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Why do we have an econ indicator such as GDP?
Most assume GNP, GDP's predecessor, was invented to measure economic growth.
My new paper, Institutionalism in Action, shows it was constructed by business cycle economists to balance intersectoral imbalances in the interwar period
Most assume GNP, GDP's predecessor, was invented to measure economic growth.
My new paper, Institutionalism in Action, shows it was constructed by business cycle economists to balance intersectoral imbalances in the interwar period
First accounts of GNP, written by insiders, pointed to Simon Kuznets and Robert Nathan's work in the Department of Commerce as the inventors of this macroeconomic object, but also emphasized the wartime needs for balancing the war production against civilian consumption.
More recently, a new wave of scholars pointed to the under-appreciated role of Keynes in the transition from Kuznets's conceptualization to our contemporary way of doing national income accounting in a way that reflects the underlying structure of Keynesian macroecocnomic models
In this piece, I complicate both of these internalist and externalist accounts from the problematizations perspective Foucault lays out in his 1977-788 lectures, Security, Territory, Population. Instead of tracing just the techniques of measurement or actors, I follow the problem
So, what was the problem policymakers primarily were concerned with in the interwar period? It was "the business cycle" and hence the cyclical structure of this economic phenomenon that generated periods of economic booms and followed by depressions.
I show that this conceptualization was constructed by Wesley Mitchell and his fellow business cycles economists at the National Bureau of Economic Research in the 1920s. These actors, I argue, invented what we today call "the economy" in their efforts to understand the b. cycle.
While Tim Mitchell has argued that "the economy" was invented in the 1930s and the 1940s by Keynesian macroeconomists like Keynes and Tinbergen, I show that macroecons had actually inherited NBER's conception. This conception was framed within a biological understanding of
what Veblen and Mitchell had called "the money economy" in the previous two decades. In this conception, "the American economy" was seen as composed of economic systems (sectors) that were interconnected with each other through an other system composed of prices.
Because "component parts" of these systems, which macroecon would come to formalize under terms such as "demand" and "supply," operated independent of each other, but were also interconnected through prices, build up of imbalances in different parts of the system generated
cyclical movement if all economic activity was to be represented in aggregate form. The question thus was how would one measure the system in such a way that one could foresee the built of these imbalances and act on them before they triggered a deflationary spiral?
This is why the income accounting was incorporated in 1922 into the business cycle research group, but not as the central aspect of the agenda but as just another component of the economic system that was always "in flux" and necessarily "imbalanced."
Yet, in the wake of the Great Depression with the rise of a new group of experts out of the business cycle research programme that we today erroneously call "Keynesians," the sectoral substantivist conception of the economy as an imbalanced system of material flows was reframed.
In this reframing, "the economy" was translated into a composite economic entity whose component parts could be vertically aggregated into a coherent whole. What allowed this reframing operation was precisely the national income accounting technique that was perfected by Kuzents
Once this was done, macroeconomists could monitor the substative intersectoral imbalances developing underneath monetary flows and intervene in them with fiscal and monetary tools without meddling with the substantive characteristics of these flows and the units generating them.
And yet, this was not sufficient to be able to manage "the economy," a new governmental entity as Tim Mitchell astutely showed us, the governmental device had to be turned into a knowledge infrastructure upon which the macroeconomic state and its institutions would be built.
This, however, could not have been accomplished w/o incorporating the state into "the economy" as an economic sector, precisely because without understanding the flows generated between the state and the economy policymakers could not really intervene in an object that was in
principle outside the institution they were in and yet that in practice paradoxically included the state. This is why although Kuznets conception of GNP did not have the state, the GNP experts in the Commerce Department constructed during the war included the state.
You might think, aha this is where Keynes makes his entrance, but that is a British centeric reading of a history that is overdetermined by the problem of intersectoral imbalances. Keynes, through his proxies, did provide a technical solution to how to calculate GNP better, but
this was done within a broader network that was mobilized by American economists like Gerhard Colm, Gardiner Means, and Laughlin Currie. For these experts, Keynes was both a cover and a technician. By the time Keynes made his entrance, they had already marginalized Kuznets during
debates on the conceptual architecture of GNP at the NBER and had come to the conclusion that the state had to be seen as a productive economic sector if they were to balance the imbalances. The introduction of the state into the economy, however, also resulted in an ironic
outcome, namely, the realization that the state itself was a source of imbalance and potentially a destabilizing source. In the words of Nixon's economic adviser, Herb Stein, the state budget was too brute of a tool to fine tune the economy.
The final puzzle is how GNP became synonymous with growth if it was not built to measure it! That is because the attempts to use the new fiscal apparatus through the Council of Economic Advisers convinced actors like Colm, Truman CEA's macroeconomist, that if the size of GNP
could be enlarged, then the destabilizing deflationary shocks would lose their potency in terms of generating downturns. So, growing GNP became an alternative governmental strategy, which proved to be much more feasible in comparison to correcting intersectoral imbalances.
Of course, the National Income and Product Accounts, which produce GDP, are still used for correcting intersectoral imbalances. Obama's ACA was the most recent example of this governmental strategy. As Christina Romer explained to Congress in 2010, healthcare spending, almost at
20% of GDP, is nothing but an intersectoral imbalance that will dampen economic growth and prosperity unless it is rebalanced. The problem is, as ACA has proven, this strategy can be very politically costly and therefore is not suitable as a discretionary policy tool, at least
under the current institutional architecture CEA is built out of.
