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GDP is completely broken. It's time to focus on inequality instead

One of the most frequently used metrics in economics is GDP – gross domestic product. In 2020 we will see that we need to abandon GDP as a marker of success. Strictly defined, GDP is the sum of market values, or prices, of all final goods and services produced in an economy during a period of time. While that sounds comprehensive, the measure does not capture the level of pro bono work that pervades many societies, by homemakers whose unpaid labour is an integral part of most functional societies, and non-profit organisations whose work also contributes to the benefit of society.

Moreover, GDP does not capture the many negative effects of some economic activities such as pollution, including carbon dioxide and other greenhouse gases. Their consequences should be factored into any measure of economic wellbeing if we are to accurately assess the state of the planet and its population.

As an average measure, GDP also fails to capture wealth and income disparities within a society, often negatively correlated with the health of that society. When the distribution of wealth becomes significantly skewed, this creates tensions that lead to change – sometimes violent, sometimes (eventually) positive. In the US, the vast disparity in wealth distribution in the so-called Gilded Age of the late 19th century led to major legislation against monopolies, trusts and cartels.

This is why, among other things, we should now be looking to the Gini coefficient, which measures wealth or income inequality, as a measure of economic success. And today the distribution of wealth appears even more skewed than it was in the Gilded Age.

In 2014, it was estimated that the top one per cent of US families owned 40 per cent of the nation’s wealth, while the bottom 80 per cent owned seven per cent. The statistics have skewed even more in the past five years, partly owing to the generative nature of stock ownership. The growth in value of stocks contributes inequitably to the wealth of the wealthiest families. A Gini coefficient of nought means that everyone has the same wealth in a nation; a coefficient of one that a single person (or entity) holds all the wealth or income. In the US in 2018, the Gini index for wealth was a stunning 0.859.

In 2020 we will begin to realise the negative side-effects of inequality of wealth and income as well as negative effects of some economic activity – and we will hear increasing voices to replace high GDP with low Gini coefficient and other metrics of wellbeing as a measure of how successful an economy really is.

Vint Cerf is a Google vice-president and chief internet evangelist

This article was originally published by WIRED UK

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