Most politicians see the pursuit of economic growth as one of their prime objectives, thus driving up gross domestic product (GDP) per capita. Economic growth is the basis of rising material well-being (in “real terms”, meaning we have filtered out any inflation). But how good is GDP per capita as a measure of whether people’s lives are actually improving? For years, economists have had reservations about the numbers.
There is also a wider question: even if GDP were a perfect measure of economic activity, should continuous economic growth necessarily be our objective?
When bad things are good for GDP
Assume that there is a major oil spill causing significant pollution. It may cost, say, £2 million to clean up the environmental damage and restore the status quo ante. The £2 million will enter the flow of national income statistics, but in the end, we are no better off.
Most police officers are diligent and hardworking, but again, much of their work is devoted to clearing up (or preventing) “bads”. If there were a societal move to zero criminality then perhaps half of police time could be saved, and society could employ fewer police officers. GDP per capita would fall, but we would be no worse off.
The work that GDP doesn’t count
Another limitation is that much valuable activity takes place outside the market and is therefore not captured by GDP.
An extended family with a number of young children might be able to arrange childcare within the family. This is done “for free”. If the arrangement breaks down and use is then made of private nurseries, market transactions now arise and GDP increases, even though broadly the same childcare is being provided.
In instances such as this, our data from the market represent an under-recording of economic activity.
Who benefits from economic growth?
GDP per capita gives an average figure for the whole economy. The population’s welfare depends on how the total is divided up. Taking the US as an extreme example, the distribution of income is very unequal. According to the US Census Bureau, in 2024 the top quintile (20%) of households received 51.5% of aggregate household income, leaving the remaining four fifths to share less than half. The bottom quintile received just 3%.
Income and wealth inequalities have been studied by two academics, Richard Wilkinson and Kate Pickett. Some years ago, they jointly published The Spirit Level, which examined the relationship between inequality and a range of health and social problems. They argued that more equal societies tend to enjoy better health and social outcomes, drawing comparisons between countries including the USA and the Scandinavian nations.
So even where GDP per capita is rising, the average alone tells us little about who is benefiting from that growth.
Can growth continue for ever?
Politicians might push for more economic growth, but we live in a world of finite resources. Some economists have argued instead for a “steady-state economy”, with low or zero growth. Very much on the same page is Kate Raworth with her book Doughnut Economics, which I reviewed previously for Yorkshire Bylines.
Given the short-sighted pursuit of economic growth by most countries, the world might seem bent on going to hell in a handcart.
Is happiness a better measure?
If GDP has these limitations, what other measures might tell us more about how well people are actually living?
The World Happiness Report is published annually and the most recent results (2026) place Finland at the top, with Afghanistan at the bottom. Finland has now been top for nine years running.
The rankings are based on people’s own assessments of their lives. Six elements are used to help explain the differences between countries:
- GDP per capita
- social support
- healthy life expectancy
- freedom to make life choices
- generosity
- perceptions of corruption.
European countries dominate the top ten, with Finland, Iceland, Denmark, Sweden and Norway among the highest ranked. These nations have been described by the Happier Lives Institute as “wealthy, homogeneous, high-trust states with generous welfare systems”.
The UK ranks 29th.
If we compare nations for total tax revenue as a percentage of GDP (2023 figures), we may note that the figure for Denmark is 46.3%, Sweden 43%, Finland 42.1% and the UK 33.5%.
At first sight, this suggests that high taxation and high levels of reported life satisfaction are not necessarily incompatible. It does not, however, establish that higher taxation itself makes people happier: many other economic, political and cultural factors are involved. UK political parties please note!
So what should we measure?
GDP per capita has some use as a guide, but it is a crude statistic that should be used with the limitations above kept in mind. It can rise because we are paying to rectify damage; it excludes much valuable unpaid work; and an average tells us little about how income is distributed.
The World Happiness Report captures more factors than GDP and, in my view, provides a more useful picture of how well people are actually living.
Finally, we should bear in mind the finite nature of our world. Even if GDP were a perfect measure of economic activity, that would not answer the question of whether continuous growth is desirable or sustainable. Excessive consumption today risks putting the well-being of future generations at risk.
Perhaps, then, the question for politicians should not simply be how much the economy is growing, but whether that growth is improving people’s lives, who is benefiting from it and whether it can be sustained.
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