This book is the detailed review of GDP, its history, method of calculations and most important its deficiencies. The main idea is that flaws are real, very significant, and there is no known way to fix them. The review of various alternatives demonstrates that they are even more flawed than GDP so there is no alternative but continue its use in foreseeable future despite all warts.
ONE: From the Eighteenth Century to the 1930s: War and Depression
This chapter is description of early attempts to calculate economic resources of the country. These attempts were caused mainly by the need to estimate resource availability for military actions. It started with William Petty in 1665 that produced population, income, and expenditure calculations for England, providing information necessary for effective taxation. Then it jumps to XX century when contemporary national accounts had been established during 1930 in UK and USA. One interesting quirk here is that father of American economic statistics Simon Kuznets wanted to exclude government military expenses, advertisement, and financial speculation as items that decrease wealth rather than increase it. He lost and now GDP includes all government expenses and other non-valuable staff making it quite inadequate tool for measurement of economic wellbeing of the country. Other countries such as USSR and Germany also developed GDP, but with some very specific caveats. For example USSR would not count value of services since services are not material and therefore according to Marxist orthodoxy has no value. This chapter also provides definitions of GDP and its tabular and graphic representations for all approaches: Value-added, Income, and final demand. Finally it analyses some inherent difficulties in GDP calculations related to technological developments, natural resources potential, and, most important, subjective character of this tool. As example of far reaching consequences of miscalculation author presents history of Britain “non-crisis” of 1976.
TWO: 1945 to 1975: The Golden Age
This is review of GDP golden age period when it was not only calculated for internal use, but also served as an important tool of comparison of economic effectiveness of various countries and even more important economic systems, serving as important tool in ideological struggle of cold war. As part of this discussion exchange rates and purchasing power parity are also analyzed. Interestingly enough it ends with admission that it was all not only highly approximate, but also subject to serial cheating both intentional and not by communist camp, which economic structure was designed to produce numbers for reporting to leadership and propaganda for masses, rather than for actual estimates of real goods and services production.
THREE: The Legacy of the 1970s: A Crisis of Capitalism
This chapter is about crisis of capitalism in 1970s presenting four challenges to existing approach:
- End of effective economic growth after Arab attack on western energy market
- Intensity of Cold war demanding huge military expenses, while communist propaganda within and without West generated misinformation, in order to undermine overall moral of western societies by creating false impression of Soviet economic superiority
- Environmentalist attack on industrial society adding additional burden on efficiency of production.
- Continuing drug on Western economy from perceived need to provide subsistence for developing countries that have no viable economy to speak of.
All this resulted in stagflation, loss of faith in Keynesian measures and overall moral and ideological bearings of West.
FOUR: 1995 to 2005: The New Paradigm
The failure of Keynesianism in 1970s led to change of paradigm to monetarism. This time it was based more or less on factual evidence from GDP data from increasing number of countries. These data supported Solow’s idea of technology as driver of economic growth and were based on data set created by Alan Maddison. As example author provides history if computer technology when for decades businesses increasingly invested into computers, while economists could not find any evidence that this investment make any sense whatsoever. Only during 2000s economists succeeded in identifying increase in productivity growth from 1.38 in 1972-1996 to 2.46 in 1996-2004. Author also reviews difficulty in measuring value of services and variety that exploded in all areas of business. Economists even come up with Hedonic index trying to measure improvement in quality and functionality of various products. Computers again used as example because it is quite striking how huge is difference in functionality between computer of 1990 and computer of 2010 sold at the same price.
FIVE: Our Times: The Great Crash
This chapter is about financial crash of 2007 that to significant extent was caused by economists’ inability to calculate real value of financial assets leading to dramatic overestimates during the boom. It also discusses inability to provide valid data that would include totality of economy including informal and household input. There is a charming quote from Robert Stone about arbitrariness of economic calculations: “… commercial products valued at market price, government services at cost, and household activities are simply ignored.” It also discusses “Production boundary” that in theory separates productive activities from non-productive, but in reality is just a bunch of arbitrary decision about what goes into calculations and what stays out. Finally it looks at relationship between GDP and other economic data and welfare of society. So far attempt to measure this welfare with various indexes including MEW and iSEW are far from perfect. Another attempt to measure economic wellbeing of society are various dashboard that include multitude of indicators. So far with all deficiencies of GDP nothing else was accepted as viable alternative to it.
SIX: The Future: Twenty-first-Century GDP
The last chapter is a look at the future development and analysis of specific challenges that GDP or any other measurement would face while creating meaningful indicator of economic welfare of society. These challenges are:
- Dramatically growing complexity of economy
- Difficulty of evaluating productivity especially in services
- Intangibility of products such as new knowledge that could not be measured in any meaningful way
- Sustainably of productive processes and their impact on environment.
The final conclusion is that GDP is a deeply flawed tool, but it is still a bright light shining through the fog of economic data and there is nothing else comparable to it.
MY TAKE ON IT:
This is a wonderful account of GDP as economic tools and it’s many deficiencies. I am strong believer in old wisdom of software engineering more than applicable in this case: “Garbage in – garbage out”. Our quasi-socialistic intellectuals and politicians keep trying to manage economy based on garbage based information like GDP and unsurprisingly continue produce garbage quality results. I believe it is absolutely not possible to measure economy in any meaningful way by calculating inputs and outputs for the simple reason that both inputs and outputs contain a lot more intangible, than tangible components.
Moreover I do not think it even make sense to try measure economy because the only reason for such measurement is to use it for management, but economy being practically livelihood of people could not and should not be measured. I believe that instead of look at economy as at machine to be managed by elites, much more productive way would be to look at it as an unmanageable conglomeration of people and resources, and all that conceivably could be done is to set some rules of game that would facilitate maximization of resource availability for people to pursue satisfaction of their needs.