathe to sacrifice it. It's a perplexing thought that even at the global level, nations are so competitive with one another that they'd rather work with a flawed system than truly know where they stand.

Margaret Heffernan and Vicky Pryce will be speaking at Salon London on Thursday April 3, 2014.