Kuznets’s caveats on GDP

Simon Kuznets (1901-1985) was a brilliant economist, making both important theoretical and empirical contributions to the discipline.

One that I’ve known about for years, without delving into details, was Kuznets’s invention (definition?) of GDP under the original name of “National Income.”

Well, I just read his 1934 paper on that topic [pdf], and there were two surprises:

(1) “If all the commodities produced and all the direct services rendered during the year are added at their market value, and from the resulting total we subtract the value of that part of the nation’s stock of goods that was expended (both as raw materials and as capital equipment) in producing this total, then the remainder constitutes the net product of the national economy during the year.”

This passage clearly indicates that net income must be reduced by the amount of capital lost or used to produce that income (e.g., depreciation), but that subtraction is left out of the modern definition of GDP (“the market value of all the final goods and services produced and rendered in a specific time period by a country“), which can encourage (or disguise) excess conversion of capital into income, e.g., running down machines or converting forests into toothpicks.

(2) The depression hit wage earners harder (see Table 5) than salaried workers, worsening economic (and social) inequality.

What about Kuznets saying “Don’t use GDP as a measure of progress?” Well, he said this in 1937: “Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.”

Bottom line: GDP is a shit measure that helps no citizens while encouraging politicians waste resources competing over whose GDP is bigger.