Economics: The Invention of ‘The Economy’

By Scott Stockdale,

If you walked up to somebody 100 years ago and asked them “how’s the economy doing?”, they wouldn’t have had any idea what you were talking about.

Sure, people talked about how many ships came in on any given day. They also talked about wheat harvests and the like.

However, this idea that we take for granted today – the idea of there being this thing called ‘The Economy’ – simply didn’t exist 100 years ago.

Today, not only do we talk about this thing called ‘The Economy’, we often talk about it in single digits.

So, without even thinking about what it means, we can say something like “last year, the UK economy grew by 1.6%”.

The question is how did we get to this point where we can boil down entire nations to a single number?

Also, why is it policy-makers believe they can control ‘The Economy’?

100 years ago…

The notion of there being this thing called ‘The Economy’ was born in a particular moment in time.

If you use Google to search through hundreds of books for the phrase ‘The Economy’, you’ll discover this to be the case.

In the 1700s, there was basically no mention of it.

In the 1800s? Nothing.

1900?

Nothing.

Then, a few decades after 1900, people suddenly felt this really compelling need to talk about ‘The Economy’; this giant, invisible thing that was all around them.

Why?

Because of The Great Depression.

At the time, there was this perception that something really bad was going on but people didn’t know exactly what.

They could see homeless people on the streets and “okies” were heading off to California by the thousands, but there was no real way of grasping it.

They needed a number to help capture the big picture.

Today, that number we use is Gross Domestic Product – aka GDP.

 

Really?

It’s worth noting that it’s not like no one had thought about this kind of thing before.

For hundreds of years, there would be moments when the king of England would tell his adviser to ride through the countryside and work out how much ‘stuff’ England had – add up all the wheat, the horses, the swords – and figure out if England had enough stuff to go invade France.

However, during The Great Depression, the US government decided to do this in a much more serious way. They wanted to go way beyond just sending a guy out on a horse.

They were going to try and add up everything that got made in the US in a given year.

They wanted to know about all the houses that got built, all the beers sold at bars, every fedora made, every visit to the doctor – etc.

To do this, they needed a numbers guy.

They needed a guy who was willing to devote his life to wading through really boring reports, figuring out how to add up lots of numbers.

Luckily, they found just the right man.

His name?

Simon Kuznets.

It’s said that this guy was extremely serious and extremely dry. He was totally sober and extremely data driven. One might say he was the ultimate scholar.

He was the perfect man for the job.

How did he do it?

Adding up all this stuff is harder than it may sound.

First of all, you need to figure out everything that you’re going to count. Just trying to define what things need to be included is an incredibly complicated task.

The steel industry association had figures on how many tonnes of steel were being sold. The agricultural associations had knew how many tonnes of grain were being produced.

No one, however, had made an attempt to actually put all that together into an integrated picture of all the economic activity that was going on.

Once you’ve figured out what to count, you’ve got to figure out how to count it. For one thing, you can only count what the country in question is producing.

This means if someone buys a Hershey bar in New York City but the cocoa to make that chocolate bar came from Brazil, you have to subtract out the cost of that cocoa because it didn’t come from the US. That cocoa’s part of Brazil’s GDP.

So Kuznets and some other guys got to work on this stuff.

In 1934, at the request of Congress, they published a report titled (cue the *YAWN*) :

National Income: 1929-1932

It became a best-seller! Thousands of copies were printed and they sold out.

Here’s a sample of what Americans were so eager to read:

The economic changes that occurred in this country during recent years are sufficiently striking to be apparent to any observer without the assistance of statistical measurements.

There is considerable value, however, in checking the unarmed observation of a careful student by the light of a quantitative picture of our economy.

It’s easy to see why this very wonky statistic which, at the time, was called National Income, became an overnight sensation.

More than anything before it, National Income was an answer to these really basic questions:

“What the hell is going on?!

“How bad are things? Are they getting worse? Are they getting better?”

Pretty soon, you can’t turn on the radio without hearing these new numbers and what they’re measuring; this new thing called ‘The Economy’.

By 1937, Franklin D. Roosevelt – then President of the US – starts talking about ‘The Economy’. He starts talking about National Income going up.

You’d never hear Abraham Lincoln or Teddy Roosevelt or George Washington talking in this way!

An intellectual revolution

This number that Kuznets is adding up becomes part of a kind of intellectual revolution.

Over in England, we Brits are also adding up this number. Famous British Economist, John Maynard Keynes, starts talking about ‘The Economy’ as something the government can control.

If you can name something – if you can boil ‘The Economy’ down into a single number (a number that rises or falls every year) –  it starts to occur to people maybe we can change it.

Maybe we can control it.

A number of people really start believing that there’s this thing called ‘The Economy’; a mechanical system which obeys laws, just like physics.

They start believing if you can describe the system and the variables correctly, it will be mechanistic.

Input will equal output.

Part of the reason for measuring, therefore, comes from the belief that all this fuzziness which had followed human history around – bursts of growth and collapse, money going up and then going down – could be captured and controlled, just as scientists had managed to capture physical reality.

This new idea that economists and government could control this new thing called ‘The Economy’ was about to be tested in huge way…

WWII

In 1941, the US entered World War II, and the government basically took over the US economy to fight the war.

Fighting an all-out war isn’t just risky for soldiers. It can mean massive food shortages at home. It can mean rampant inflation.

At its worse, it can bankrupt a country almost overnight.

If you’re going to turn all domestic industry into war industry – car plants into tank plants; parts plants into gun plants; clothing factories into military apparel – how far could you go in the direction of war output before you imperil domestic production?

How far could you go before people started freaking out and worrying that prices would rise and goods would become scarce?

Fortunately, the US had a secret weapon: Simon Kuznets. He quickly became the chief economist on the planning committee of the war production board and started to make things happen.

Apparently, however, FDR had not consulted with Kuznets.

In 1942, FDR gave his ‘State of the Union’ speech, laying out incredibly specific plans for what he wanted to do in terms of war production.

This year, we’re going to make 60,000 planes and 45,000 tanks and…

… the list went on and on, with the demands growing bigger and bigger.

Kuznets looked at those numbers – really crunched them using the tools he put together to work out GDP – and went back to the Roosevelt administration.

He basically said:

“I’ve got some bad news. Your plan isn’t going to work.”

Kuznets looked at how much steel and aluminium and copper the US was producing; he looked at how many factories there were; and he realised the US economy just wasn’t big enough to make all the planes and tanks Roosevelt was planning.

If the US tried, he suspected it could lead to shortages, massive inflation and could wreck the economy.

It was the generals versus the economists.

Somewhat surprisingly, the economists won.

These are the people Roosevelt listened to.

(Yey for us.)

War-winning invention

There are many people who have said that the invention of GDP was one of the prime factors in the US helping us win the war. The ability to, with some confidence, be able to dedicate all these resources to the effort was a big deal.

It wasn’t because America fought particularly better than anyone else. It’s because it had such a massive industrial machine that dwarfed the capacity of anyone else and because it was able to use it with confidence, knowing it wouldn’t create huge domestic destruction…

The war ended and afterwards, GDP really swept the world.

There were all these new international organisations setup – the UN, the IMF, the World Bank – and the people running these new global groups loved (and still love) GDP.

The first things you do in the 1950s and 60s, if you’re a new nation, is open a national airline; create a national army; and start measuring GDP.

You start measuring GDP because if you want to go to the World Bank or you want to go the UN for some sort of economic aid, the sole criteria for those is “if we give you money, you have to show that it’ll help your GDP.”

Of course, once you have a single number summing up your country’s economy, it’s tempting to rank countries by GDP, like some sort of Olympic event.

This was especially true during the Cold War which was, as much as anything else, a battle of economic systems.

Who’s winning: Communism or Capitalism?

Let’s ask GDP.

Politicians around the world start to focus on questions like:

“How do make our GDP bigger?”

“How do we win this competition?”

“How do we move up in the rankings?”

By the 1960s, GDP was such a big deal that it faced its own backlash. Robert Kennedy called out its shortcomings in 1968:

If the Gross National Product does not allow for the health of our children, the quality of their education or the joy of their play; it does not include the beauty of our poetry or the strength of our marriages…

Kennedy wasn’t the only one complaining about how GDP was being used. Even Kuznets – the super serious, sober economist who had helped create it and eventually won the Nobel Prize in part for that work – was not entirely happy with how his creation was being used.

Just as Robert Oppenheimer, creator of the nuclear bomb, recoiled at the proliferation of nuclear weapons and strength being defined by this, Kuznets himself said:

The fetishisation of numbers and the use of this number as a proxy for everything is what politicians and people do. I would never have recommended that.

He wasn’t happy.

Today

In just a few decades, GDP went from being a useful tool to a WWII weapon to a piece of Cold War propaganda to facing its own backlash in the 1960s. What’s more, GDP is still with us today.

In the end, what should we make of it? What does GDP really do?

It does what it says on the tin. It measures the economy. We shouldn’t try to make it do something it’s not intended to do.

It was never intended to measure overall well-being or a nation’s standard of living.

Certain things that are bad actually make a country’s GDP go up, like storm damage which can cost a lot to fix.

Sometimes, it’s not ever clear what should count in GDP.

For example, stay-at-home dads and the labour they exert doing this, in the current rules, does not count as GDP, even though it’s quite clearly work. However, if two dads were to swap their kids for a day and pay one another to look after them, it does.

There’s also the black market: everything from off-the-books babysitters to mafia drug deals.

In the US, the black market doesn’t count towards GDP. In some other countries, it does.

Back in the 80s, Italy started counting its black market. Once it did, the Italian economy became bigger than the UK economy.

We often tend to think of GDP as if it’s a natural object, like a mountain, and we have methods of measuring it that are better or worse, but all the same, there is a thing there to be measured.

That’s just not true with the economy. There’s no natural entity called GDP.

In other words, perhaps the most important thing to remember about GDP is it’s not a thing. It’s an idea and that idea keeps changing.

In 2014, the US tweaked the way it calculates GDP. In an instant, the economy was $500 billion bigger!

It’s just an idea.

 

Source: Planet Money

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