Does Annual Real Gross Domestic Product per Capita Overstate or Understate the Growth of Individual Welfare over the Past Two Centuries?

Article excerpt

The decrease in the death rate, and the attendant increase in life expectancy--more than doubling--during the last two centuries in the richer countries, and in the twentieth century in the poorer countries, is [sic] the most stupendous feat in human history.

--Julian Simon, introduction to The State of Humanity (26)

Angus Maddison's (2001) historical estimates of annual real gross domestic product (GDP) per capita show that nearly all the economic growth in annual real GDP per capita that has ever occurred in the world occurred after 1820. Maddison's estimate of 1820 real GDP per capita of $667 at 1990 prices and others' estimates that the real output per capita at which humanity can survive is approximately $250 per year at 1990 prices imply that average world real GDP per capita little more than doubled during the first several hundred thousand years of human existence. (1) During the past two hundred years, the world's average real GDP per capita has increased nearly ninefold. In the more developed countries, the growth of annual GDP per capita has been much greater. Figure 1 illustrates the recent explosion of the world's average annual real GDP per capita.

[FIGURE 1 OMITTED]

The accuracy of the stunning picture of recent economic growth shown in figure 1 depends on whether annual real GDP per capita correctly reflects human welfare and economic growth. Many economists have accepted real GDP per capita as a reasonable proxy for human welfare. For example, Simon Kuznets explicitly defined economic growth as "a sustained increase in per capita or per worker product" (1966, 1), and Douglass C. North and Robert Thomas wrote that economic growth "implies that the total income of society must increase more rapidly than population" (1973, 1). However, although few people deny that Maddison's carefully researched historical data indicate what happened to annual real GDP per capita over the past two hundred years, some authors have objected to using real GDP per capita to measure human welfare.

A common theme in the economic development literature has been that the growth in average annual real GDP per capita overstates the improvement in human welfare. (2) Some economists have suggested alternative measures of economic growth that focus on health, education, political rights, and many other conditions that are equated with the quality of life. Julian Simon (1995a) and others have pointed out that virtually all measures of human welfare have improved greatly over the past two hundred years, in which case the general impression given by figure 1 is not misleading. (3) However, because most of the other measures have not improved by as great a multiple as real GDP per capita, the perception remains that the growth in annual GDP per capita overstates the improvements in human welfare during the past two centuries.

In this article, I argue that the various alternative measures of human welfare do not remedy a serious fundamental shortcoming of annual real GDP per capita as an indicator of human welfare, which is that it fails to measure the lifetime welfare of individuals. The many alternative measures of human welfare that have been proposed are, like GDP, also annual flows or point-in-time stocks, none of which tells us anything about individuals' lifetime welfare. A simple measure of average individual lifetime welfare fortunately can be constructed easily from readily available data. This measure indicates that the recent growth of individual welfare actually has exceeded the growth indicated by annual real GDP per capita.

Alternative Measures of Human Welfare

Economists have suggested many alternative measures of human welfare, including life expectancy, infant mortality rate, caloric intake, access to safe water, adult literacy rate, school enrollment, the distribution of income, hospital beds per capita, and a long list of other similar measures of the "quality of life. …