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Princeton Univ. Press: Princeton, N.J., 2014,
159 pgs., index, end notes
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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.
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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."
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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.
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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."
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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 management tools seemed to make
matters worse rather than better." Indeed so - read Keynesian for
'conventional'. She claims the second problem was the 'Cold War' itself. And
she thinks that MAD was 'correct'. (digression here) Then her third challenge
is the emerging environmental movement. And I agree with her. And her fourth
challenge was the failure of the newly 'developing nations' to achieve the
economic success that the establishment economists claimed for their nostrums.
She correctly fingers the policy programs that substituted 'welfare for
growth'. In terms of the book's purpose she writes: 'This, too, has proven a
lasting challenge to the dominance of GDP". She continues that the four
challenges to conventional economic thought resulted in 'the most profound
crisis of capitalism since the Great Depression and until our own Great
Financial Crisis".
Without coming right out to say it, she asserts that the entire superstructure
of economic theory built around focus on GDP was responsible for the
mismanagement that created this mess. Or at least I can infer that conclusion
from her evidence. She then describes the era of 'Stagflation' in relation to
data on GDP changes. And she notes, "There was, in a way, too much growth.
The tools of demand management proved too tempting and were used to boost the
economy whenever there was a business cycle downturn. But lower interest rates
and extra government spending (or tax cuts ) were generally used to try to
limit downturns and keep the level of employment high." In other words the
establishment economic theories were used to support political policy by
preventing the normal period of deflation that is created by a period of
inflation. The economy had been floated on a cloud of credit-debt and when that
began to contract it could no longer support the irrationally expanded
production.
Here she fingers the central problem. "The definition of GDP was
constructed around Keynes's model of how the economy works." But
politicians, responding to public demands, refused to allow the normal results
of a market economy responding to deflation. She describes some of the actual
battles between unions and employers - governments. But then, unfortunately,
she claims the "Philips curve' is valid. She continues: "The dismal
economic experience of the 1970's paved the way for both a revolution in
thinking about the economy and a political revolution, too. In economic theory,
there was a loss of faith in the simple Keynesian demand management tool of
adjusting the government's budget deficit. Instead, the new consensus was that
the government should concentrate on creating a good environment for
business."
She writes much more, but concludes, "for the first time in a generation
economists were not confident they had the answers". Well, lets limit that
to the dominant establishment Keynesian economists. Austrian School economists
following Ludwig von Mises and Frederick Hayek had since the 1920's proposed
theories about the real workings of economies. They were more than ever
confident that they had the answers politicians had suppressed. Dr. Coyle
continues with a section on Communism and one on Environmentalism and one on
developing nations in which she relates these to ideas about GDP.
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Chapter 4 - 1995 to 2005: - The New Paradigm
- This chapter contains much worthwhile food for thought. In this chapter the
author describes shifts in thinking by establishment economists as a result of
their previous failures. She summarizes: "This menu of policy choices was
mirrored by the development of a new consensus in economics, which also
downplayed the scope for activist fiscal policy and instead emphasized the role
of the central bank in providing monetary stability." She focuses on the
disputes over economic concepts between Keynesians and monetarists. (meaning
the Chicago school principally). In this the concept of 'economic growth' is
related to the concept of GDP as a measure of this 'growth'. (I object to this
term 'growth' since economies expand rather than grow). Anyway she cites the
availability of more refined data. Her chapter title refers to the then
increasing use of the terms "new Economy' or New Paradigm' based on the
expectation that computers and IT in general was creating a new economy. She
rightly notes that: "From today's side of the financial crisis, the New
Economy hype looks almost delusional." Great insight.
She moves on to describe the difficulty in using GDP estimates when the economy
is shifting more and more from manufacturing countable items into services many
of which do not even enter into usual financial accounts. Plus there is the
problem of adjusting for changes in quality rather that changes in quantity.
What does 'productivity' even mean? She notes that GDP does not capture
'innovation' well. She writes: "The lesson to draw from this discussion is
that GDP is not, and was never intended to be, a measure of welfare."
Wonderful - by 'welfare' she means not government welfare subsidies but the
broader concept of the 'quality of life' of the population at large. But I
believe Dr. Coyle ignores the increase in influence of Hayek and Austrian
school economic theory.
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Chapter 5 - Our Times: The Great Crash
-Dr. Coyle begins with this: "There are three elements to classic Greek
tragedy: arrogance, foolishness, and destruction: hubris, ate, and
nemesis." She continues: "The arrogance was the triumphalism
about the prevailing model of economic growth." Unfortunately, she does
not address the real causes of the collapse of the mortgage market and the
subsequent expanding influence that had. She sticks to the establishment story
that it was all caused by 'greed', in the private financial industry. But, in
keeping with her subject, she focuses on 'two fundamental issues the crisis
raises about measuring economic output.' The first is the growing role of the
financial sector itself. In this she is very right and her view deserves wide
appreciation. In part this includes how and why the financial sector's
activities are measured and included IN the GDP number. I have long objected to
the huge percent attributed to the financial sector in not only GDP but in the
various weights of stock market indices. The establishment considers that the
financial sector contributes greatly to the economy, while I think it is mostly
a parasite that sucks wealth from real producers. Dr. Coyle's lengthy
discussion makes the whole book worthwhile.
There is much more in this chapter. A most telling comment is: "GDP is a
constructed statistic that can rise without limit." She then launches a
lengthy discussion of whether GDP and other economic statistics are valid
measures of 'happiness'. But 'happiness' is not an economic concept and cannot
be measured by ANY economic data. But she is only the messenger on this issue,
reporting what establishment economists are thinking.
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Chapter 6 - The Future: Twenty-first Century
GDP
- This chapter is a summary with some ideas about the future of GDP as a means
for measuring a country's economic condition. She writes: "This book has
described the origins and evolution of GDP, the measure of economic performance
used all the time in the media and in the world of economic policy. And in this
she has achieved her goal very well. He conclusion is that despite the many
problems she has identified GDP is still the best tool we have. But she also
concludes with this remark; "At present, we are in a statistical fog,
without the information needed about either the negative aspects of growth when
it is unsustainable and depletes the natural and other assets available for the
future, or the positive aspects, when it delivers innovations and
creativity."
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References
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Lawrence H. White - The Clash of Economic
Ideas: The Great Policy Debates and Experiments of the Last Hundred Years
Dr. White describes the origin and purpose for the creation of the theoretical
concept of GPD.
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Frederic Mishkin - The Economics of Money,
Banking, and Financial Markets Ninth Edition
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