a blog

by Josh Nicholas

The artifice of it all

One of the mainstays of modern life is GDP. Newspapers harp on about it, investors set their expectations by it, politicians' careers live and die by it. But until I read GDP: a brief but affectionate history by Diane Coyle, I had never really appreciated how artificial the whole thing is.

Of course, GDP isn't a natural phenomena. There isn't a GDP-shaped mountain range somewhere. Moses didn't bring us tablets etched with the formula. But that's not really it.

"The concept of 'national income' may seem clear enough, but measuring it in practice means choosing what to include and exclude, which is surprisingly fuzzy".

You see, from the start, our measurements were both malleable and rife with ideology. Obvious, you may say. But what we choose to include and exclude ultimately shapes how we view the world. And this is largely invisible. No one can "see" the economy. Very few can or do investigate the statistics. Instead, we go with the heuristics.

You may hold in your head that economics is a human construct but still come under the influence of its selective view of the world.

According to Adam Smith's definition of productive labour, for example, "only those involved in the making of physical commodities, agriculture and industry would count toward national income."

The very essence of what is "productive" is a construct that has changed over time. And changed massively.

But perhaps Coyle's most cogent example of this artifice is military spending. Again to Smith:

...money spent on warfare or the interest on government debt was also being used unproductively. The nation's wealth was its stock of physical assets less the national debt. National income was what derived from the national wealth."

Two things.

First, compare this to the current system, which is essentially a measure of flows of income, expenditure and production, rather than a measure of assets or liabilities. Change.

Secondly, how big would our modern militaries be if their expenditure was still considered a drain on the national accounts? In fact, Simon Kuznets, the father of national accounts, originally tried to count military spending as a negative to the national output.

"Kuznets, however, specifically saw his task as working out how to measure national economic welfare rather than just output."

"With this aim, in fact, Kuznets was out of tune with his times. Welfare was a peacetime luxury... Before long, the president would want a way of measuring the economy that did indicate its total capacity to produce but did not show additional government expenditure on armaments as reducing the nation's output."

Politics. With the Second World War approaching, governments needed to ramp up military spending. But, as now, the heuristic of growth held sway over the electorate. It's an easy mental shortcut. So, the government changed the national accounts to include military spending on the "plus" side.

"By the time the wartime economists developed the modern concept of GDP, government was already a far greater presence that it had been. Subtracting Defense spending from the older conception of national income would have wrongly given the impression that the war effort was going to involve a huge sacrifice in private consumer spending."

"...early definitions of "national income" did not include government spending, because governments before the late nineteenth and early twentieth century had such limited functions. Paying for war, or similarly for the justice system, was seen as a necessary evil reducing national income, rather than a positive contribution to the economy."

Of course, we can extend this. There are plenty of things inexplicably included or excluded from our national accounting.

"The main reason for not counting unpaid housework as part of "the economy", while paid housework is counted, is the difficulty of measuring it. Well, difficulty is not the right word. It can be measured by surveys, like the many other economic statistics, but generally official statistical agencies have never bothered - perhaps because it has been carried out mainly by women."

We all need to remember this the next time politicians tout growth. We've chosen what goes into growth and what doesn't. Our figures only show us changes in what we choose to count, what we currently find "important". They say more about our current priorities than anything else.

None of our measures are immutable laws of nature. They are subject to whims and change.

"The imaginary line dividing productive from unproductive activity is called the "production boundary." There is no sharp division in reality, so at the boundary there are arbitrary decisions, and this can be simply a matter of convenience. The border also becomes self-fulfilling, though, as being included in the national accounts definition of GDP is taken as a mark of "productiveness."

I really recommend GDP: a brief but affectionate history by Diane Coyle