The Great Invention: The Story of GDP and the Making and Unmaking of the Modern World - Ehsan Masood (2016)

Introduction. The Great Invention

Washington, DC, December 7, 1999: members of President Bill Clinton’s economics team were assembled for a press conference to announce the US government’s achievement of the century. The once invincible Federal Reserve Board chairman Alan Greenspan was there, as was Clinton’s top economics adviser, Martin Baily; Commerce Secretary William Daley and Undersecretary Robert Shapiro were in the audience too. As the identity of “one of the great inventions of the 20th century”1 was revealed, the only notable absentee was Clinton himself.

As US government agencies go, the relatively small Commerce Department is responsible for a collection of critical government-run services, every one of which could have been a contender for the top prize. It is responsible for patents: the department issued 6 million of them in the 20th century (compared with 600,000 in the previous two centuries combined). It also developed the census and introduced the US National Weather Service. “We built the first atomic clock and we had a hand in creating the 911 emergency phone number,” Daley said. “We are the smallest of the cabinet agencies, but we have accomplished the most—in my unbiased opinion,” he added, injecting some humor into what could have been a very dry affair.2

But the Commerce Department’s achievement of the century would be something else, something that one might ordinarily struggle to describe as an invention. The department’s achievement of the century was a simple formula consisting of six letters: the formula for gross domestic product, or GDP.

“Think of it this way,” Daley added. “A doctor can only make a diagnosis and prescribe a treatment after first sitting down and piecing together all the test results that have been taken. And economic policy makers are very much like doctors. So what the GDP accounts have done is to give us the tools to make those critical decisions.” GDP, Shapiro would add, is “a living, growing monument to the ability of American economic genius.”

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Governments from the earliest times have wanted to count and measure that which falls in their domain of influence. They have sought to map the distances between towns and cities; they have looked for ways of quantifying the nation’s stock of natural resources, such as water and fossil fuels. Governments also like to know how much their citizens earn, so that they can levy the appropriate amount of tax.

But before Simon Kuznets’s 1932 report on national income, governments in the Western Hemisphere had a weaker grip on this kind of knowledge. Unlike the more centrally planned states in the Soviet sphere of influence, countries such as America and Britain knew less about what their citizens earned, or the state of their economic production and consumption. At the same time, there was no agreed method to work out how much money was coming in and how much was being spent by the state. Countries didn’t know with precision how much businesses were producing, nor did they have much of a sense of consumption patterns. This is what GDP was partly intended to fix. Forged in the fires of the Great Depression and the Second World War, the rationale behind GDP was that governments needed such data.

For arguably a majority of economists, and certainly for the assembled Washington gathering, GDP provided nations with an accurate account of their economies. The act of measurement also enabled, or coincided with, their nations becoming wealthier. The world’s richest nations belong to a club called the Organization for Economic Cooperation and Development, or OECD. According to the OECD, today’s nations are in effect ten times richer when their GDP of today is compared with their GDP in the early 1800s.3 And it is no coincidence that this increase has coincided with the eighty years in which calculating a nation’s GDP has been a global activity.

In his remarks to the gathering Daley flashed up a slide showing a simple chart with three vertical bars colored in black. The three bars represented America’s GDP for three different years. Two of the three bars illustrated data for 1900 and 1929, before GDP was formally worked out. The third represented GDP in 1999.

America’s GDP for 1900 was a lowly $290 billion. Twenty-nine years later it was $730 billion. In 1999, six decades after the great invention, US GDP had leapt to $9.2 trillion. Next to the other two years, that period appeared like a skyscraper on Daley’s slide. “Gone are the bank runs, the financial panics, the deep and drawn out recessions, and the long lines of the unemployed,” Daley said. “Obviously, the GDP accounts are not solely responsible for putting America’s economy on a steadier track—as much as I’d like to make that claim. But no question about it: They have had a very positive effect on America’s economic well-being.”

The Washington party therefore had an extra-special resonance for the DC elite: at the same time as celebrating one of their own—William Daley—Alan Greenspan and colleagues were honoring a system of measurement that had contributed to the United States becoming the most powerful nation on Earth.

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The only hint of caution that morning came, ironically enough, from Greenspan. This was still some years before the crash of 2008, and the Federal Reserve Board chairman was at the height of his powers and regarded as the chief architect and steward of America’s seemingly unending run of prosperity. “I cannot say what the size of the economy will be 1 year from today or 100 years from now,” Daley joked. “But I can say that when we reach the next milestone—$10 trillion—will depend a lot on . . . Chairman Greenspan.”

Amid the celebrations, however, the Federal Reserve Board chairman had a warning for his audience. In the very mildest of terms, he said that it would be wrong to conflate GDP with quality of life, and he cautioned that an increase in one did not necessarily mean an increase in the other. Just because a country such as the United States has high rates of economic growth, it doesn’t automatically mean it will enjoy a high quality of life, Greenspan said. To illustrate what he meant, Greenspan asked his audience to compare how people in the northern states cooled themselves during the summer months compared with folks in the South. While the northern residents were fortunate to enjoy cool sea breezes, those down south had to turn up the air-conditioning. While both, you could say, enjoyed an equally high quality of life, in GDP terms, the air-conditioned group would come out on top. “The wonderful breezes you get up in northern Vermont during the summer, which eliminates the requirement for air conditioning, doesn’t show up in the GDP,” Greenspan added.4

Greenspan was correct. GDP is neither a measure of welfare nor an indicator of well-being. That is because it is not set up to recognize important aspects of our lives that are not captured by the acts of spending and investing. There is no room in GDP for volunteering or housework, for example; nor does it recognize that there is value in community or in time spent with families. More measurable things such as damage to our environment are also left out, as is job satisfaction. GDP doesn’t even measure the state of jobs.

Greenspan’s was by no means a lone voice cautioning against reading too much into GDP beyond what it says about the state of production, or spending, or incomes. From the earliest days, its inventors, including Simon Kuznets and the British economist John Maynard Keynes, understood that it is not really a measure of prosperity, and Kuznets in particular became skeptical of the way in which his invention was being used as a proxy for this. As far back as 1922, the English banker and statistician Josiah Stamp questioned why national income did not include the value of housework or volunteering and remarked that the trend seemed to be to value those things that are important to rich people.5

Today, such voices have been joined by many more, including the leaders of developed and developing nations. Together with government ministers and civil servants, academics, campaigners, and business folk, they recognize that GDP has strengths but also flaws, and they want change. But they cannot agree on what could or should change, and they are even less certain about how change could happen.

Many support the idea that world leaders should be encouraged to follow a “dashboard” of numbers, of which GDP could be one, alongside indicators of the state of a nation’s health, education, employment, living standards, environment, and well-being. This dashboard might include the Human Development Index, a pioneering idea that in a single number captures life expectancy, literacy and schooling alongside income. The HDI was created more than twenty-five years ago as an alternative to GDP but would stand for better things, according to one of its architects, the Pakistani economist Mahbub ul Haq.6 A dashboard of alternatives to GDP might also include Gross National Happiness, an innovation from the landlocked state of Bhutan. India’s Nobel Prize–winning economist Amartya Sen famously said that if you wouldn’t drive a car by looking at a single indicator, say, the fuel or temperature gauge, why adopt such a flawed principle to managing an entire economy?

Sen has a point, and I for one wish that such a multifaceted approach became the norm. But the practice of the past eight decades tells us that our leaders are not quite ready to embrace the complexity that Sen and so many others are advocating. If anything, in our era of Big Data, the volume and frequency of information are greater than at any time in history. Policy makers, at the same time, are on the whole less expert than they once were. More than ever they need an index that can capture complex phenomena and represent them in easy-to-digest formats. That is quite possibly why, in the years since the introduction of the HDI and the many indicators that have come in its wake, one index continues to reign, and that is GDP. While it is true that nations are now better informed on the alternatives, it is GDP on which our leaders are judged. Even if every single one of the alternatives on the dashboard were to show a positive sign, it is economic growth (for which read GDP) that matters at the ballot box for any serving head of government and his or her finance team. So long as growth remains the overriding objective, that effectively means there will always be a higher priority for economic policies that result in higher production and higher consumption, no matter what the costs of those policies may be.

If we are to assume that GDP isn’t going away anytime soon, then the challenge is not about introducing a better alternative indicator, because that won’t make a difference to economic policy making. The challenge has to be to change GDP itself so that it is better able to represent the things that matter to us.