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

Chapter 3. Made in Cambridge

I thought that the economics I was taught was insufficiently quantitative and that theory and facts were too widely separated.

—Richard Stone, “The Fortune Teller,”
Economica X (1943)

John Maynard Keynes’s role in constructing what eventually became GDP, and his concurrent debate with Simon Kuznets about the place for public spending—the G in the GDP formula—has been one of economic history’s best-kept secrets. But Keynes wasn’t working alone. He had a partner in this endeavor, another of his students and fellow Cambridge economist Richard Stone (1913–1991). After Simon Kuznets, Stone, too, would win a Nobel Prize for his work on national income accounting.1

Shortly before his death on April 21, 1946, Keynes persuaded the powers at the University of Cambridge to create a new Department of Applied Economics. Keynes, being Keynes, had a hand in choosing the department’s director and ensured that the post would be “for life.” Stone was the first director, and the Cambridge department along with Harvard University’s Development Advisory Service would together become among the world’s leading centers for thinking, teaching, research, and policy advice on macroeconomics. They would incubate the first set of ideas around what GDP would look like, and then help to export them to the four corners of the world.

Although he was among the first generation of Cambridge economists who had studied under Keynes, Richard Stone was unlike his teacher in many ways. He was more of an introvert, altogether more outwardly sensitive, less of a big-picture thinker. Compared with Keynes’s very public dramas and on-off relationships with his famous friends,2 Stone is said by his friends not to have owned a TV or radio. But he did have plenty of inner steel. We know this from his own written account of the time when he clashed with his father over his choice of career. Privately educated, Stone was born to upper-middle-class parents who wanted their son to join one of the moneyed professions; ideally a job in finance or the law would have suited them well. After two years of law Stone switched to economics “much to my father’s disappointment,” he would write many years later. “At that time the world was in the depth of the Great Depression and my motive for wanting to change subject was the belief, bred of youthful ignorance and optimism, that if only economics was better understood, the world would be a better place.”3

During the war years, while Keynes was busy negotiating US help for Britain’s war effort (the Lend-Lease Act), Stone was working at the British Treasury compiling the country’s first official national accounts with the economist James Meade, which would be needed during the talks.

Stone was well aware that the Keynesian template he was working to was out of synch with the Kuznets framework on which the US accounts were based. Had Keynes been in such a position he may well have made some grand statement to a national newspaper, but Stone preferred instead to debate with his US colleagues in the pages of The Economic Journal.4 “What is the economy we wish to measure?” he asked in a 1942 paper, as he urged the United States to include government spending in its accounts. Stone’s intervention, along with that of Keynes as we have seen, was just what some of his US counterparts were looking for.

By 1944 civil servants in the US administration had still largely been unsuccessful in shaking off the influence of Simon Kuznets. On their own they needed all the external support they could get. In order to search for a consensus, a three-way meeting was arranged between the UK, the United States, and Canada. Whereas Stone represented the UK, Kuznets had not been invited to represent the US delegation. The result was that the UK’s Keynesian proposal to include government spending in the national accounts was adopted by all three nations. This allowed the US economists to break away from Kuznets’s definition once and for all and adopt Keynes’s definition instead.

Richard Stone was by now developing something of a habit of being in the right place at the right time. Having successfully negotiated the definition of what would become GDP to include government spending, he found himself coming to America’s assistance once more. But the results this time would not be so favorable.


With the war over, America was preparing to provide financial aid to Europe. Under what became known as the Marshall Plan, European governments would be given grants and loans at favorable rates to rebuild war-damaged infrastructure. The US government had set up an agency based in Paris called the Organization for European Economic Cooperation. It was the job of the OEEC to monitor how the money was being spent and to check that the funding was helping Europe to become more prosperous—in much the same way that they had earlier sought to measure the effectiveness of President Franklin D. Roosevelt’s New Deal policies. To do this, the United States needed to know Europe’s existing levels of prosperity. And America’s planners figured that the best way to assess the extent of Europe’s wealth (or poverty) would be to use the GDP formula. This is how GDP would become a proxy for prosperity.

The OEEC asked Stone to establish an office in Cambridge that would crunch the numbers on the agency’s behalf. The OEEC and Stone’s suggested prescription was to link America’s aid to a European country’s GDP. If GDP went up, it meant that the aid was working. If GDP fell, that meant aid was being spent on the wrong things. Later, Stone and his team would train hundreds of economists and statisticians so that in the future each country would do the job for itself.

Europe’s countries had no real choice in the matter. If they wanted America’s aid, they needed to submit to its system of measurement. Little did they know that the act of measuring their economies would ultimately determine how their economies would be managed. In order to keep receiving American aid, a country’s GDP had to go up each year. It meant in practice that the GDP’s components needed to go up. In any economy the two easiest things to bump up are government spending and consumer spending, and Europe’s economies started to see the size of their public sector get bigger (which is still the case). Something else started to happen: this mainstreaming of GDP would be the start of the idea that national prosperity and GDP are one and the same.

Having embedded GDP across Europe, Stone would soon turn his attention to organizing accounting systems for the rest of the world. The statistics office of the United Nations got in touch and asked him to prepare a template for national accounting, not only for Europe, but for all UN member states. By the late 1950s the system of national accounts developed under Richard Stone had become the gold standard.

When delivering his Nobel lecture in Stockholm in 1984, Richard Stone would pay a generous tribute to his Cambridge University teacher Colin Clark. Clark was Stone’s great mentor, and there is no doubt that the two were close. But the reality is that Stone owes as much (if not more) to Keynes. It was Keynes after all who spotted Clark and brought him to Cambridge. It would be Keynes who would give Stone a job as his research assistant when writing How to Pay for the War. It was Keynes who recommended Stone to head up the new Department of Applied Economics, from where Stone would introduce GDP to the world. In doing so, perhaps most important of all, Stone used Keynes’s definition of GDP, and not that of Colin Clark and Simon Kuznets.

In tapping Stone for the job, Keynes had chosen wisely. He understood that national income accounting needed economists who were good with figures. That sounds like an odd statement to make in today’s world, where so much of economics is taught and understood in numerical terms, but in Keynes’s day economics was mostly a descriptive field, and economists capable of solving differential equations while taking afternoon tea were thin on the ground. Keynes, himself a mathematics graduate, had spotted Stone’s mathematical and statistical abilities.

And yet when it came to the primacy of numbers in policy decisions, the two were different. As we have seen, Keynes was what in today’s terms we would call a data-conservative, arguing instead for numerical data to supplement human judgment. He believed that it was folly to say with any precision which nations would fight a war or where the next natural disaster or next financial crisis might hit, arguing as he famously did that “in the long run we are all dead.”5 For Keynes, measuring quantities such as factory output or government spending was always an imperfect means to a nobler end. Keynes wanted to count things so that jobs could be created, so that the poorest could escape poverty. Measurement for Keynes was never intended to be an end in itself, and he would urge his colleagues and politicians not to get bogged down in the fog of figures.

Stone, on the other hand, was as much of a theoretician as Keynes but at the same time more of an empiricist, more of a scientist. Theory for Stone was there to be tested with data. He would often claim in interviews that the economics he had been taught was insufficiently quantitative, and that he was no fan of the grand theory that tries to explain everything but with insufficient supporting data—both implicit criticisms of Keynes.6 And yet, and in spite of his insistence on precision in economics, Stone couldn’t see the irony of trying to compress the entire national economy into a single number: GDP.

Throughout his life, Stone would maintain a laser-like focus on national accounts. Honing and refining what goes into the GDP formula and what comes out became his life’s obsession and won him the Nobel Prize in 1984. Even if we accept that this was never the intention, Stone and his colleagues helped propagate the idea that GDP, economic growth, and national prosperity are interchangeable. And budding economists from across the world would flock to Cambridge to learn how to work his magic.