How Energy and Work Drive Material Prosperity
INTRODUCTION Although GDP is widely used by economists, its value as an indicator of development or wealth creation has been widely criticized. Two points of criticism are of particular relevance. First, GDP doesn’t measure sustainable growth, as a country may achieve a temporary high GDP by over-exploiting renewable natural resources. Second, extraction and consumption of non-renewable resources is counted as national income and not (as it should be) as depreciation of capital assets (Repetto et al. 1989; Repetto 1992; Solorzano et al. 1991). A third criticism of the GDP concept is that it does not subtract activity that produces no net welfare gain, but merely compensates for negative externalities. For example, if a factory pollutes a river, the cost of cleanup adds to the GDP but adds nothing to social welfare. Crime increases the demand for police, which adds to GDP. War destroys people and property, but the military expenditure adds to GDP, as does the postwar reconstruction. This concept is summarized by the self-explanatory titled ‘parable of the broken window’, created by Frederic Bastiat (Bastiat 2006 ) in his 1850 essay That Which is Seen and That Which is Not Seen1 to illuminate the notion of ‘opportunity costs’. It is important to note that in our examples cleaning up the river, catching criminals or winning the war may provide no net (new) beneﬁts, but can constitute important opportunity costs, diverting funds from other more ‘productive’ (wealth-creating) investments. Additional concerns are that GDP, as a measure of economic activity,...
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