Don’t confuse familiarity with understanding. That’s perhaps the biggest takeaway from Diane Coyle’s short and highly readable GDP: A Brief but Affectionate History. The official guidance for calculating GDP, the System of National Accounts (SNA), published by the United Nations runs 722 pages. That combined with the difficulties of executing the actual calculation makes one wonder how many people, even ostensible experts, really understand the quarterly numbers. In addition to the intricacies of defining and calculating GDP, Ms. Coyle takes the reader through the short yet turbulent history of the metric, its uses and mis-uses, and several possible improvements and alternatives. The CFA Society Chicago Book Club members who met to discuss the book at their March 2019 meeting agreed that the book left the reader with more questions than answers, which is perhaps one of the marks of a good book.
As for GDP’s short yet turbulent history, Ms. Coyle traces the origins of the modern metric to Colin Clark and his pioneering work at the United Kingdom’s National Economic Advisory Council, an organization based on the then-novel concept of providing economic advice to governments to combat problems, the most notable problem at that time being the Great Depression. On the other side of the pond, the famed U.S. economist Simon Kuznets applied Clark’s concepts to the U.S. economy at the National Bureau of Economic Research, work for which he was later awarded the Nobel Memorial Prize in Economic Science. From the very beginning, Kuznets grappled with using the metric to read into welfare, well-being, or happiness, a theme that’s repeated throughout the book and a problem that persists to this day.
Spawned in depression, the concept of national accounting gained maturity in war. The Allies’ efforts to defeat the Axis powers required a complete mobilization of their nations’ resources, so it’s no surprise that understanding what those nations’ resources were was vital to that effort. During that time economists started meaningfully incorporating government spending into GDP calculations for the first time. The reasons for neglecting it previously were numerous. For one, as is easy to forget with our current bloated governments, government spending prior to the war was miniscule in comparison to aggregate economic output. A second reason for incorporating government spending was a matter of mathematical necessity. Without taking into account government spending, national income would fall short of the market value of goods and services produced. Kuznets again warned that incorporating government spending into GDP “’tautologically ensured that fiscal spending would increase measured economic growth regardless of whether it actually benefited individuals’ economic welfare.’”
Fast forward nearly a century later, and that recurring theme of reading too deeply into GDP notions of happiness or welfare is no less tractable. Efforts to combat that shortcoming include the Human Development Index (HDI), the Index of Sustainable Economic Welfare (ISEW), the Measure of Economic Welfare (HEW), and several others. Those indices try to account for, among other things, leisure time, environmental degradation, crime, the negative impacts of defense spending, and several others. The most compelling response to attempts to read welfare and happiness into GDP might come from Clayton Christensen’s How Will You Measure Your Life. In that classic book he discusses “motivators” and “hygiene factors” in the context of one’s personal life. Motivators are, like the name suggests, factors that compel people to go above and beyond the call of duty and can include the sense of duty or purpose that comes from curing disease, educating people, or defending the innocent in the military or as first responders. Hygiene factors, like salary, are necessary but not sufficient conditions for happiness. Below a certain level, people are unable to meet basic human needs and their happiness is adversely affected. After a certain level income level ($75,000, according to a study by Angus Deaton and Daniel Kahneman), there’s little relationship between income and happiness. Perhaps the same can be said of GDP. Below a certain level of economic output, a country likely will be unable to meet the basic needs of its people, such as nutrition, sanitation, and vaccinations. After a certain point, GDP and happiness likely has a more tenuous relationship. It might even be a negative relationship. Anecdotally, demand for mental health counselling seems to rise with income.
Perhaps people wish too much of one metric. Not only can GDP not explain human happiness and prosperity, but it’s very hard to make it account for economic output. How should GDP account for nominally free services like search engines, Wikipedia, or open-source software? How should GDP account for unpaid labor such as the cleaning and child care services performed by stay-at-home spouses (mostly women), a perennial bugbear among feminists? Perhaps most consequentially, how should GDP account for the changing variety and quality of goods over time? To account for the change in quality, Ms. Coyle discusses hedonic price measures. Instead of just looking at the price of a good over time, hedonic price measures regress the price of a good on measures of quality, such as screen size and screen resolution in the case of televisions and computer monitors. The consequences of hedonic price measures for health care and education, two of the goods with the highest inflation rates, could be striking. The cost of health care has increased markedly in this author’s lifetime, but so have the availability and efficacy of several treatments. Education, unfortunately, has probably suffered the opposite fate. Despite the rising cost of higher education, there’s little evidence that the average graduate has gotten smarter based on measures of verbal and quantitative competency.
Those are just a few of the questions raised in a remarkably short book, only 145 pages. Although those questions deserve careful thought, one should only undertake such contemplation with Ms. Coyle’s warning about GDP: “the ‘object’ being measured is only an idea, not something with an independent existence waiting to be discovered and counted.” With all the variation in definition and measurement, one is unlikely to come to stable and satisfactory conclusions about GDP, but knowing that before contemplating GDP is perhaps the greatest lesson from an excellent book with several such lessons.