Dear New Yorker: Kuznets Did Not Invent GDP (and that matters)

The New Yorker just published a short piece by James Surowiecki on the difficulty of valuing the gains for consumers generated by new technologies, especially digital goods which are given away for free. The piece is a nice summary of recent research by economists like Brynjolfsson and Mandel who attempt to augment existing national income accounts with better measurements of the consumer surplus generated by the internet. So far so good.

In making this argument, Surowiecki briefly invokes the history of our existing national accounts:

Our main yardstick for the health of the economy is G.D.P. growth, a concept devised in the nineteen-thirties by the economist Simon Kuznets.

Despite its brevity, this sentence packs in two big, misleading claims.* First, “GDP” was not commonly used in the 1930s, or even the 1940s. In the US, economists only began to emphasize GDP in the 1990s. Elsewhere, the transition to GDP as the principal aggregate took place a little earlier. Gross National Product was first discussed in the early 1940s, during World War II (Carson 1975).** Before that, including throughout the 1930s, economist tended to write about National Income.

Second, Simon Kuznets did not “devise” GDP, or even GNP. Simon Kuznets did write extensively in the 1930s and 1940s about the practice of compiling national income statistics. Kuznets identified several different aggregates of interest, and came up with many useful conceptual distinctions for determining where to draw the “boundary of production” and how to value those goods and services included in that boundary (especially problematic goods that lacked market prices). Kuznets himself focused his attention National Income, which looks more like Net National Product than GDP or GNP. The biggest difference between national income and GNP is the attempt to subtract out capital depreciation, although Kuznets’ version of national income also treated government expenditures differently than GNP as developed by the Department of Commerce in the 1940s (Carson 1971).

That said, even though Kuznets was a major figure in the development of national income statistics in the United States, he was by no means the sole deviser of our modern national income accounts. The idea of calculating a total national income goes back to at least William Petty and his 17th century Political Arithmetick (Studenski 1958). Important precursors include such storied names as Lavoisier, better known as the founder of modern chemistry, who also worked on the double-counting problem in national income statistics, and Wesley Mitchell, Kuznets’ mentor and a co-founder of the National Bureau of Economic Research. And contemporary to Kuznets, we have figures in the UK like Colin Clark, James Meade, and Richard Stone (not to mention John Maynard Keynes himself, see Tily 2009). Stone, notably, won the Nobel Prize in Economics in 1984 for his work developing international standards for national income accounts. These standards (e.g. the United Nations System of National Accounts) follow conventions closer to the US Department of Commerce, and to the British Treasury, than Kuznets would have preferred. In fact, Kuznets was skeptical of the whole project of thinking of national income through the metaphor of accounts and accounting (Kuznets 1948)!

Both mistakes – claiming that GDP goes back to the 1930s, and suggesting that GDP was devised by a single man – tend to suggest that our current understanding of the economy has been more fixed and unchanging since the 1930s than it really has. These mistakes also downplay the multitude of alternatives that have been considered over the past 100 years, from Nordhaus and Tobin’s (1972) “measure of economic welfare” to Norway’s inclusion of housework in its official national income statistics in the 1940s (Sangolt 1999), to contemporary attempts to account for environmental damage (Muller et al. 2011). I am enthusiastic about attempts to augment GDP, to create alternatives, and to make explicit its arbitrariness and quirks by showing what it fails to see. But we do that debate a disservice when we collapse all of the work of national income statisticians into Kuznets, and all of the various proposed measures into GDP.

In short: Don’t blame Kuznets. GDP is younger than you think, and more alternatives have been proposed than we usually remember.

* Note that while I’m picking on Surowiecki here, this basic claim is repeated all the time in criticisms of national accounts. Surowiecki actually treats the issue more carefully than most by citing some of Kuznets’ cautionary words on the dangers of overinterpreting measures of national income.
** For citations, see this bibliography.

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