GDP: A BRIEF BUT AFFECTIONATE HISTORY
Diane Coyle
Princeton University Press
159 pages
THE LEADING INDICATORS
Simon & Schuster
259 pages; Rs 799
One of my pet theories, pooh-poohed by professional economists, is that in a large measure Keynes' General Theory of Employment, Interest and Money was a response to the challenge of Communism. Clever man that he was, Keynes needed to, and did, persuade Western governments to tax the rich more because governments needed to intervene in the economy from time to time to stabilise it. The alternative was the spectre described by Marx.
Another pet theory of mine - once again pooh-poohed widely - is that during 1950-70, the Cold War was as much a battle for the minds of Western intellectuals as anything else. Sociologists, historians and political scientists showing broad agreement with Marx, economists were the exceptions. But data being scarce, economics research had to prove the virtue of markets. Plenty of funding was made available for this.
The more substantive attempt was to show that the West produced more of everything than the USSR did because Western markets allocated resources better. But in order to do that convincingly, national output had to be actually measured first, which wasn't easy. The USSR, of course, had no such problems: its bureaucrats simply set targets that were then claimed to have been achieved.
These two books are a history of that effort to measure how much a country produces - now known as gross domestic product (GDP). The effort was begun in the late 1930s and fully refined by the 1970s. By and large, the methodology has worked well.
But now, both books conclude, the time has come to review it because technology and other factors have changed the very nature of economic activity. The current methodology, they say, does not capture these changes fully.
Good reads
Both are nicely written and accessible to the informed reader with an interest in a subject as boring as national accounts. The one by Diane Coyle is perhaps the better of the two because Zachary Karabell has committed the cardinal sin of modern times: he has written double of what was needed by giving too many examples. But if you prefer that sort of thing, this is the book for you.
Ms Coyle's suggestion for improving GDP statistics is to expand the scope of the statistics collected by using the new technology to collect data - something that is already being done, I think. The current modes of data collection just aren't up to the task, she says.
She then asks the key question: "Has GDP reached its limits because of the changed character of the economy ... but rather than continue down the path of making the definitions and refinements ever more complicated, statisticians and economists should think more deeply about what we mean by the 'economy' of the 21st century ... the economy is a fluid concept which should be redefined."
She may well be right, but there is a danger of becoming too fluid: if GDP measures value (PxQ) and if practically everything is a part of Q, you run the risk of reporting a much higher GDP than what is warranted.
At the same time, fluidity could also mean lower prices, which could depress GDP. This would be especially true of globalised services, whether delivered directly or in a disembodied way by technology.
Mr Karabell's suggestion takes individualism to another level altogether. Now that so much data is available, he says, instead of having just one number like GDP to judge where they stand, people should construct their own "bespoke" numbers to see how well or badly off they are.
"We need 'bespoke' indicators tailored to the specific needs and specific questions of government, business, communities and individuals."
In his scheme of things, every individual becomes the collector and analyser of the data that is out there in cyberspace. That is to say make your own martini because you can and should.
Not this, nor that alone
The more sophisticated Indian readers will be reminded of the Hindu concept of "Neti, Neti, Neti", which means "not this, not this", "neither this, nor that". The ideas of "not" (or Rs ) form an integral part of both maths and philosophy.
In measuring GDP, I guess, this translates into "not this alone", which means that there is more to GDP than meets the eye - literally, as in financial markets, which add to it without actually producing anything.
This, more or less, is what these two books do: they help us understand GDP by telling us what it is not any longer. But they falter when it comes to telling us what it should be.
Diane Coyle
Princeton University Press
159 pages
THE LEADING INDICATORS
Also Read
Zachary Karabell
Simon & Schuster
259 pages; Rs 799
One of my pet theories, pooh-poohed by professional economists, is that in a large measure Keynes' General Theory of Employment, Interest and Money was a response to the challenge of Communism. Clever man that he was, Keynes needed to, and did, persuade Western governments to tax the rich more because governments needed to intervene in the economy from time to time to stabilise it. The alternative was the spectre described by Marx.
Another pet theory of mine - once again pooh-poohed widely - is that during 1950-70, the Cold War was as much a battle for the minds of Western intellectuals as anything else. Sociologists, historians and political scientists showing broad agreement with Marx, economists were the exceptions. But data being scarce, economics research had to prove the virtue of markets. Plenty of funding was made available for this.
The more substantive attempt was to show that the West produced more of everything than the USSR did because Western markets allocated resources better. But in order to do that convincingly, national output had to be actually measured first, which wasn't easy. The USSR, of course, had no such problems: its bureaucrats simply set targets that were then claimed to have been achieved.
These two books are a history of that effort to measure how much a country produces - now known as gross domestic product (GDP). The effort was begun in the late 1930s and fully refined by the 1970s. By and large, the methodology has worked well.
But now, both books conclude, the time has come to review it because technology and other factors have changed the very nature of economic activity. The current methodology, they say, does not capture these changes fully.
Good reads
Both are nicely written and accessible to the informed reader with an interest in a subject as boring as national accounts. The one by Diane Coyle is perhaps the better of the two because Zachary Karabell has committed the cardinal sin of modern times: he has written double of what was needed by giving too many examples. But if you prefer that sort of thing, this is the book for you.
Ms Coyle's suggestion for improving GDP statistics is to expand the scope of the statistics collected by using the new technology to collect data - something that is already being done, I think. The current modes of data collection just aren't up to the task, she says.
She then asks the key question: "Has GDP reached its limits because of the changed character of the economy ... but rather than continue down the path of making the definitions and refinements ever more complicated, statisticians and economists should think more deeply about what we mean by the 'economy' of the 21st century ... the economy is a fluid concept which should be redefined."
She may well be right, but there is a danger of becoming too fluid: if GDP measures value (PxQ) and if practically everything is a part of Q, you run the risk of reporting a much higher GDP than what is warranted.
At the same time, fluidity could also mean lower prices, which could depress GDP. This would be especially true of globalised services, whether delivered directly or in a disembodied way by technology.
Mr Karabell's suggestion takes individualism to another level altogether. Now that so much data is available, he says, instead of having just one number like GDP to judge where they stand, people should construct their own "bespoke" numbers to see how well or badly off they are.
"We need 'bespoke' indicators tailored to the specific needs and specific questions of government, business, communities and individuals."
In his scheme of things, every individual becomes the collector and analyser of the data that is out there in cyberspace. That is to say make your own martini because you can and should.
Not this, nor that alone
The more sophisticated Indian readers will be reminded of the Hindu concept of "Neti, Neti, Neti", which means "not this, not this", "neither this, nor that". The ideas of "not" (or Rs ) form an integral part of both maths and philosophy.
In measuring GDP, I guess, this translates into "not this alone", which means that there is more to GDP than meets the eye - literally, as in financial markets, which add to it without actually producing anything.
This, more or less, is what these two books do: they help us understand GDP by telling us what it is not any longer. But they falter when it comes to telling us what it should be.