Lies, damn lies, and GDP

Laurie Laybourn-Langton writes that measuring the economy is political - and economic measurement dominates politics.

February 20, 2018 · 5 min read

Before headline statistics were developed, governments had little idea of what was going on in the economy. In the 1930s, American presidents Hoover and Roosevelt grasped at a range of statistics in an attempt to understand the functioning of the economy, from the number and value of freight train loadings to stock price indices.

As David Pilling points out in a new, immensely readable book on the foibles of our headline economic statistic, the problem of measurement spurred the development of GDP as a summary measure of the economy at a particularly important time. Simon Kuznets, a brilliant, dedicated empiricist was tasked by President Roosevelt with deepening overall understanding of the economy as the Great Depression tore across the country. The resultant GDP measure was immeasurably powerful for two reasons: it provided a singular, seemingly authoritative description of the economy; and, in the moment of its creation, showed that the US economy had shrunk by around a half in the years since the Wall Street Crash. This justified Roosevelt’s New Deal policies, which argued for an enormous increase in government intervention to assuage the impacts of the depression and limit the chance of calamity calling again.

Over in Britain, GDP caught the attention of John Maynard Keynes who rejected the prevailing view that definitions of the economy should not include the activities of government, arguing that government action was essential in tempering the boom and bust proclivities of the capitalist system. If government spending was absent from GDP measures, then stimulus spending would count against national income, and so the state was soon included in Keynes’s modified GDP. Soon, World War Two and the necessity of national accounting saw the new British measure adopted in America.

By the time the war ended, GDP went global, literally, and ultimately came to encompass many of the things Kuznets warned against, like arms and advertising, and missed those he thought we should promote, like play and poetry. This has created perverse incentives for politicians who mark their success against headline GDP. As Robert Kennedy noted in an oft-cited remark, the logic of GDP says that more security locks and jails count as economic progress, while having little to say about the effect of the crime wave that would presumably be underway.

In this way, GDP also serves to entrench the set of economic ideas that have dominated political thinking over the last 30 years – that material growth, measured in terms of production, is essential to economic and social functioning, and that certain economic interests should be given free rein. As these ideas crumble, their legitimacy smashed by financial and environmental crisis, what comes next? There are three certainties we should consider when answering that question.

The first is that we should and must measure those things upon which we wish to make decisions, otherwise we are flying blind. Technological improvements in data capture have allowed more ‘objective’ measures of the forces that affect the economy, including concentrations of air pollution and the level of CO2 in the atmosphere. These join the rich array of alternative measures that already exist – such as GDP per capita – and others that are becoming more credible, including happiness.

The second is that our choice of measurement is and will always be political. GDP justified a larger state, after which it was used to do precisely the opposite. In combating our economic, social and environmental problems, the measures we choose will be used to justify certain policies and, in return, set the bounds of what is possible in politics thereafter.

The third concerns power, which GDP has helped us forget. Our current way of measuring the economy benefits powerful interests, many of whom may not benefit from change. This is one of the reasons why the existing range of alternative and complementary measures to GDP haven’t been adopted. The example of the US Congress threatening the US statistical agency with a significant budget cut if it adopted green accounting serves to illustrate. Analytical rigour often comes second to power. In this way, the popular narrative of Trump and Brexit being a rejection of ‘experts’ is an inversion of the truth unless their cheerleaders demand we move beyond GDP.

Pilling’s book is an excellent place to start in understanding these issues, and joins a rich literature springing up on these issues, including Diane Coyle’s authoritative GDP: A Brief But Affectionate History. In these times of disjuncture, it is important to read them. And when you do, remember that economic measures have only interpreted the world, in various ways. The point, however, is to change it.

Laurie Laybourn-Langton is a senior research fellow on the IPPR Commission on Economic Justice. He tweets @Laurie_L_L.

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