History of Economics Playground

Inclusive wealth and the history of GDP

The International Human Dimensions Programme on Global Environmental Change (IHDP) recently published the Inclusive Wealth Report 2012, in which the authors propose a measure of wealth based on the stock of capital present in a country, as opposed to the flow measure of GDP. It is an important step towards a more explicit recognition of the sustainability of the economy’s use of resources, and is so obviously analogous to the standard assets-based way of accounting and estimating wealth in the corporate sector that one wonders why on earth it took so long to appear on the scene.

As with every attempt at something new, the inclusive wealth report has its fallacies. For one, it only includes three types of capital: natural, human, and productive capital, which means that obvious additions such as cultural or social capital are not considered. More serious, however, is the problem that these three types of capital are chosen because they directly contribute to the production of GDP. In fact, their values are determined directly on the basis of how much they potentially contribute to the production of GDP. One may hence very well argue that even if it’s good to move beyond the flow-measurement of GDP to the stock-measurement of the amount of capital available in the country, the new measurement does not attempt to expand the very narrow definition of wealth implied by GDP. That said, these are all problems that may be sorted out in future reports – one has to start somewhere after all.

What really intrigued me was how the report reproduced an account of the history of GDP that seems to have graduated into a standard history of post-war economics and politics. In this stylized history, Keynes, Kuznets and sometimes others fought over what is the best measure of the size of the national economy during the Second World War. In the end, GDP carried the day because that measurement provided the best indication of how much tax a government could collect and thus provided the best estimate of the relative economic and military strength of different countries. But then somehow along the way during the 1950s-1980s this GDP measurement became interpreted as also defining the total wealth in a country. All economists knew that that was a way too narrow definition of wealth, but somehow it got stuck, and somehow it redirected the focus of governments the world over to only maximizing GDP. In response to this regrettable development, measurements like the Human Development Index were developed.

What strikes me is that we have various very good accounts of the start of this story – Keynes, Kuznets and all that (see Ben’s work on this for starters) – but that the rest of this story seems to have simply appeared at some point without grounding in any serious historical account. Or did I miss something here? Who’s doing the history of GDP post-1945?