GDP and beginners
Financial Times Has GDP outgrown its use? By David Pilling has an excellent beginners article on the make up and use of GDP that poses questions:
Simon Kuznets, the Belarusian-American economist often credited with inventing GDP in the 1930s, had severe reservations about the concept right from the start. Coyle told me, “He did a lot of the spade work. But conceptually he wanted something different.” Kuznets had been asked by US president Franklin Delano Roosevelt to come up with an accurate picture of a post-crash America that was trapped in seemingly interminable recession. Roosevelt wanted to boost the economy through spending on public works. To justify his actions, he needed more than just snippets of information: freight-car loadings or the length of soup-kitchen lines. Kuznets’ calculations indicated that the economy had halved in size from 1929 to 1932. It was a far more solid basis on which to act.
When it came to data, Kuznets was meticulous. But what, precisely, should be measured? He was inclined to include only activities he believed contributed to society’s wellbeing. Why count things like spending on armaments, he reasoned, when war clearly detracted from human welfare? He also wanted to subtract advertising (useless), financial and speculative activities (dangerous) and government spending (tautological, since it was just recycled taxes). Presumably he wouldn’t have been thrilled with the idea that the more heroin consumed and prostitutes visited, the healthier an economy.
Kuznets lost his battle. Modern national income accounts include both arms sales and investment banking services. They don’t distinguish between social “goods” – say, spending on education – and social “bads” (or necessities) – say, gambling, repairing the damage after hurricane Katrina or preventing crime. (Countries without much crime miss out on related economic activity such as security guards and repairing broken windows.) GDP is amoral. It is defined simply as the total monetary value of everything that has been produced in a given period.
The first thing to understand about GDP is that it is a measure of flow, not stock.
Diane Coyle, Economist
‘There is no such entity as GDP out there waiting to be measured.’
The second thing to notice is that it is a measure of monetized flows. With a few exceptions (some of them odd), if the flow of goods or services weren’t involved in a market exchange transaction, they didn’t happen.
Sandwichman
except to the IRS, which is perfectly willing to tax you for non monetary benefits. and even working, i am told, on taxing you for ANYTHING that benefits you whether such as the imputed rent (opportunity cost) of your own house.
if the GDP is worth anything it is as an accounting of those things people are willing, able, and find necessary to pay government money for.
this may not measure some other things that are perhaps more important, and those things should be measured, as opposed to “we gotta increase the GDP at all costs (because Wall Street knows how to make money out of that).”
But it gets a little hard to follow the conversation if we never know what we are talking about or why. Sort of like “the budget.”
And the “debt” and “the deficit,” where backward is forward sometimes, and that’s okay. It keeps the people, the press, the politicians, and the professors completely confused all the time.
Coberly,
That’s what I meant by a few exceptions, some of them odd.
Sammich
if we had world enough and time… it might be fun and useful to try to understand what each other meant by what he said.
since i just spent x dollars fixing something that broke, i’m not sure where we’d draw the line between spending money on a bad (hurricane repair) and a good (my mirror). and i’m sure that all those stock traders would feel aggrieved if they couldn’t spend their hard earned money on drugs and call girls after a gruelling day of taking money from Y and giving it to X with a cut for themselves either way.
but don’t get me wrong. i don’t even understand the way “depreciation” is accounted in GDP. just don’t see a good way to make those good – bad distinctions in counting money.
one frequent writer at AB was sure that increasing the GDP by increasing the take to drug lords would be “good for the economy” because, i suppose, it would trickle down…
that way lies madness. i would propose in my simple, obnoxious, way that we keep GDP more or less what it is, but stop worshipping it.
Coberly,
Yes, I would also agree to keep GDP as it is (with reasonable technical adjustments from time to time) but stop worshipping it. What seems to be little understood is the contingency of the Keynesian refutation of classical political economy. Keynes argued that sometimes spending money on a bad can have beneficial effects but not always. Vulgar Keynesians like Krugman ignore the contingency. Austerians ignore the sometimes.
John Quiggin at Crooked Timber has launched a discussion of Henry Hazlitt’s recycling of Bastiat’s Broken Window fable. Have a look at my responses at EconoSpeak:
http://econospeak.blogspot.com/2014/07/one-lesson-ad-nauseum.html
http://econospeak.blogspot.com/2014/07/john-maurice-clark-on-window-breaking.html
Sammich
read your first (so far). i may be the wrong person for this argument. i am not educated in economics so a lot of what is said here goes right by me.
in any case it seems to me the writers… hard for me to keep track of who is who… seem to be in love with their own logic. while “supply IS demand” can be made to sound logical, it simply is not the way the world works. and at any given time there may well be… certainly is… only a fixed amount of work that is “demanded,” and other those conditions some kind of job “sharing” might make perfect sense. the long term takes care of itself.
whether it is better to reduce the work week, or to just lay off workers and let them collect unemployment while looking for some “demand” for their labor would seem to me to depend upon the circumstances.
i do not, alas, expect some “experts” to look at circumstances when their “logic” is perfect.
Sammich
second link
John Maurice Clark seems (to me) to be saying what i have been trying to say.
I’d say that post ww2 we have seen the triumph of “unimaginative” production.. that is selling people (and stoking the demand for) essentially the kind of toys they have always demanded instead of, horrible to say, creating and satisfying, a demand for “productive leisure” including “education”. of course this is not entirely or strictly true. but when people can think of nothing to spend their excess money on but speculating in bubbles… we are dealing with a sick economy.
we also have the unintended (perhaps) consequence of military Keynesianism leading to empowered neocons, the human and material cost of empire, and looks like the destruction of the planet.
but that is no doubt off topic.
coberly:
Did you ever read Kennedy’s “The Rise and The Fall of The Great Powers?” If not, do so. It is good for a long trip to Beijing or Shanghai China and back.
forgot to mention that Clark was writing in 1931
just beginning to see the results of “war prosperity”.
Run
sounds interesting. i’ll read it if i can find it.
i have it on order. meanwhile i read the wiki and the nytimes review.
he doesn’t seem to be saying anything very startling. maybe he has the data to cinch the case. but he seems to leave out the reasons for those bad decisions in the top. i suspect senility or corruption among the “elite.”
just like here. why an “old” empire should be any more corrupt than a new one is a question i have asked myself. it could be just that a “new” empire gets started simply because some new leadership has some programs it doesn’t allow to be corrupted, but with time the crooks figure out the system, or the “elite” just stop paying their taxes.
it seems to me that the people in America who have any money at all have already bought everything they can think of, so there is less to drive the capitalist system. some poorer country may have people still hungry for things they never had.