Published by EH.Net (November 2015)

Dirk Philipsen, The Little Big Number: How GDP Came to Rule the World and What to Do about It. Princeton, NJ: Princeton University Press, 2015. xi + 398 pp.  $30 (cloth). ISBN: 978-0-691-16652-0.

Reviewed for EH.Net by Donald E. Frey, Department of Economics, Wake Forest University.

Dirk Philipsen argues that growth of GDP has become the world’s overriding goal, with bad results; and, rather surprisingly, that the cause of this is national product accounting itself. That is, widespread knowledge of the magnitude of GDP (essentially single-handedly) has produced growth mania. This is a rather sweeping assertion, raising important questions, but inviting skepticism.

The book opens with the story of the construction of modern national income and product accounts. Philipsen emphasizes misgivings Simon Kuznets, the architect of the accounts, had about the value judgments and assumptions he had built upon.  He also tells of the advocacy needed to create national accounts at a time when policymakers blundered in ignorance of such information. Imperfect as he thinks they are, Philipsen nevertheless credits the accounts for playing a worthwhile role in the Depression and in World War II.

Early success, Philipsen says, catapulted GDP into an undeserved role as the only influential measure of society’s overall wellbeing. In the mid-twentieth century, economic growth seemed the antidote to “calamities of depression, war, and revolution…” (p. 120). In the post-war context, that apparently seemed good enough to link GDP growth with wellbeing. Eventually, “more jobs, more revenue, more wealth, and more stuff for everyone effectively allowed political leaders to sidestep deeper questions” as economic growth became the nation’s overriding goal (p. 121).

Counter examples to this sweeping assertion are abundant. To this day, even undergraduate texts clearly emphasize that GDP is a measure of production, not of welfare. In the 1950s and 1960s, political rhetoric, as I recall it, focused less on GDP itself than on what a growth dividend would allow — sustaining a costly contest with the Soviets (which included even Moon expeditions), a war on poverty, enforcing civil rights for minorities, environmental clean-up, creating Medicare and so on. Fixation on GDP growth did not seem to divert attention from higher goals in that era.

More recently, during the Great Recession’s recovery phase, surveys constantly showed that no one confused rising GDP statistics with improved personal wellbeing as unemployment and personal debt remained high. Further, some (for example, Tea Party in America and “Austerity” party in Europe) actively resisted growth stimulus in favor of budget-balancing.

A part of Philipsen’s argument seems to be that GDP and true wellbeing may actually have a negative correlation.  For example, consider huge expenditures to alleviate effects of the various harms that befall persons or society (e.g., pp. 153, 274).  The punchline is that GDP counts expenditures on recovery (from diseases, accidents, earthquakes, etc.) as a gain to GDP, even though wellbeing may still be below its prior state. Clearly, GDP adds nothing to wellbeing.

However, only an incorrect comparison allows such a conclusion. Expenditures on remedies should be judged by the reduction in pain and suffering they produce, not by their inability to remove all effects. In short, GDP (though it only measures production) does not generally have an inverse relation to wellbeing.

Philipsen gives a summary of the faults of GDP (pp. 156-157). And he is correct that as a measure of final production, weighted by market prices, GDP fails in a lot of ways. Indeed, market prices don’t qualify as morally correct weights. But in a secular nation, founded on the moral individualism and relativism of the Enlightenment, what is an acceptable substitute?  Philipsen’s answers are not impressive, and even contradict each other. For example, he complains that human activities not caught up as measurable transactions are “culturally devalued” by GDP (p. 156).  Later, he complains that “GDP reduces human and social complexity to a market transaction” (p. 157).  Which is morally worse — cultural devaluation outside the market nexus or reductionism by the market?

Next Philipsen considers alternatives to using GDP as a welfare measure. These range from designing a radically adjusted GDP (but still a measure of product), to ditching GDP in favor of some single, aggregated, non-economic measure of wellbeing, to a “dashboard” of indicators, that presumably lets each indicator speak for itself to policymakers. His discussion of these alternatives seemed more balanced and nuanced than much of the rest of the book.

My judgment is that policymakers already wisely look at a variety of social indicators, not just GDP. A variety of indicators provides more information than a single number that hides as much as it reveals. In fact, it has been indicators (not necessarily systematized) completely unrelated to GDP that in the past have launched various successful movements in public health, conservation, education, fuel efficiency, reducing atmospheric ozone, etc. Some reforms occurred before GDP accounts even existed. Whole Cabinet-level departments of government are guided by non-GDP indicators.

My comments do not mean that GDP needs no improvement. GDP has long been adjusted for depreciation to get NDP. And more such adjustments, provided they are consistent with the foundations of national accounting, could be justified. The depletion of natural resources comes to mind.

I disagree with Philipsen that national income accounts have a primary effect on private decision making. Businesses have their own motives in taking actions — but seeing their (minuscule) contribution to GDP growth surely isn’t one of them. Conversely, I also question whether the failure of GDP to account for some things (such as depletion of natural resources) changes many private decisions.  Surely, if a firm buys rights to an oil field with large proven reserves, it can’t believe that after years of pumping it could sell the rights for as large a price as it originally paid. This is true no matter how national accounts handle resource depletion.

For most of the last two hundred years Americans did not even have GDP statistics to goad them to engage in growth-focused activities. Further, conservation and environmental movements arose to redress these economic behaviors that involved wanton destruction of nature or harm to people. In fact, Philipsen’s case against growth mania largely depends on the awareness of growth-related harms that reform movements have highlighted. In short, this book doesn’t convince me that GDP has caused our problems, or that tinkering with it will cure them. Other things are at work.

This book deserves one and a half cheers. Its cautionary story of the creation of GNP accounting is eye-opening, and well told. The list of ways that GDP could be improved, even as a measure of production, contains both good and questionable ideas — but all provoke thought. The book easily could be used as a directory of research criticizing GDP. But ultimately, the thesis that GDP statistics are all-important in leading us astray seems flawed.

Donald E. Frey, now retired, taught national income and product accounts for years as part of the macroeconomics curriculum at Wake Forest University.  He is the author of America’s Economic Moralists (SUNY Press, 2009).

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