Book review: GDP - A Brief but Affectionate History

Gross Domestic Product (GDP) is often unfairly maligned as a poor measure of societal wellbeing. However, many of those critiques miss the point that GDP was never designed to be a measure of wellbeing (as I noted in my review a couple of days ago of Measuring What Counts). However, the way that economists use GDP also displays a misunderstanding (or, perhaps, an ignorance) of the origins of GDP and the array of limitations it has, even as a measure of production or income.

Users of GDP statistics, and would-be critics of its use, would benefit greatly from reading Diane Coyle's GDP - A Brief but Affectionate History. I really enjoy Coyle's writing style (for example, see my review of her earlier book The Soulful Science), which is clear and has just the right amount of storytelling to keep what might otherwise be a dry statistical topic interesting. GDP could be an incredibly complicated topic, and on that point Coyle notes that:

Understanding GDP is a bit like a video game with increasing levels of difficulty.

This short book is pitched to an audience of interested amateur players, and she doesn't get too bogged down in statistical minutiae. The book starts by running through the history of the development of summary statistics measuring the economy, from the 18th Century, through the invention of GDP during the Depression and World War Two, and on through its use (and misuse) from the 1970s to the start of the 21st Century. I found the historical development details particularly interesting. For instance, I hadn't realised just how much of historical GDP statistics were only developed since the 1980s, with data on only a handful of developed countries available before then. As someone who did all of their economics training in the 2000s, it seems like GDP statistics have been around for a lot longer.

Coyle uses the historical development to draw our attention to the many limitations of GDP. This is where the real value of the book lies. And Coyle is under no illusion that GDP is a measure of wellbeing (or welfare):

The lesson to draw from this discussion is that GDP is not, and was never intended to be, a measure of welfare. It measures production... If the aim instead is to develop a measure of national economic welfare, we shouldn't be starting with GDP.

This isn't the only place where Coyle's views on GDP as a measure of wellbeing accord with my own. On the Great Financial Crisis, and the resulting critiques of economics, she notes:

To the chagrin of many economists, who do not recognise their own work in the attacks made on the subject, economics gets the blame for the intellectual climate of advocacy for markets that made the financial excesses possible and, more broadly, seems to have made short-term profit the arbiter of most areas of life.

Coming back to the main limitations of GDP, Coyle outlines quite clearly the problems of home production, the informal economy, the measurement of financial services, the measurement of services provided by the government at non-market prices, quality improvements over time, as well as adjustments for inflation and for purchasing power parity (when comparing across countries). Many of these issues are touched on briefly by economics textbooks. My one disappointment is that Coyle doesn't explore the feminist critique of GDP in much detail, limiting it to a single sentence noting that unpaid housework is not included in GDP, "perhaps because it has been carried out mainly by women". However, Coyle doesn't resile from expanding on the other flaws in GDP, noting that there are three main issues that suggest a different approach may be needed:

Those three issues are:

• the complexity of the economy now, reflected in innovation, the pace of introduction of new products and services, and also in globalization and the way goods are made in complicated global production chains;
• the increasing share of advanced economies made up of services and "intangibles", including online activities with no price, rather than physical products, which makes it impossible to separate quality and quantity or even think about quantities at all; and
• the urgency of questions of sustainability, requiring more attention to be paid to the depletion of resources and assets, which is undermining potential future GDP growth.

 On that last point (sustainability), Coyle writes that:

A regular, official indicator of sustainability is urgently needed, however. At present, governments have nothing to tell them whether the growth their policies are delivering is coming at the expense of growth and living standards in their future.

This book was published in 2014, before the 'dashboard' approach outlined in Measuring What Counts really started to be adopted or advocated for more widely. Otherwise, it would have been interesting to hear her take on the optimal breadth of measures of wellbeing (although, admittedly, that might be beyond the brief of this book).

Overall, I really enjoyed this book, and it should be required reading for many critics of GDP as a measure, and critics of economics as a profession. GDP serves a useful purpose as a measure of production, with recognised limitations. The problem is not mainly the measure, but how it is used and interpreted, and that suggests a different approach to measuring wellbeing is needed.