Stop pretending we can function without GDP

Diane Coyle’s history of GDP proves it is the only tool that reliably links prosperity to your personal well-being

Title: GDP: A Brief but Affectionate History
Author: Diane Coyle
Publisher: Princeton University Press
Publication Year: 2015
(Available from Amazon)

Whether the intention is to inform us or win a political argument, numbers are everywhere. And one of the most common is gross domestic product (GDP).

Ostensibly, GDP is a scientific measure of the goods and services produced by the economy, which in turn provides critical input to public decision-making. Without it, governments would be severely handicapped in setting economic and social policy. After all, if you don’t understand something, how can you manage it?

But as English economist Diane Coyle’s GDP: A Brief but Affectionate History makes clear, creating a comprehensive and accurate measure of an economy is tricky.

Coyle also reminds us of GDP’s origins.

During the Second Anglo-Dutch War (1665-67), a government official named William Petty took a crack at systematically measuring the economy of England and Wales. His motive was to assess taxation capacity. Indeed, “The word statistics has the same origin as state, and originally referred to the collection of figures concerning the state, specifically taxes.”

Then, spurred on by mid-20th-century events like the Great Depression and the Second World War, modern GDP measurements began to take shape. The United Kingdom produced its first version in 1941, and the United States followed suit in 1942.

Refreshingly, Coyle doesn’t let her affection for the concept of GDP get in the way of a frank acknowledgement of its significant limitations.

First off, there’s the fact that household production isn’t included in the numbers. Hence the famous paradox of the widower who marries his housekeeper. Most people would think this a happy development, and certainly not one where economic welfare is in any way diminished. However, because GDP measures only monetary transactions, the official numbers are reduced by the fact that he is no longer paying her a wage!

Then there’s the technical challenge of ensuring that the measurement accurately captures all monetarily remunerated activity. And even if it does, there are lots of other caveats.

For GDP to be a useful indicator of prosperity and general welfare, it needs adjustments, one of which is for population. Obviously, a GDP of, say, $800 billion that has to support 40 million people is far less impressive than one of the same size that only has to support 20 million people.

And it also needs adjustment for the price level. If inflation has driven up prices by, say, 10 per cent, then a GDP that’s nominally grown by the same amount hasn’t grown at all in real terms and people are no better off than they were before.

Hence the concept of real GDP per capita (RGDPpc). Any smart discussion starts there.

Even then, GDP is an imperfect metric. With its focus on things with an explicit monetary value, it doesn’t capture everything we cherish, and doesn’t pretend to. Useful activities like volunteer work don’t get counted. Nor is any value ascribed to leisure time. And it takes no account of inequality.

Nonetheless, the things that GDP does measure are a useful proxy for what we call standard of living. And comparative levels of RGDPpc tend to correlate with higher life expectancy, lower infant mortality, and robust social resilience to adverse weather events. To quote economist Adam Ozimek: “GDP is an undeniably important and helpful indicator. It may not include everything that matters, but it is strongly related to many things that do.”

Accurate measurement was easier when economies were focused on the production of physical, relatively homogeneous things. Assessing changes in output value for crops, manufactures and energy is more straightforward than doing the same for services, particularly when, as is the case with many government services, there’s no competitive benchmark.

Then there’s the need to take account of product improvement, enhanced choice and brand new inventions.

For example, a modern automobile isn’t identical to one produced in, say, 1960, so measurement of GDP change has to factor in consideration of the added safety and convenience features of the modern version. And whether it’s the range of clothing one can now buy, or the availability of new developments like personal computers, smartphones, and music streaming, the choices available today dwarf those available as recently as 50 years ago. How do you put a true GDP value on the extent to which the range of choice has been expanded for ordinary people?

While not disputing GDP’s shortcomings, economist Scott Lincicome is of the view that, on balance, GDP’s “biggest flaw is probably that it underestimates just how much things have improved over the last century—by a significant amount.”

He cites the example of Nathan Rothschild, reputedly the richest person in the world in the 1830s. On July 28, 1836, Rothschild “died at age 58 from an infection that $10 of antibiotics would cure today … Far from overstating how well off we’ve become, GDP may be seriously undercounting it.”

Food for thought. And, no doubt, debate!

Troy Media columnist Pat Murphy casts a history buff’s eye at the goings-on in our world. Never cynical – well, perhaps a little bit.

Our Verdict

Diane Coyle’s GDP: A Brief but Affectionate History succeeds because it treats economics not as ideology or abstraction, but as an imperfect attempt to measure how people actually live. Coyle neither worships GDP nor dismisses it. Instead, she explains why it became indispensable, where it falls short, and why abandoning it altogether would leave policymakers flying blind. Clear, thoughtful and surprisingly accessible, this is a book that reminds readers that behind every economic statistic lies a political, moral and human judgment.