Photo: Abhijit Bhatlekar/Mint
Photo: Abhijit Bhatlekar/Mint

Book Review | GDP: A brief but affectionate history

GDP is an imperfect measure. Butfor all its flawsthere is no better measure right now to provide a snapshot of our economic circumstances

This slim volume is a succinct history of a statistical abstraction that has taken the world by storm: GDP, or the gross domestic product of a country.

GDP is a very recent addition to the stock of human knowledge. It is not at all hard to guess why. Economic historians have shown that output stagnation was the rule through most of recorded history. So why measure something that does not move?

It was only after the Industrial Revolution that some early attempts were made to measure the size of economies. The big push came much later. The Western democracies needed to get a sense of the size of their economies as they prepared for what has now come to be known as World War II. The subsequent Keynesian revolution meant that governments tried to manage their economies to prevent the sort of wild swings in output that had led to such misery during the Great Depression. The Soviet planners took that insight to its logical conclusion.

Diane Coyle provides a whistlestop tour of how modern methods of measuring GDP emerged in the first half of the previous century. She tells an engaging story featuring such towering economists as Colin Clark, Simon Kuznets and Wassily Leontief. Jan Tinbergen developed one of the first econometric models that allowed governments to understand the linkages between various parts of the economy as well as their impact on GDP. The great Sukhamoy Chakravarty was a disciple of Tinbergen. However, I am surprised Lawrence Klein does not get even a cursory mention for his path-breaking econometric models.

Indian readers have one good reason to feel disappointed. As is so often the case with such histories of economic thought, countries from other parts of the world get short shrift. Dadabhai Naoroji had attempted to provide an estimate of Indian national income way back in 1870, when he read a paper, The Wants and Means of India, before the East India Association in London. His reason for doing so was neither to assess whether resources are available for war nor to provide advice on demand management to iron out economic fluctuations. Naoroji was building his case against colonial economic policies. And then there was the brilliant pioneering work by V.K.R.V. Rao, who built a good estimate of Indian national income in the 1930s, around the same time that Clark and Kuznets were working in the UK and US.

The book does not suffocate in aridity because Coyle has painted the global economic backdrop against which her story comes to life. She deals with both the statistical as well as philosophical underpinnings of the measure that so dominates contemporary economic discourse.

There are several important philosophical issues in the debate. One, GDP is a measure of output rather than of human welfare. It is neutral between bread and bombs, and many economists point out that it is unrelated to human happiness. I am personally sceptical about targeting happiness as an explicit goal of government policy since it is an inherently subjective issue. A poor man could very well be happier than a rich man; and mass happiness can be manufactured as anybody who has read Aldous Huxley would suspect. Perhaps the serfs of North Korea are happy.

Two, GDP measures only what it can. Feminists have pointed out that it fails to measure the value of housework that is usually done by women. There are further problems in the new economy. The massive improvement in the quality of various gizmos—from computers to cars—is not adequately captured in national statistics despite some recent attempts to develop hedonic price datasets. Then there are the modern forms of barter trade that do not involve monetary transactions, as when travellers agree to offer their homes to others in return for home stays in foreign countries.

Three, the generation of economic output comes by using the natural capital that humans have been given for free. There is now serious work going on to develop green accounts which take into account what it happening to stocks of natural capital, human capital and institutional capital in the process of economic growth. India is one of those countries that are trying to build green accounts for its economy.

Coyle does well to give ample importance to such issues in what she describes as a short and affectionate history. There is no doubt that GDP is an imperfect measure. Perhaps the financial markets (and financial journalists who cater to that market) make too much of one measure of economic activity. But—for all its flaws—there is no better measure right now to provide a snapshot of our economic circumstances.

Niranjan Rajadhyaksha is the Executive Editor of Mint.

Comments are welcome at views@livemint.com

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