GDP: A Brief but Affectionate History by Diane Coyle (Revised and Updated Edition 2014, Princeton University Press, pp. 167 )
Diane Coyle’s little book GDP: A Brief but Affectionate History tells a very mainstream history of the statistics of GDP (Gross Domestic Product) in brief 145 pages. The book is divided into six chapters not including the introduction. The introduction discusses what GDP actually means. Coyle throws light on this often confused statistic:
GDP is the way we measure and compare how well or badly countries are doing. But this is not a question of measuring a natural phenomenon like land mass or average temperature to varying degrees of accuracy. GDP is a made-up entity. The concept dates back only to the 1940s.
As Coyle clearly states, when looking at GDP numbers published by the newspapers, journal articles or uttered by the politicians from their bully pulpit in election rallies, we must keep this fact in mind that GDP is purely a made-up entity. It has nothing inherently natural in it. It is a device of some economists, bureaucrats and politicians designed for some specific purpose in past. What that specific purpose was we come to know in the first chapter.
The first chapter covers the history of GDP beginning from the eighteenth century to the 1930s. This chapter is important because this is where we get to know the main reason why economists, bureaucrats and politicians devised the statistics of GDP. Before discussing the concept of GDP Coyle takes us on the brief tour of the history of national income account statistics, which were the predecessors of the concept of GDP, starting from William Petty in the 17th century. This history is covered to reveal the fact that the early definition of the concept of national income was not precise and fixed. Here is Coyle:
The quick dip into the early history of national income accounts and the forerunners of GDP shows that the definition of “national income” was not precise or fixed. How it was interpreted depended on the intellectual climate and on the political or military needs of the moment, and so the definition changed over time.
In the following discussion of how the concept of GDP came into being in the 20th century the emphasized words of Coyle above should be kept in mind as the same political and military needs played fundamental part in the birth of the concept of GDP.
Now Coyle discusses the main reason behind the birth of GDP. And here is Coyle again:
The definitions we use now date back to two seismic events in modern history, the Great Depression of the 1930s and World War II (1939-1945).
During the depression years the Roosevelt government was interested in knowing how the economy was doing overall so they can plan their anti-depression policies properly. This work of providing the overall picture of the US economy was carried out by the National Bureau of Economic Research and their economist Simon Kuznets who later won the Nobel Prize in economic science for the same work. The crucial fact to keep in mind in this history is that the US government was only interested in knowing the total amount of output in the economy while Simon Kuznet was mainly interested in working out how to measure national economic welfare rather than just output. Before this modern exercise of measuring national income of the economy in the 20th century, the old pre-depression pre-war methods of measuring national income will show government war expenditure as negative in the national income accounts and consequently it will reduce the private output available for consumption in the economy. In short, government expenditure on war will reduce the national income. This was unacceptable to the Roosevelt government, who wanted to increase their warfare and welfare expenditure to boost the economy, and they devised the new concept of GDP to overcome this hurdle. Simon Kuznet was ignored and the bureaucrats and politicians got what they wanted in the new concept of GDP. And why the Roosevelt government thought that they can boost the economy by increasing government spending on warfare and welfare? Because they were following the advice of the British economist John Maynard Keyes whose just published book The General Theory of Employment, Interest and Money swept the profession of economics and became a new policy dogma. As Coyle puts it, at the heart of this classic economic text lies a theory about the relationship between different economic variables, including, in addition to national income, personal consumption, investment and employment, interest rates, and the level of government spending. The theory set out links between the tools the government had available and the size of the economy. It became the basis for a more interventionist approach to government economic policy from the 1940s onward, using both fiscal policy (the level of tax and spending) and monetary policy (the level of interest rates and availability of credit) to target a higher and less volatile rate of growth for the economy.
This means, the concept of GDP was solely devised by government friendly economists, bureaucrats and politicians to justify their macro and micromanagement of economy via central planning as ordered by Mr. John Maynard Keynes. In this way the whole history of GDP is also the history of the so-called science of macroeconomics. GDP is the main concept used by central planners in their macroeconomic centrally planned management of the economy even today. And as the theory and history is evident, this central planning is the main cause of our economic, social and political miseries.
After discussing the birth of GDP, Coyle goes on to discuss the various ways in which macroeconomists measure GDP today. I will not go into these technical details here. Rather I want to focus on her important discussion of various conceptual problems of GDP, which almost render the whole statistics useless. The first thing Coyle warns us about is not to mistake GDP as a measurement of welfare. She clearly says that, GDP is not a measure of welfare; it does not measure well-being. It only measures economy’s output that also in highly dissatisfactory and misleading ways. The major conceptual problems with GDP are:
- Calculating real GDP: GDP is a total of variety of goods lumped together and expressed at their market prices. This means, higher price inflation can increase GDP without increasing the actual output. To counter this problem economists convert nominal GDP to read GDP by adjusting it for price inflation using various methods. These methods are highly flawed. As discussed by Coyle, so, although we definitely want to make this adjustment for inflation to measure real economic growth, the choice of technique can lead to strikingly different “real” conclusions.
- Hedonic price adjustments: GDP also doesn’t measure the quality improvements taking place in the goods. To tackle this issue economists have devised a technique of hedonic price adjustments, but this technique is highly problematic and involves lot of guess work and arbitrary decisions by the statisticians.
- Seasonal adjustments: Most of the data massaging in the calculation of GDP is done while adjusting it for seasonal fluctuations.
- Adjusting GDP for exchange rate: Comparing GDP across countries is also highly problematic looking at the various techniques of adjusting GDP for price levels in different countries via exchange rates. Any altering of techniques by one country will make big impacts on comparisons.
- Changing base years: GDP will also change drastically if some country changes the base year used to calculate GDP.
- Production boundaries: production boundaries mean what counts as economic output? As Coyle puts it, much of GDP is private sector output or expenditure measured at the prices charged in the market…but large portions of output are not marketed – everything done by the government for one thing. This has to be valued in a variety of other ways, such as the wages paid to government employees. This is surely highly flawed method. Wages paid to government employees in no way passes the market test of how much consumers are actually valuing these employee produced goods and services e.g., I know many teachers in my government run university whose contribution in students’ learning is not only zero but negative and still they get seven figure salaries! Counting this as positive contribution in GDP is surely nonsensical.
- Household production: GDP also doesn’t take into account all those valuable activities that are taking place outside the market e.g., all unpaid household work. As Coyle puts it, a widower who marries his housekeeper and stops paying her a wage reduces GDP!
- Innovation exclusion: GDP also ignores the impact of innovation on output and prices.
- Inclusion of financial industry in GDP: After the 2007 financial crisis and the role played by the finance industry in making that crisis many people, including Coyle, has started questioning inclusion of financial industry contribution in GDP calculation. If financial sector is damaging the economy by carrying out risky and morally bankrupt activities then its inclusion in GDP is surely questionable.
All these flaws in GDP has forced economists to look for alternative measures of welfare like the Human Development Index (HDI), Happiness Index, Net National Product, OECD’s Better Life Index, Economic Well Being or “dashboard” of indicators etc., instead of just looking at economy’s output.
In the beginning I called this book a very mainstream history of GDP. The reason why I am calling it a mainstream history of GDP is because it fails to take account of other schools of economic thought like the Austrian School when analyzing this history. If Coyle used the theories expounded by the Austrian economists then the whole history would have looked very different from what she has presented in her book. For example, in recanting the 20th century history of growth, stagflation and boom-bust business cycles she completely ignores the role played by central banks in generating those business cycles and stagflation. This is a huge omission. Instead of taking a critical look at the role of central banks, she looks at them very favorably and thinks that central banks played a role in stabilizing markets. In doing so she completely ignores the very important work of Prof. Ludwig von Mises and his student and Nobel Prize winning Austrian economist F A. Hayek.
In the end, despite discussing at length so many flaws of GDP, she still favors using it and ends her book by saying, GDP, after all its flaws, is still a bright light shining through the mist. This is very contradictory.
The real question Coyle never asks and answers is what is the need of gathering all these statistics like GDP in the first place? As we saw GDP’s history, the only reason for gathering GDP and other statistics is because they are needed and used by the politicians and bureaucrats to centrally plan their economies. Not looking at this side of history reveals Coyle’s ideological biases towards Socialist central planning; she takes this mainstream point of view of centrally planning our economies for granted. As theory and history has shown us, this very same statist socialist central planning and macro and micromanaging of economy is the root cause of our economic, social and political miseries. Statistics like GDP or GNP or HDI etc., enables governments’ dangerous socialist central planning. Without it governments cannot do their central planning, which means our economic, social and political problems will be solved if governments are deprived of these statistics. As Murray Rothbard brilliantly put years ago, statistics is the Achilles’ heels of governments:
Surely, the absence of statistics would absolutely and immediately wreck any attempt at socialistic planning. It is difficult to see what, for example, the central planners at the Kremlin could do to plan the lives of Soviet citizens if the planners were deprived of all information, of all statistical data, about these citizens. The government would not even know to whom to give orders, much less how to try to plan an intricate economy.
Thus, in all the host of measures that have been proposed over the years to check and limit government or to repeal its interventions, the simple and unspectacular abolition of government statistics would probably be the most thorough and most effective. Statistics, so vital to statism, its namesake, is also the State’s Achilles’ heel.
Notwithstanding the support of Coyle for GDP, instead of collecting the data of GDP and other statistics what we need to do is what the unsung hero of Hong Kong’s growth story, its financial secretary John James Cowperthwaite, did. When Marian Tupy asked Mr. Cowperthwaite to name the one reform that he was most proud of, “I abolished the collection of statistics,” he replied. Sir John believed that statistics are dangerous, because they enable social engineers of all stripes to justify state intervention in the economy.
Overall, Coyle’s book is a good read for students and laymen who want to understand the intricacies of GDP and know its brief history. But its mainstream treatment doesn’t make it very useful beyond that purpose.