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?

Comments

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I'm working on it for my dissertation, but you're going to have give me a year or two!

A few corrections though - GDP didn't carry the day immediately post-war. GNP did. GNP replaces GDP as the main aggregate a couple decades later (not until 1990 in the US). I wrote a long-ish post on that here. Another quick one is that GDP is taken as a measure of income, not wealth, though we do certainly treat it as *the* thing to be maximized. But more importantly, I argue that GDP gets defined as "the size of the economy," which is a new way of framing the whole system, and it gets baked right into the basic postwar macro and growth models - the Y of Solow or Hicks. I could go on a lot more, but instead I'll simply say, much more to come!

0

Dear Dan,

Thanks so much. Most interesting. Is it possible to detect a moment when GNP/GDP became THE measure to be maximized? Or is it rather a matter of relative shifts of emphasis. And what do you think of the Incusive Wealth report?

Floris

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Andrew Yarrow has written a book in the neighbourhood of this subject, Measuring America (link to Amazon), it sets its focus on the emergence of a culture of "growthmanship". It is an interesting piece for my purposes because so much of his account plays out in the media.

0

I'd ask you not to forget the importance of consumption as well as wealth. Consumption does more than keep the wolf from the door, and thinking about consumption (even when expressed in GDP terms) counterbalances the creation the 'Egyptian pyramids'. It's wealth (their pyramid of paper debt) that truely separates the .01% from ordinary people.

0

Dear Floris and dear all:
my recent book Gross Domestic Problem: The Politics Behind the World's Most Powerful Number (Zed Books 2013) does exactly that. It is the first account of how GDP became the almighty number it is today. I trace the history of the individuals who created it and how it evolved in the second half of the 20th century till today. You can find info about the book here: http://www.zedbooks.co.uk/paperback/gross-domestic-problem

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