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Gross Domestic Product Verses Gross Domestic Waste

10/23/2006
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I’ve always been fascinated by how humans count, especially the way we always seem to count the wrong things. Recently I was looking at the American counting of Gross Domestic Product (GDP). The U.S. government reports that GDP was up 2.6% in the second quarter of 2006, after rising 5.8% in the first quarter, and the economists offering commentary seem to think this is good. We are producing more product per capita, meaning economic output is growing faster than population. But growth has slowed recently toward a level that can be sustained without causing inflation.

Governments in every country across the globe do this same sort of counting with the same thought process. The universal view is that growth in domestic product is good. End of discussion.

But for the Lean Thinker this should just be the start of the discussion. GDP simply counts all economic activity in the economy. Any goods produced or services provided that someone paid for is “product.” Thus the surge of growth in on-line and telephone help desks to aid consumers using products they can’t understand how to install, that won’t work with their other products, or that simply won’t turn on, counts as growing domestic product. So does increased spending on recalls of defective products. So does new warehousing for needless inventory. How about construction of massive airports to cross-dock passengers at Point C who really just wanted to go directly from Point A to Point B? Or additional spending on mega medical centers to warehouse patients waiting for the next step in their treatment when the flow paths are blocked? More growth in gross domestic product!

Clearly the problem here is that one measure called “product” co-mingles two very different things: value and waste. What we really need is to measure Gross Domestic value (all of the “product” that actually creates value as perceived by the consumer) and compare this with Gross Domestic waste (or maybe GDM, for Gross Domestic Muda.) We want the former to grow but we want the latter to shrink.

This counting problem actually has two additional dimensions. First, even in the case of goods that clearly create value for the consumer, such as the new computer that actually works without resort to a help desk, the processes of designing, making, and delivering the item are a mixture of value and waste. For example, assembling the parts is clearly value while reworking the finished unit in the factory to a point where it finally works properly is waste. But the consumer has to pay for the value and the waste together.

A second issue is that externalities imposed on the environment by value-creating processes are currently counted as economic product. For example, a recent study by the Chinese government’s environment ministry estimated that of the officially recorded 10% growth in Chinese Gross Domestic Product last year, 3% was actually expended on trying to deal with the environmental damage to human health and agriculture caused by the other 7%! In this case the “internalities,” in the form of the goods and services produced for consumers, are confused with externalities: the burden of their production on the environment. Both are counted as GDP.

We are all familiar with product labeling that tells what fraction of the product was made domestically, what fraction uses recycled materials, what fraction is fat, protein, carbohydrate, and so on. How about labels that show how many of the steps involved created value and how many were actually waste from the standpoint of the consumer? That is, an accounting of the steps the customer was happy to pay for compared with those the customer was forced to pay for because of the poor design or performance of the processes involved? And what about “green” labels that show the costs to the environment that ought to be subtracted from the value of the product?

But actually this would be a mistake if it was just another counting exercise. Unless waste was actually removed as result, this type of counting would just be more Muda.

What I propose instead is that Lean Thinkers help others with less vision to see that growth is good but only the growth in value, not the growth in waste. And then I hope we will all re-examine every process we touch to clearly distinguish value from waste. That of course, is just the necessary preparation. The value of the exercise lies in removing the waste, not just counting it.

My ultimate hope is that some day our current method of counting Gross Domestic Product will become completely accurate even if we don’t change it. We will really be counting Gross Domestic value, whatever we may call it, because we will have removed our Gross Domestic waste.

Best regards,
Jim

Jim Womack
Founder and Chairman
Lean Enterprise Institute (LEI)

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