How a Sober Economist Invented The Economy
A brief history of how we’ve come to measure countries thanks to a man named Simon
An article inspired by Planet Money
If you walked up to somebody a hundred years ago and asked “how’s the economy”, they’d have no idea what you’re talking about.
Sure, people asked about the ships coming into Seattle or how the harvests were doing, but this thing called “the economy”?
It didn’t exist.
Today, not only do we talk about the economy, we talk about it in numbers. Without thinking, we can say things like the US economy grew by 1.9%.
How did this happen?
According to Zachary Zarabell, author of Leading Indicators, it’s because of the Great Depression.
Enter a Man Named Simon
“You can use Google to search through old books for the phrase ‘the economy’,” says Zachary. “If you do that, what you find is the following. In 1700, basically nothing. 1800? nothing. 1900? nothing.”
As Zachary goes on to explain, a few decades after 1900, people suddenly felt compelled to talk about ‘the economy’. They wanted to discuss this giant, invisible thing that was all around them.
“It was invented because there was a perception something really, really bad was going on, but people didn’t know what it was.
“There were homeless people in the street. Families were leaving their dustbowl farms. And yet, there was no way of grasping the problem.”
You can imagine FDR saying to his advisors “boil it down for me. How bad is it? What’s the big picture?”
To answer him, they needed a number. The number they found was Gross Domestic Product — GDP for short. We’ll get to this shortly.
People had thought of this before. During the Great Depression, however, the US government decided to do this in a much more serious way.
They wanted to add up everything that was made in the entire country. In a given year, they wanted to know the number of houses that got built, all the beers sold in bars, every visit to the doctor — the works.
To do this, they needed a numbers guy. A guy who was willing to devote his life to wading through reports and figuring out how to add up lots and lots of numbers.
And they found just the right guy. His name was Simon Kuznets.
His turn will come, too.
Everything a Country Makes = GDP = The Economy (Sort of)
Adding up this stuff is harder than it sounds. First of all, you have to figure out everything you need to count.
Trying to define what things need to be included is incredibly complicated. The steel industry association had figures on how many tons of steel were being sold, and the agricultural associations knew how many tons of grain were being produced, but no one had made an attempt to put it all together.
Once you figure out what to count, you have to figure out how to count it. For one thing, you have to make sure you’re only counting what the US is producing.
If someone buys a Hershey bar in New York City, but the cocoa to make it comes from Brazil, you have to subtract out the cost of the cocoa because it didn’t come from the United States.
That cocoa is part of Brazil’s GDP.
Simon and his team went to work on this stuff, and in 1934, at the request of Congress, they published a report. It was called National income: 1929 to 1932. 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 have 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 even a careful student by the light of a quantitative picture of our economy…”
National Income Becomes an Overnight Sensation
National income is an answer to these 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.
By 1937, Roosevelt starts talking about the economy. He starts talking about national income going up.
The number Kuznets is calculating becomes part of an intellectual revolution over in England too. British economist, John Maynard Keynes, starts talking about the economy as something that the government can control.
If you can name something — if you can boil the economy down to a single number, a single number that rises or falls every year — it occurs to people maybe we can change it. Maybe we can control it.
Many people start believing there’s this thing called ‘the economy’ — that it’s a mechanical system that obeys laws, just like physics. If you can describe the system and the variables correctly, it’s very mechanistic.
Input in and output out.
The Test of WWII
This new idea that economists and the government could control this new thing called ‘the economy’ was about to be tested.
In 1941, the US entered world war two, and the government took over the US economy.
Fighting an all-out war is not just risky for soldiers. It can mean massive food shortages at home. It can mean rampant inflation. It can bankrupt a country almost overnight.
If you’re going to turn all of this domestic industry into war industry — car plants into tank plants, part plants into gun plants, and clothing factories into military apparel — how far could you go in the direction of war output before you imperiled domestic production?
And how far could you go before people started freaking out and worrying that prices would rise and goods will become scarce?
Fortunately, the US had a secret weapon. Simon Kuznets. He became the chief economist on the planning committee of the war production board.
However, FDR had apparently not consulted with Kuznets, and in 1942, he gave his state of the union speech laying out incredibly specific plans for what he wanted to do in terms of war production.
Kuznets looked at the numbers, crunched them, and went back to the Roosevelt administration. “I’ve got some news for you. Your big plan? It isn’t going to work.”
He realised the US economy wasn’t big enough to make all the planes and tanks and everything else that Roosevelt was planning. And if the US tried, it could lead to shortages. It could lead to massive inflation. It could wreck the US economy.
It was the generals versus the economists. Surprisingly, the economists won. That’s who Roosevelt listened to.
Many people have said that the invention of GDP was one of the prime factors in the allies winning the war. The ability to, with some confidence, dedicate these resources was crucial.
The war ends and GDP sweeps the world. All these new international organizations pop up — The UN, the IMF, the World Bank — and the people running these global groups love GDP.
The first things you do in the 1950s and 60s if you’re a new nation are the following: Open a national airline, create an army, and start measuring GDP. This is because if you want to go to the world bank or the UN for economic aid, the sole criterion is if we give you money, you have to show that it helped 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 an Olympic Games.
People do, especially during the cold war. As much as anything, this was a battle of economic systems. Who’s winning: communism or capitalism?
Let’s ask GDP.
Politicians around the world start to focus on this thing. How do we make our GDP bigger? How do we win this competition? How do we move up in the rankings?
By the 1960s, GDP is such a big deal that it gets its own backlash. Robert Kennedy calls out its shortcomings in 1968.
“(Gross National Product) doesn’t 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…”
Simon Kuznets was not happy with how his creation was being used either. He said this fetishization of numbers and the use of this number as a proxy for everything is what politicians do. It’s what people do. I would never have recommended it.
GDP went from being a useful Depression-era tool to a world war II weapon to a piece of cold war propaganda to facing its own backlash in the 1960s.
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.
Diane Coyle is an economist who wrote a book called GDP: A brief but affectionate history. She says GDP was never intended to measure overall wellbeing or standards of living. Some things that are bad actually make GDP go up, like hurricane damage. That costs a lot to fix.
Then there’s the black market. Back in the eighties, Italy started counting its black market, and overnight, the Italian economy became bigger than the UK economy. Italians celebrated. In reality, nothing had changed.
“We tend to think about GDP as if it’s a natural object, like a mountain,” says Diane. “And we have methods of measuring it that are better or worse.”
“That’s just not true with the economy. In the universe, there’s no natural entity called GDP.”
In other words, maybe the most important thing to remember about GDP is it’s not a thing. It’s an idea.
And that idea keeps changing — for better or worse.