{short description of image}  
 

GDP: A BRIEF BUT AFFECTIONATE HISTORY

 
 

Diane Coyle

 
 

Princeton Univ Press: Princeton N.J., 2014, 159 pgs., index, end notes

 
 

Reviewer's Comment:
The book is much more than an academic treatise on GDP, although it is an excellent work on that subject. It is a clear summary of the history of the creation of the abstract concept of a GDP - a statistic designed to give government policy makers an idea of the total economic output of a country for comparative purposes. On this theoretic basis they could claim legitimacy for their ideologically based political actions. The author shows the fundamental faults and short comings of the methods used to create this GDP but accepts that this is the best we can do, at least currently. The story shows that creation of abstract concepts of this sort are directly the result of government bureaucrats and politicians desire to expand the power of governments to control the economic activities in their countries. She indicates that this desire was increased when governments sought to wage war (WWII) and intervene during the Great Depression. Not specifically mentioned, but inherent in this process, was the creation of a new category of academic bureaucrats, economists, who sought to enhance and expand their power as government advisors and officials. It was this new breed of 'secular priests' who needed all the alchemy and augury they could create. One must note also, that as powerful as they sought to be by claiming validity for their prognostications they remain advisors subject to the demands of their political bosses, which demands are for 'answers' that can be used as basis for legitimacy of political policies and programs. Thus, Dr. Coyle's academic, historical description of the origin and development of the concept of GDP and its growth throughout the academic economist industry results in a critique of the entire industry.


 
 

Introduction - Dr. Coyle, as an author, begins by indicating why the subject of her book is important for readers. The statistic called GDP has become a critical political issue. Governments depend on it. Political careers succeed or fail due to it. In particular GDP has now been linked with the size of government and country debt by assessments of the ratio between them. If government budgets and total debts are deemed too large in comparison with the country's GDP serious problems may be predicted and critical demands on governments may be enforced. Since governments hate to reduce their budgets and don't see how to reduce their debts a solution to be considered is increasing the GDP number. Increasing the real size of a country's total economic output is not that easy. Instead, governments may focus of ways to manipulate the calculations that create this GDP number to increase it. This is entirely possible because the criteria for including or excluding any of the myriad components of economic activities were and are arbitrary.
The author cites "Benford's Law' about patterns in the digits in a statistic that indicate when the statistic has been fudged. She is explicit: "The point of the story of nefarious statistical manipulation is to highlight the importance of GDP in everyday politics and finance." But we read frequently these days about open measures beyond manipulation -such as governments publicly changing the composition of their GDP by adding entire categories of economic activity previously excluded.
So what is this GDP? She explains both what it is and why it is controversial. "GDP is the way we measure and compare how well or badly countries are doing." She continues: "GDP is a made-up entity. The concept dates back only to the 1940's". Further, she notes: 'Yet the primacy of GDP as the measure of economic success has been increasingly challenged, not so much by politicians or economists as by people who see it as the primary symbol of what's gone wrong with the capitalist market economy." By this, of course, she is referring to individuals who do oppose 'capitalism' itself and seek to abolish it. However, I believe that there are indeed politicians and economists who are firm supporters of free markets who question both the calculation of and the political use of GDP. Dr. Coyle writes, "But GDP is also, as this book will show too, an important measure of the freedom and human capability created by the capitalist market economy." And, "This book explains GDP and describes its history, sets out its limitations, and defends it still as a key indicator for economic policy." And. "How well the economy is going is always going to be an important part of everyday politics, and we're going to need a better measure of 'the economy' than today's GDP."


 
 

Chapter 1 - From the Eighteenth Century to the 1930s - War and Depression -
"Warfare is the mother of invention". A brilliant way to begin her discussion. The creation of the abstract concept of 'state' itself and its development since circa 1500 through various constitutional forms were also in response to changes in warfare as analyzed in Shield of Achilles. She notes, "GDP is one of the many inventions of World War II." Terrific. She follows with a clear description of efforts to estimate the power of 'states' on the basis of fundamental economic measures.
The Early Days of National Accounting
The first effort Dr. Coyle describes took place in 1665 when a British scientist attempted to estimate the relative economic factors of England and Wales versus Holland during the Second Anglo-Dutch War. She notes that there were further attempts during the 18th century. The efforts were made because of a recognition of the importance of economic power as a basis for national political-military power. During that century England was almost constantly at war. Books on the history of money and banking show how important the creation of the Bank of England was in providing England with financial power to overcome France. Then, Dr. Coyle notes, Adam Smith separated the economy into 'productive' and 'unproductive' sides. And he counted creation of physical output but not services. The result for a nation's wealth was only its physical assets versus its debts. Smith's categories were accepted through the 19th century. With Alfred Marshall the distinction was dropped. She quotes Marshall, "Wealth consists of material wealth and personal or non-material wealth".
The Birth of Modern National Accounts
The author writes, "The definitions we use now date back to two seismic events in modern history, the Great Depression of the 1930's and World War II (1939-1945)". Further, "The experience of the Depression created this demand for statistics that might help the government figure out how to bring to an end the unprecedented economic slump." She mentions the role of Simon Kuznetess, who is frequently cited in the creation of GDP. However, she includes a point not always noted, "Kuznets, however, specifically saw his task as working out how to measure national economic welfare rather than just output."She then notes that now GDP definitely does not measure national welfare. The desired outcome was for a measure that would INCLUDE government expenditure, especially for war. But the subject was widely debated. They rested on decisions about what really constituted national economic expansion and what purpose measuring it would serve. The government wanted a measure it could use in developing fiscal policy and organizing national production for war. She provides a quotation, "By including all government purchases as part of national products, the GNP statistics established the role of national government in the economy as that of an ultimate consumer." Kuznets was not happy but he lost the arguments. Thus we see that GDP as a concept based on a specific set of statistics was designed from the start as a tool of expanded govenment intervention and manipulation of the entire national economy. An important change this supported was 'the switch to conceiving of government as adding to national income rather than subtracting from it." And by now this view of the role of government is so ingrained in the popular mind that it is difficult to argue against it. Another important economist the author cites is John Maynard Keynes. In Great Britain efforts to calculate national economic power proceeded along with the American efforts.
The Nature of the GDP
- While the effort to measure national income has a long history, there is no such thing in the real (physical) world as a GDP. It is an abstract concept and has become more and more complex.
What Is it? Definitions -
The author writes, "It is surprisingly hard to write down definitions of GDP that do not assume some prior knowledge." "The system for measuring GDP and its components has steadily become more and more complicated too." "GDP can be measured in three ways, in principle equivalent to one another." . "One can add up all the output of the economy, all the expenditures in the economy, or all the incomes." The author provides a table and graphical representation of 'circular flow'. The standard equation is GDP=C + I + G + (X-M) - that is consumer spending, plus investment spending plus government spending plus net exports minus imports. But what specifically in included in consumer spending or investment spending or government spending? And of course the reverse, what actual economic transactions are left out? Mark Skousen in his book - The Structure of Productrion - describes an even deeper problem with measurement of GDP -it only counts final expenditure and ignores the 'roundabout' economy that produces a finish product by many steps. One result is the statement one reads constantly that the consumer makes up 70% of the economy, but this ignores the multiple levels of producers who add value and participate in the market as well.


 
 

Chapter 2 - 1945 to 1975; The Golden Age - The story of the development of GDP as a theory. Dr. Coyle begins with discussion of the devastated condition of Europe and the Marshall Plan. She writes "the growth of GDP is the single most important benchmark measure of how an economy is doing." And its growth showed that the Marshall Plan was working as Europe recovered. And this was a result of extensive government planning and control. She writes, "the foundations of prosperous modern consumer societies were being laid." This is why it can be called a 'Golden Age'. But now we read a critical comment. "It is one of the distasteful aspects of a disaster that the immediate consequence is a boom in GDP growth. GDP does not measure the nation's assets or balance sheet, only its flow of income, expenditure, and production from year to year. Wipe out a portion of the assets, whether through natural or man made disaster, and the activity or repairing and replacement will increase the growth of GDP."
And this is what happened after World War II. Terrific - just what I have claimed for years, The costs of repairing broken windows adds to GDP. Some commentators even pointed out after Sandy storm that the repairs and replacement of destroyed homes and infrastructure would add to GDP as if that was a great benefit. Meanwhile much work that does add to real wealth is not counted. But the worst aspect is that the concept of GDP was designed in the first place to enable government spending to be counted. Plus expenditures generated by credit-debt are included.
Dr. Coyle then includes a table showing GDP growth rates between 1950-1973 compared to between 1973-1998 to indicate that the higher growth rate for the earlier period was boosted by Marshall spending. Dr. Coyle notes that "There is no simple explanation for the thirty-year success story." She mentions several that she questions. But she writes: "Perhaps as important was the steadily improving availability of consumer goods, and the virtuous circle of consumer spending, increased output of consumer goods, increased employment, and higher incomes." What she does not mention is that this 'mass consumerism' was (and is) based on expanding credit-debt - in other words this immediate spending is funded by built in decreases in future spending. She does note (favorably) how recent is this 'mass consumerism'.
In her next section she discusses the use of GDP" as a tool for comparison between the economic conditions in different countries. She credits the UN with establishing ideas and rules to make GDP calculations comparable. One has to question the validity of creating GDP figures retroactively into the past, given the questionable nature of historical data. She does raise important issues (questions) about the impact of exchange rates on such GDP data. Also there is the problem of how much economic activity in a given country actually involves official markets. She describes the concept of 'purchasing power parity" ( PPP ) as a solution. The Economist Magazine has a simpler method based on its McDonald Big Mac cost comparisons. And she notes that PPP is controversial. She describes some of the arguments in detail. Of course all this effort in data collection and statistics is to make comparisons between countries appear valid. And such comparisons then are the 'bread and butter' of politicians. They are used to support ideological theories created to legitimize political policies and actions. She notes that the early theories had weak at best real data bases even though they were manipulated by elaborate math and algebra.
Her final comment is key. "Economists were confident that they knew how to use government spending and taxation to manage GDP, using the mechanics of the circular flow developed in the national accounts. But the Golden Age was not to last."


 
 

Chapter 3 - The Legacy of the 1970's: A Crisis of Capitalism - Dr. Coyle describes the situation clearly. "After the postwar boom, Western capitalism started to falter, and its troubles were various. There were four distinct challenges to conventional economic thinking by the 1970's, challenges that corresponded to disturbing developments in the global economy.." She identifies the first 'problem' with the trend for declining GDP" growth accompanied by increasing inflation. - The so-called 'stagflation'. "Conventional economic manage