GDP, a Forgotten History

I’ll start off this post with a very brief description of GDP, since I’ll just use the acronym for the rest of my post.  GDP (Gross Domestic Product) is most commonly known as the final value of all goods and services produced in a country within a given time (usually a year).  It can be calculated based on total income, expenditures, or value-added in production. The most common formula associated with GDP is GDP= C + I + G + (Ex – Im). C stands for consumer spending, I stands for investment by businesses, G stands for government spending, and Ex-Im stands for exports minus imports.

That sounds really complicated and technical (and it is), but GDP is so much more than just an equation.  I’ll go ahead and mention a few of the issues with it too.  It doesn’t include the value of unpaid services, such as cooking and cleaning done at home. It also doesn’t reflect income inequality.  No costs are subtracted for environmental harms that occur through production.  Additionally, events such as car accidents, divorces, and natural disasters actually increase the GDP because goods and services are expended to respond to and/or cleanup these events. Those are just a few – I’ll address more problems in later posts!

Over the past week and a half, I have spent most of my research time reading books about the history and evolution of GDP.  I have also been looking at some articles, websites, and videos –  some about GDP, and some to get ideas for what I want to do with the video that will be part of my final product.

The books I have read so far are:  GDP: A Brief but Affectionate History by Diane Coyle, The Great Invention: The Story of GDP and the Making and Unmaking of the Modern World by Ehsan Masood, The Little Big Number: How GDP Came to Rule the World and What to Do about It by Dirk Philipsen, The Power of a Single Number: A Political History of GDP by Philipp Lepenies, and Gross Domestic Problem: The Politics Behind the World’s Most Powerful Number by Lorenzo Fioramonti.

It has actually surprised me that I have found so much written on the history of GDP.  I think this is partly because the history of GDP is so connected to other concepts…economic theories, origins of capitalism, the meaning of growth, the meaning of wellbeing, degrowth movements, environmental movements, money, currencies…and more.  Many of the concepts are ones that I have learned about at least a little bit in other contexts, but it is really interesting to see them framed in relation to GDP.

Even though most of my reading so far has been on the history of GDP, these histories have also included references to many critiques of GDP and many alternative economic/social indicators.  There are more books and articles I have come across that relate to the history of GDP, so I could spend more time on the history, but I think I am going to move on for now, and I can always come back to it later.  Next, my plan is to look in more detail at some of the critiques and alternative measures.  I am also going to try to find and read (or listen to/watch) arguments in favor of GDP.  It seems like a lot of the advocates of GDP are just implicitly favoring it by using it without much question, and they tend to defend it when an alternative pops up.  But I think if I do some more searching, I can uncover additional arguments in favor of GDP.

Before moving on, I will summarize some of what I have learned so far.  It has been really interesting, and a bit confusing, to see that different authors highlight different dates, events, and people, as being the most important.  I have spent a good bit of today going through my notes and trying to piece everything together.  Of course, I will present more extensive information, synthesis, and analysis in my final paper, but here are some snippets.

Selected Key Dates and Events

  • 1664 – Englishman William Petty created the first attempt at Western national accounting…but national accounting was not used much until the 20th century
  • 1934 – Simon Kuznets published the first official report of America’s national income, using techniques set forth in Britain by Colin Clark

FDR used national income statistics to support New Deal Programs

The U.S. used national income statistics to monitor and increase production for World War Two

  • 1942 – first American GNP statistics published (Gross National Product – includes any goods/services produced by an American or American company whereas GDP only includes good/services produced within a country)
  • 1944 – Bretton Woods Conference, IMF and World Bank founded, countries generally agree to use GNP as standard for evaluating economic performance
  • 1946 – U.S. and Britain agree upon standard calculation for GNP, greatly influenced by British economist Richard Stone

GNP was used extensively to evaluate the effectiveness of aid to European countries through the Marshall Plan

  • 1953 – United Nations System of National Accounts (UNSNA) established, officially created standard metric for national accounting
  • 1954 – by this date, all non communist economies use GDP
  • 1991 – U.S. replaced GNP with GDP; other countries followed soon after
  • 1992 – China adopted GDP
  • 1992 – almost major economies use GDP after collapse of Soviet Union
  • 1999 – GDP declared by Clinton administration “one of the greatest inventions of the 20th century” but Alan Greenspan cautioned that it would be wrong to conflate GDP with quality of life

Selected Key Themes/Points

  • GDP was invented largely due to the Great Depression and World War Two.
  • GDP is not an objective measure. There have been numerous disagreements about what should be included and how. There have also been adjustments over time.
  • Simon Kuznets’ original statistic did not count government or military spending as increasing national income, but the U.S. was influenced by British economist Maynard Keynes to include these factors, especially since in the face of World War Two, incorporating government and military spending made the figure look better.
  • Only a few statisticians really understand all the details that go into calculating GDP.
  • Simon Kuznets, among others, warned that it would be unwise to use GDP as the sole measure of an economy.
  • Nowadays, GDP and “the economy” are often considered relatively synonymous.
  • Politicians and countries are rewarded when GDP increases and criticized and/or punished when GDP decreases.
  • Many economists are (and have been) aware that GDP does not necessarily reflect wellbeing.

I’ll leave it at that for now.  If you want to hear more, here’s an NPR piece that I think sums up a lot of this history: http://www.npr.org/sections/money/2014/02/28/283477546/the-invention-of-the-economy

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