In 1990, Amartya Sen questioned the ability of the GDP figure to reflect a country’s level of development. This statistic was, according to him, useful to acquaint the economic level of a country but prevented from grasping other characteristics of development such as school enrolment or life expectancy. Therefore the UN, referring to his research, decided to create another figure: the Human Development Indicator (HDI) to enlighten the country’s progress in those fields. The 1998 Nobel Prize winner does not however negate the capacity GDP has to reflect economic development. I, on the other side, would like to do so. I will intend to prove that GDP necessarily overestimates the real economic growth as it doesn’t take overproduction into account. I will then explain that this statistic deficiency can, per se, lead to crises and recessions.

Over a limited period, the production of an economy can be either sold or stocked. Stocked production has the particularity that it represents future sales. One can thus assess wealth flows in two distinct ways: either by sales or by production. GDP is an evaluation under the second method: production. GDP thereby represents the production of an economy over a limited period no matter what happens to the production (sold or stocked).

When the production is sold, there is a direct enrichment of the economy because the exchanges created by this production add up to the precedents. The economy is in growth. When it is stocked, production itself does not participate immediately to the enrichment of the economy so long as it doesn’t imply any exchange and thus any entrance on the market of goods. It is only when the stocked goods are sold that the wealth of the economy grows effectively. When evaluating GDP, economists therefore incorporate into the present the future growth of wealth that will result from stocks selling.

A problem arises then. Past or present sales are certain and therefore empirically quantifiable whereas future sales are uncertain and unquantifiable. Indeed, stocks might be sold just as well as they might not be. Stocks are not sold if the production of a good exceeds the intertemporal demand of that good, namely in a case of overproduction. The unsold share of stocks is destroyed and thereby never participates to the enrichment of the economy. The GDP figure however accounts for them as if they did. As GDP does not take sales into account but only production, it overestimates the new wealth flow of the economy by considering that production is necessarily sold.

50 years ago, the economical answer to this remark would have been the following. Every new production implies new factors of production (capital or work). As these factors are remunerated, the global income of the economy grows when production grows, regardless of whether it is sold or not. It follows that the gains in terms of global income and therefore in terms of consumption perfectly offset the losses in terms of stock-destruction. On a macro scale, the insufficient sales in a branch of business are compensated by the growth of sales in another branch of business. Wealth growth is then equal to production growth.

This answer is not valid anymore. The markets are now open, and the economy globalised. It follows that growth of the global domestic income does not necessarily improve domestic sales in the same proportions. Indeed, foreign goods can be consumed rather than domestic goods. Then higher production levels would boost neighbour’s sales instead of ours. Another country’s wealth grows while ours decreases considering the losses due to overproduction combined with the exit of wealth due to the relative preference for foreign goods.

Nevertheless, the GDP of the other country does not take into account its wealth growth (unless their production also grows to satisfy foreign demand), our GDP grows from a supposed stock selling which in reality does not exist. In an open-market economy, since a share of the stock is destroyed, the statistic GDP necessarily overestimates the economic growth of a country.

This overestimation is a problem for several reasons. More than the inaccuracy of the information given by the GDP that leads to distorted economical action, the most important issue is the temptation for overproduction, a major reason for crisis. In economic theory, stocks (i.e. overproduction of goods) is seen as an erroneous gap between firms’ expectations on demand and the real level of demand. The problem does not stem therefore from the real economy, as it is evident that no firm has any interest to overproduce.

Governments, on the contrary, might think that it would be in their interests. GDP is indeed the

main indicator of a country’s conjuncture. Governments may then, for diverse reasons, be tempted to inflate its GDP by stimulating overproduction. Lets suppose a country wants to attract capitals. This country has to send positive messages to international capital markets, namely a high probability of high return of their investments. The higher their GDP is, the more the investors will be inclined to invest in their country. So long as governments deem negative effects due to overproduction (indebtedness, resource destruction) negligible compared to positive effects due to investment (job creation, immediate enrichment, favourable electorate) they will think overproducing is in their interest. In China for example, the multiplication of « ghost towns » is the direct manifestation of this kind of policy. The government massively invested in the building sector to maintain its GDP at an unprecedented level and stay the country which attracts the most investors in the world for almost 20 years. Today, a large number of these buildings are uninhabited, which is to say not sold, which is to say stocked without any chance of being bought.

GDP-inflating policies not only substitute themselves to useful investment, namely in line with a real demand, but are problematic with regard to the environment as they destroy resources, and are almost always doomed to result in future recessions. Indeed, although inflating GDP has immediate positive effects on the economy, in the long term, it necessarily deteriorates the economy.

As government-funded policies, overproduction schemes have two sources of financing but only one certain consequence.

First, governments can finance its spending with taxes. They truncate household incomes and thus the possibility to consume goods produced by real economy. Demand is then reduced, supply follows accordingly and the flow of exchanges in the economy goes down, lowering economic growth. First, GDP grows because of its inflation by overproduction even though the amount of exchanges decreases. Second, when the Government stops stimulating overproduction, GDP only reflects firms’ production which has decreased but been masked by public overproduction. The transition between the first and the second step is precisely what we call a recession.

Governments can also fund themselves through indebtedness; as their debt comes with interests, the amount owed by the government increases as time goes by. And when the debt has to be repaid, the taxes on householders are greater than if they had been collected in due time since the value of the loan is topped with the value of interests. Demand is contracted further, and so is supply. The collapse of the GDP is then even more severe and the recession as well. This is highly reminiscent of the recent Greek crisis.

To conclude, the GDP figure necessarily overestimates the economic performance of a country since there are some unsold stocks, namely overproduction. Given the informant role of GDP, some states could want to use overproduction as a lever to artificially inflate their GDP which has only one consequence: depreciation. The unviability of GDP is thus, per se, a source of crises.

Three different solutions can be given. First, GDP can simply be replaced by an indicator for sales which would leave no room for uncertainty: Gross Domestic Sales (GDS). But stocks that do end up being sold would then be accounted for later, introducing a temporal distortion between the figures for resources’ use and those for their sales. One could then decide to combine GDS and

GDP so that over time investors could find out which countries inflate their GDP, and thus stop investing in this country. The result of this would necessarily be the end of conscious overproducing as no government would have any interest left in overproduction. Finally, in the same vein, one could couple the publishing of GDP with an average sell rate on the 10 previous years, calculated as a technical average or as a trimmed mean (like for prices inflation). This would allow to differentiate production which is stocked and then sold from production which is destroyed, namely overproduction. This kind of system already works in a very specific market: oil. In the United States, the volume of oil which is stocked directly influence the price of oil since the creation of the OPEC cartel. The prices fluctuations of oil therefore depend less on politics than on economics and the law of demand and supply. In the United States, crises such as the one that occurred 1974 are now significantly less likely, and their causes would be very different.