I recently reviewed Zachary Karabell's short history of economic indicators. Diane Coyle, a British economist, zeroes in on perhaps the best known of these indicators, the gross domestic product. Expanding on a talk she gave in 2011, she offers, in the words of the subtitle, a brief but affectionate history of GDP (Princeton University Press, 2014). "Affectionate," it should be noted, does not, in Coyle's logic, imply "uncritical" although it does imply "defensible"- at least until a better measure of the economy comes along.
GDP is "an abstract statistic derived in extremely complicated ways" that is nonetheless critically important; it even tends to dictate governments' fortunes. Its critics (environmentalists, "happiness" advocates, and social activists) "see it as the primary symbol of what's gone wrong with the capitalist market economy." But, Coyle argues, despite its flaws "GDP is … an important measure of the freedom and human capability created by the capitalist market economy." (p. 5)
Coyle traces the development of the GDP construct from the eighteenth century to the present. Let me, for purposes of this "really brief" post, fast forward to the financial crisis since it "raised some profound questions about what finance is for and specifically how it is counted in GDP." (p. 98)
As it turns out (and why should we be surprised?), finance is not properly accounted for in economic statistics. A case in point: in the disastrous fourth quarter of 2008, "the statistics showed the fastest growth in the United Kingdom's financial sector on record" and a contribution to the economy roughly equal to that of manufacturing even as the state was "propping up the sector through subsidized funding and direct state ownership." (p. 99) One major problem with measuring the value of financial services to the economy is that "increased risk-taking is recorded as increased real growth in financial services." The higher the leverage, the greater the contribution to the economy. We know only too well that's not so. As a result of this mistaken methodology, "the size of the financial sector in recent years has been overstated by at least one-fifth, maybe even by as much as one-half." (p. 101) And so, perhaps, has its importance to national economies.
In many ways, GDP is an outdated statistic, designed for an era of mass production with its many countable units. Even though Coyle maintains that "we should not be in a rush to ditch" it, she recognizes "three issues that suggest we might move toward a different approach in time." (p. 121) They are: "the complexity of the economy now, reflected in innovation, the pace of introduction of new products and services, and also in globalization and the way goods are made in complicated global production chains; the increasing share of advanced economies made up of services and 'intangibles,' including online activities with no price, rather than physical products, which makes it impossible to separate quality and quantity or even think about quantities at all; and the urgency of questions of sustainability, requiring more attention to be paid to the depletion of resources and assets, which is undermining potential future GDP growth." (p. 122)
Coyle's book is a valuable addition to our understanding of GDP and the way governments have relied on it to make decisions about war, welfare, and political influence. Reading it is a wonderful way to while away at least part of a weekend afternoon.