Gross Domestic Problem

The Politics Behind the World's Most Powerful Number

Lorenzo Fioramonti

• Publisher: Zed Books
• Year: 2013
• ISBN:
  9781780322759
• Edition: 1
• Topic: Business
• Subtopic: Business Development
• Index: Business

Gross domestic product is arguably the best-known statistic in the contemporary world, and certainly amongst the most powerful. It drives government policy and sets priorities in a variety of vital social fields - from schooling to healthcare. Yet for perhaps the first time since it was invented in the 1930s, this popular icon of economic growth has come to be regarded by a wide range of people as a 'problem'. After all, does our quality of life really improve when our economy grows 2 or 3 per cent? Can we continue to sacrifice the environment to safeguard a vision of the world based on the illusion of infinite economic growth? Lorenzo Fioramonti takes apart the 'content' of GDP - what it measures, what it doesn't and why - and reveals the powerful political interests that have allowed it to dominate today's economies. In doing so, he demonstrates just how little relevance GDP has to moral principles such as equity, social justice and redistribution, and shows that an alternative is possible, as evinced by the 'de-growth' movement and initiatives such as transition towns. A startling insight into the politics of a number that has come to dominate our everyday lives.

CHAPTER 1

The history of GDP: from crisis to crisis

While the GDP and the rest of the national income accounts may seem to be arcane concepts, they are truly among the great inventions of the twentieth century.

Paul A. Samuelson and William D. Nordhaus,
Nobel laureates in Economics

The invention of GDP was the ‘Manhattan project’ of economics.

Alan AtKisson, author of The Sustainability Transformation

Although the first attempts at measuring national income date back to seventeenth-century Ireland, the current systems of national accounts have a much more recent history. The gross domestic product, or gross national product as it was initially called, was invented in the twentieth century in a time of profound economic crisis. It was the Great Depression of the 1930s, with its heavy toll on industrial production and employment, that prompted policymakers and economists in the United States to join forces with a view to developing a systematic method to assess the state of the national economy and its performance over time. At that time, government needed more reliable evidence to guide its macroeconomic policies given that existing data was too sketchy and hard to compare. With the outbreak of the Second World War, the defence budget became the most significant propeller of America’s economic output and large industries were to be quickly converted into producers of ammunition and military equipment. In this context, the capacity to estimate the speed at which the civilian economy could be effectively converted into a war machine without hampering internal consumption turned out to be one of the most critical advantages of the US vis-à-vis other countries, especially Nazi Germany. For all intents and purposes, the invention of GDP helped America win the war at least as much as the development of the nuclear bomb carried out by the Manhattan Project. No surprise, then, that such a close connection between GDP and the war economy continued unabated in the post-war period and especially with the end of the Cold War, when the US asserted itself as the only superpower and its model of consumption won the hearts and minds of most of the world.

Ever since, GDP has been dominating the policies of international financial institutions, such as the World Bank and the International Monetary Fund, and has driven virtually every sector of political and economic governance. In the past few decades, GDP performance has become the number one priority of most (if not all) countries around the world, irrespective of their political leadership, industrial development and cultural background. Until another crisis hit: the Great Recession starting in 2008, which converged with the environmental degradation caused by economic growth. This chapter tells the story of how all of this came about.

Numbers and politics: the pre-history of GDP

The first attempt at designing a system of national economic accounts was made in Ireland in 1652, when a physician of the British army, William Petty, was asked to conduct a systematic survey of the country’s wealth as part of a land redistribution programme promised by Cromwell to his troops in the aftermath of a repressed uprising. Within thirteen months, and with the help of innovative surveying instruments as well as trained soldiers, Petty completed the study and drew up maps of roughly thirty counties, which stretched for over 5 million acres. The Down Survey, as it is commonly known, represented the first ever attempt to measure the wealth of a country through systematic economic analysis. And, perhaps not surprisingly, its application soon revealed hidden political agendas. For starters, the survey was designed to serve the interests of the British government, whose main goal was to put its Irish problem to rest by expropriating the country’s populace (especially its Catholic component) of productive land and turning it into a source of income for a permanent occupational presence. Some historians have demonstrated the extent to which this statistical undertaking helped eradicate Ireland’s indigenous culture,¹ while others have described it as a ‘gigantic experiment in primitive accumulation’.² Petty’s work was also instrumental in equipping government with new information to raise taxes and limit the amount of wealth owned by private individuals, a useful piece of intelligence to restrain local autonomy and avoid concentrations of capital in the hands of potential opponents.

On a personal level, the survey also turned into a gold mine for Petty’s financial assets. Only a few years later, this young son of an English clothier had acquired nearly 19,000 acres of Irish land, some of which was given to him in lieu of salary, and some of which he was able to purchase from the soldiers to whom the land had been granted by government. How did he manage this? Because, according to the law based on the results of his survey, most of this land was declared ‘unprofitable’ and thus it could be bought very cheaply. Yet, in spite of its alleged unprofitability, it constituted the primary source of Petty’s considerable fortune: while in 1652 his total assets had been less than £ 500, in 1685 he could count on a personal wealth worth of over £6,700.³ Although Parliament tried to impeach him on several occasions, charging that he had taken bribes and had profited unfairly from his official position, the government protected him, and when the monarchy was finally re-established in 1660 all charges against him were immediately dropped. King Charles II pardoned him for his service under Cromwell, awarded him a knighthood and, by royal letter, secured all his personal holdings in Ireland.

According to historian Mary Poovey, Petty forged the link ‘between personal experience, mathematics, and impartiality that made his experience in Ireland seem both essential and incidental to the kind of knowledge he produced for the king’:

Numerical representation was critical to this link, because the credibility of numbers that purported simply to reflect what had been counted was enhanced by firsthand experience, while the precision of ‘computing’ seemed to efface the personal interest of the person who made knowledge from numbers.⁴

Petty’s close relationship with government and, personally, with the king, allowed him to continue influencing Britain’s economic policies. Among others, he recommended that the state keep records about domestic consumption, production, trade, and population growth as part of a centralization process that would eventually strengthen the government at the expense of peripheral pockets of autonomy. He also made the case that keeping track of domestic production would have improved the collection of taxes and the design of economic policies to support the expansion of Britain vis-à-vis competitors in Europe. In his Economic Writings, Petty argued that ‘if every mans Estate could be alwayes read in his forehead’, then economic activities would prosper and the nation’s wealth would grow indefinitely.⁵ Obviously, this type of accounting would require more than simply distinguishing profitable from unprofitable land. Among others, it would need some measurement of the value of each property, which would inevitably include the amount of labour necessary to make it profitable and sustain production. Thus, by venturing into the complex world of economic accounting, Petty began to focus on these issues during the latter part of his life as an economic advisor to the Crown. His objective was to develop an ‘impartial’ method to compare the value of property and labour in order to make both subject to taxation. In his view, a more sophisticated national account system would assure the sovereign that ‘he would eventually be able to collect the assessed taxes’, thus making government more inclined to let money circulate freely in society and let the subjects trade and produce.⁶ He envisioned society as an economic collectivity whose overall production was in the interest of Britain’s projected power in the world. Even though some individuals may experience losses and others may gain out of this process, what really mattered to Petty was that the nation, as an economic entity, could grow. What some saw as a contest between the government and the people, he portrayed as a common effort directed against other nations. And ‘what could look like a game of chance’ became a circulation of wealth ‘that seemed equitable’.⁷

As part of his effort to ‘modernize’ the British political economy, Petty did not limit himself to measuring quantifiable entities. Having developed an interest for the economic assessment of the worth of labour, he believed that it was possible to use statistical techniques to extrapolate ‘the value of the people’.⁸ According to his approach, ‘value’ should be gauged exclusively in monetary terms, without any other psychological, ethical or religious connotation.

Suppose the People of England be Six Millions in number, that their expence at 71. per Head by forty two Millions: suppose also that the Rent of the Lands be eight Millions, and the profit of all the Personal Estates be Eight Millions more; it must needs follow, that the Labour of the People must have supplyed the remaining Twenty Six Millions, the which multiplied by Twenty (the Mass of Mankind being worth Twenty Years purchase as well as Land) makes Five Hundred and Twenty Millions, as the value of the whole People: which number divided by Six Millions, makes above 80l. Sterling, to be valued of each Head of Man, Woman and Child, and of adult Persons twice as much; from which we may learn to compute the loss we have sustained by the Plague, by the Slaughter of Men in War, and by the sending them abroad into the Service of Foreign Princes.⁹

As cynical as it might sound, Petty honestly believed that human beings could be given a monetary value. Although he never argued for the commercialization of people, he opined that individuals were an economic resource of the country and, as such, their economic value needed to be assessed in some way. A firm believer in the impartiality of arithmetic, he presented his approach as a factual representation of the worth of a nation, even though it was largely based on generalizations and value judgements. By relying on apparently neutral numbers, Petty could hide the fact that his theory was shaping the way in which government would end up regarding the populace: instruments and commodities rather than human beings. Thus, soon after Petty’s time, preoccupations with economic performance took priority over other objectives of public policymaking. And the adoption of economic accounts to measure not just the income of a nation but also the overall worth of a people would turn into a powerful tool for the central government. Perhaps surreptitiously, Petty’s economic theory paved the way for the introduction of cost–benefit analyses in policy planning. So, if the worth of a human life could be monetized, then the king could easily weigh the expense of disease prevention, for example, against the cost of an unaddressed plague, or the human capital to be invested in a military campaign against the loss it would cause in terms of domestic consumption.¹⁰

Just as Hobbes’s mechanical representation of political power inaugurated modern political thought, William Petty’s quest for mathematical representations of national wealth provided the foundations of modern political economy.¹¹ His attempt to turn the value of social phenomena (as well as human beings) into numbers was presented as a genuine effort at advancing knowledge and impartiality. In fact, it served the interests of the ruling elite and was amply adopted as an instrument of domination. And this has been true for all measures of economic performance, from that time to the present.

GDP as a ‘war machine’

Although the collection of statistics to describe national economies has a long tradition in the Western world (as the pioneering work of William Petty demonstrates), the invention of the System of National Accounts (SNA) and the measurement of GDP are relatively recent. The SNA was created in the US over the course of the 1930s to allow the American government to jump-start the economy out of the Great Depression and, more importantly, to maximize production in what was soon to become a wartime economy.

The first set of national accounts was prepared under the guidance of the American Russian economist Simon Kuznets and a small team of young researchers. Of Jewish origin, Kuznets was born in the Russian Empire in 1901 and spent his childhood under the Tzar’s rule. As an adolescent he sympathized with moderate Menshevik movements inspired by a reformist approach to Marxist socialism, and as a consequence he opposed the radicalism of Leninist Bolsheviks. When, after the 1917 October Revolution, the nation fell into civil war, the family fled the country and, via Turkey, migrated to the US, where Simon continued his studies in economics and received a Ph.D. from Columbia University.¹² Although during his academic career Kuznets held a number of chairs at various American universities, from the University of Pennsylvania to the Johns Hopkins University and ultimately Harvard, his major contributions to economics were made during his long tenure as a senior researcher at the National Bureau of Economic Research (NBER), a think-tank founded in 1920 that was soon to become the leading economic research organization in the US. As one of the students and closest collaborators of the NBER’s founding director, the renowned political economist Wesley C. Mitchell, who had been appointed chairman of President Hoover’s Committee on Social Trends, Kuznets was immediately exposed to the various ranks of the US policy community of the time.

By the late 1920s, the Great Depression had hit America. Workers were being retrenched on a daily basis, capital markets were up in arms and entire industries were on the brink of collapse. Although the federal government tried to tackle the situation with the various means at its disposal, the absence of systematic and regular data on the state of the economy threatened the effectiveness of economic policies. According to economist Richard T. Froyen, ‘One reads with dismay of Presidents Hoover and then Roosevelt designing policies to combat the Great Depression of the 1930s on the basis of such sketchy data as stock price indices, freight car loadings, and incomplete indices of industrial production.’¹³ As America sank deeper into an economic slough, the White House called on the Department of Commerce to produce some factual evidence to assess whether the government’s policies were actually working. President Hoover himself, having been a former secretary of commerce, was able to exert direct influence on the Department’s bigwigs to come up with some numbers. Elections were looming and his job as the first citizen of America was on the line. Amid mounting political pressure, a handful of employees were dispatched throughout the country with a view to collecting data and filing reports about industrial production.¹⁴ Their capacity was limited and their methods largely ad hoc; thus it came as no surprise that such anecdotal evidence tended to support Hoover’s view that recovery was just around the corner. But, as it turned out, it was not.

Meanwhile, Kuznets had begun to work on the conceptualization and measurement of national income, and in 1932 he authored an article for the Encyclopaedia of the Social Sciences. An early draft of his entry landed on the desk of a Democratic senator from Wisconsin, Marion LaFollette, who convinced his fellow congressmen that the time had come to stop compiling sketchy reports aimed at assuaging the White House and invest in a more systematic and reliable methodology.¹⁵ LaFollette wrote up a resolution that was immediately approved by the US Congress. The Department of Commerce was officially tasked w...

Table of contents

• Cover
• Economic Controversies
• About the Author
• Title Page
• Dedication
• Contents
• Acknowledgements
• Introduction The world’s most powerful number
• Chapter 1 The history of GDP: from crisis to crisis
• Chapter 2 The Frankenstein syndrome
• Chapter 3 The global quest to dethrone GDP
• Chapter 4 Change from below
• Conclusion Supremacy and resistance
• Notes
• Bibliography
• Index