GDP: A Brief but Affectionate History

"Hers is a very sober account and that’s what I like about it. It’s written by a proper economist and it’s very clear. In one hundred and fifty pages or so, you get a very good guide to this number that has come to dominate public discussion. GDP has become a kind of a proxy for things that we ought to care about. I’d argue that she takes a gentler line than I do – hence it’s an “affectionate history” – but hers is a very smart account of the origins, the uses, the calculation, and the shortfalls of this measure as we move from manufacturing to services and as we move from analogue to digital. The real origins of this measure lie in the 1930s when Franklin Roosevelt was elected President of the United States in the midst of the Great Depression . He really wanted a measure that would justify doubling down on the New Deal and spending lots of money. As hard as it is to believe these days, there was no single measure that compacted everything we did as human beings in what we now call “economic activity”. It took Simon Kuznets, a brilliant statistician and data manipulator, to work out a method of doing this, by calculating the value added in an economy. So, at each stage, he would subtract the inputs and work out the total market value of everything produced. There are three measures and they kind of cross-check. He did this in record time and came out with a number that showed that the US economy had halved in three years. So this really gave FDR the ammunition to fight the great depression with Keynesian counter-cyclical spending. I found it very interesting that Kuznets had all sorts of problems with his own invention. He thought that GDP should never be elided with any concept of well-being. He wanted to take off various things from gross domestic product. The clue is in the word “gross”. He wanted to take off armaments and he wanted to take off financial speculation which becomes very important later on, as recently of course as 2008. Coyle discusses at some length how we can calculate the contribution of financial services to our economy and the ways that accounting for those activities can be perverse. Kuznets even wanted to take off things like roads, streets, and trains, because he thought that they took people to work where they produced things. So, they were an input to production. So, just as we don’t count the flour in bread or the wheat in flour, he thought we shouldn’t count the commuter lines that took people to work because that was merely a facilitator of production. The point is, I think, that this thing that we take to be sacrosanct was invented . It was invented by human beings. There could have been other ways of inventing it. In fact, Coyle tells us in a very clear way how, under the Marshall Plan, for example, GDP measures were constructed in Europe because America said it had invented this great way of working out how economies work. It was a case of, “if we’re going to give you lots of money, we need to know if it’s having any effect. So, you must account for it in this way.” The developing world was basically told to do the same by the Bretton Woods institutions like the IMF and the World Bank. And then China and Russia adopted it. So, it became this standard measure. And because it’s so convenient, because it’s one number, and because we can compare countries or at least we have the impression that we can compare countries, it has really stuck. So, Coyle’s book is a very sober, clear, and useful handbook which was very useful to me when writing my book. But I think it can be of use to anyone who has ever thought “I wonder what this thing GDP is. How did it come about? How has it become the standard measure of national economies? What are its strengths and what are its flaws?” For example, in the internet age, there are activities that used to be part of the economy, but no longer are. To give a simple example, booking an airline ticket. You used to call up somebody who was paid to book your ticket and sent it to you through the post. Now you do it yourself. So that’s moved from the economy to the non-economy. Because you do it yourself, we don’t measure it. Exactly the same activity is taking place but it’s not being measured at all. So, the economy is the same size or bigger, and yet through the lens that we’ve chosen to use it looks smaller. It’s moved from the economy to something called household production. We don’t count it when you make your bed, cook your children food, or drive your children to school, because we think that’s what parents do and no money has changed hands, so why should we count it as part of the economy? Now we no longer count the booking of your own airline ticket. We don’t count a house swap. But we would count Airbnb because money does change hands, but less money changes hands than if you were in a hotel bed. Presumably, fewer people build hotels as a result of people swapping those assets that we used to call houses. All of this distorts how we might look at the economy. You could argue, as the chief economist of Spotify does, that things are getting better and better and that our utility is growing. But, at the same time, GDP appears to be getting smaller. This could certainly help explain why progress is everywhere but in the productivity numbers. This could be part of it. It could be that we’re using a measure that’s really not quite up to the task of capturing these changes in the economy."