Source: FT, date indeterminate
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.
The first thing to understand about GDP is that it is a measure of flow, not stock. A country with high GDP might have run down its infrastructure disastrously over years to maximise income. The US, with its ageing airports and less-than-pristine roads, is sometimes accused of precisely that.
Neither is any account taken of depleted resources. China has been growing at 10 per cent a year for 30 years. That makes no allowance for the (presumably) finite oil and gas reserves it has been consuming. (The assumption is that technology will always come to the rescue.) Nor does it account for what economists call “externalities”, the by-products of growth, including pollution. How much it may eventually cost to clean up polluted rivers and restore denuded forests is of no concern to GDP.
Coyle told me GDP provided “no sense of the trade-off between present and future”. Innovation could help us find alternatives to finite resources, such as metals, but GDP took no account of sustainability. That left us vulnerable to “tipping points”, such as the sudden collapse of fishing stocks.
Before the 2008 financial meltdown, the size of the financial industry in the US had risen astronomically to reach nearly 8 per cent of GDP by 2009. (That was partly the result of changes in how banking was measured.) Yet a bigger banking sector, as we subsequently discovered, was not necessarily a good thing. Much of its size owed to an increasing capacity to generate “sophisticated” products, some of which turned out to be toxic. Given the lengthy recession that followed the crash, you could plausibly argue that an expanded financial industry destroyed GDP rather than created it. If banking had been subtracted from GDP, rather than added to it, as Kuznets had proposed, it is plausible to speculate that the financial crisis would never have happened.
On the other hand, says Coyle, GDP is particularly bad at capturing one of the most important features of modern economies: innovation. So-called “hedonic accounting” seeks to adjust for the fact that equipment like computers is improving all the time. If you buy a computer today that has four times the computing power of the one you bought a year ago but costs the same, then in reality its price has fallen. Put another way, you are better off.
Investment Watch Blog, Nov 2017
When, in the 1930s, the great economist Simon Kuznets created GDP, he deliberately left two industries out of this then novel, revolutionary idea of a national income : finance and advertising. [..] Kuznets logic was simple, and it was not mere opinion, but analytical fact: finance and advertising don’t create new value, they only allocate, or distribute existing value in the same way that a loan to buy a television isn’t the television, or an ad for healthcare isn’t healthcare. They are only means to goods, not goods themselves.
Eand.Co, Nov 2017
Finance and advertising are no longer merely allocative industries today. They are now extractive industries. That is, they internalize value from society, and shift costs onto society, all the while, creating no value themselves. The story is easiest to understand via Facebook’s example: it makes its users sadder, lonelier, and unhappier, and also corrodes democracy in spectacular and catastrophic ways. There is not a single upside of any kind that is discernible — and yet, all the above is counted as a benefit, not a cost, in national income, so the economy can thus grow, even while a society of miserable people are being manipulated by foreign actors into destroying their own democracy.
It was because finance and advertising were counted as creative, productive, when they were only allocative, distributive that they soon became extractive. After all, if we had said from the beginning that these industries do not count, perhaps they would not have needed to maximize profits (or for VCs to pour money into them, and so on) endlessly to count more. But we didn’t. And so soon, they had no choice but to become extractive: chasing more and more profits, to juice up the illusion of growth, and soon enough, these industries began to eat the economy whole, because of course, as Kuznets observed, they allocate everything else in the economy, and therefore, they control it. Thus, the truly creative, productive, life-giving parts of the economy shrank in relative, and even in absolute terms, as they were taken apart, strip-mined, and consumed in order to feed the predatory parts of the economy, which do not expand human potential. The economy did eat itself, just as Marx had supposed — only the reason was not something inherent in it, but a choice, a mistake, a tragedy.