GDP is one economic model among several that could serve the purpose, but its use conveniently leads to policies that reflect the thinking of a particular school of economic monetary and fiscal policy advocates.
We all know that in operating a business we need to be able to measure the profits of our company and then adjust our prices and production to make sure that there are enough profits to adequately fund the company. That is a relatively straightforward process, since the amount of money in the bank at the end of the month is a real number.
GDP: A Brief But Affectionate History
GDP: A Brief But Affectionate History is a fascinating 140-page book that I cannot recommend highly enough. This is simply the best book on GDP that I’ve ever seen. You can read it on a few hours’ plane ride or a lazy Sunday afternoon. And Ms. Coyle actually makes a relatively dry subject interesting and at times a page-turner. She has a true gift.
Ms. Coyle starts with the predecessors to Adam Smith and takes us through the 17th century right up until today with the development of GDP, so we see the ebb and flow of ideas through time. Who knew the early developers of the model did not want to include defense spending, as they saw it as a wasteful, nonproductive activity? Or that Adam Smith thought the inclusion of services in the concept was misleading. “The provision of more services was a cost to the national economy, in his view. A servant was a cost to his employer, and did not create anything. Importantly, money spent on warfare or the interest on government debt was also being used unproductively. The nation’s wealth was its stock of physical assets less the national debt. National income was what derived from the national wealth.”
Will the Real GDP Please Stand Up?
GDP is a huge undertaking, full of rules, with almost as many exceptions
to the rules, changes, fixes, and qualifications, so that, as one
Amazon reviewer noted, GDP is in reality so complex there are only a
handful of people in the world who fully understand it, and that does
not include the commentators and politicians who pontificate about it
almost daily. The quarterly release of GDP statistics is more akin to a
religious service than anything resembling a scientific study. The awe
and breathlessness with which the number is discussed is somewhat
amusing to those who understand the sausage-making process that goes
into producing the number. Whether the GDP reading is positive or
negative, it often changes less in a given quarter than the margin of
error in the figure itself, and it can be and generally is revised
significantly – often many years later when almost no one is paying
attention.
GDP Is a Political Construction
GDP has always been a political construction, subject to the ebb
and flow of the intellectual and political climate, the need to raise
taxes, and the military needs of the day. It is also a tool used to
argue for or against income inequality (depending on what country
you’re in).
GDP is a financial construct at its heart, a political and philosophical
abstraction. It is a necessary part of the management of the country,
because, as with any enterprise, if you can’t measure it you can’t
determine if what you are doing is productive. That said, the act of
measuring GDP precipitates the observer effect writ large.
