I have often wondered what happened to the old GNP calculations. Even if you search Google you will have difficulty finding a logical explanation about the changing definition. Once upon a time, when I was growing up, Gross National Product (GNP) meant the goods and services that a country produced.
But as our economy shifted more toward government and away from the free market, a larger and larger portion of the total economy came under the control of the government. And even though these “zombie employees” (as Bill Bonner would call them) didn’t produce real goods or real services they do spend and earn money… so economists had to come up with a way to count all that money swirling around in the economy. So they redefined GNP from real goods and services produced to GDP and added in all that extra swirling money. Unfortunately, all that extra swirling just spreads the real goods and services among more people thus actually spreading the existing money thinner and making people poorer.
But… Voilà, the economy looks better… the economists have done the job required by their masters the bureaucrats, because obviously the GDP is now much higher than the old GNP. And unlike the GNP the more the government sucks from the economy the better the GDP looks. Putting more Zombies to work looks good for the numbers. Nothing to do? Just push more papers around and the GDP will go up!
Does the actual wealth of the country go up? No! But the numbers don’t care.
In today’s post John Mauldin looks at the origin of the GDP. Here are a few excerpts:
The problem we have today in economics is that many people, and not a few economists, seem to regard economics as “pure science,” … If you delve deep into measurement theory, you find that all too often the way in which you measure something determines the results obtained… And if you’re using models, as we do in economics, to determine policies that govern nations, your efforts can result in economic misdirection that seems for a time to work but that all too often can lead to a disastrous Endgame…
GDP is one economic model among several that could serve the purpose, but its use conveniently leads to policies that reflect the thinking of a particular school of economic monetary and fiscal policy advocates…
When most people see the release of the GDP number, they equate the precision of that statistic with the bottom right-hand number in their bank accounts. And news anchors and journalists rarely acknowledge the rather significant caveats that the Bureau of Labor Statistics publishes along with that data…
At its very core, GDP is John Keynes versus Friedrich Hayek writ large. And their debate explains a great deal of the current tension between those who would make final consumption – or what we call consumer spending – the be-all and end-all of economic policy…
Did you know that Adam Smith didn’t want to include services in the GNP calculation? Why? Because he felt that, “A servant was a cost to his employer, and did not create anything.” He also felt that money spent on government interest and on warfare should not be included in the GNP because it was being used “unproductively”.
When you build a house (or anything else that is useful) you take raw materials combine them with knowledge and labor and the result should be worth more than the sum of its parts. For instance, if you take $30,000 worth of land, $40,000 worth of materials and $30,000 worth of labor you might create a house worth $200,000… for a net gain of $100,000. This is the creation of wealth and that is what Adam Smith wanted to measure. But does adding $10,000 worth of bureaucracy to the building process for permits, licenses and fees make the world richer or poorer? Adam Smith would contend that it makes the world poorer because the net gain is now only $90,000 instead of $100,000 for creating the same house. What if instead of $10,000 the bureaucracy added $100,000 to the cost? There is now no incentive to build the house at all and it probably wouldn’t be built at all and the world is actually $100,000 poorer than it would have been without the bureaucracy.
According to Adam Smith:
‘There is one sort of labour which adds to the value of the subject upon which it is bestowed: There is another which has no such effect. The former, as it produces a value, may be called productive; the latter, unproductive labour. Thus the labour of a manufacturer adds, generally, to the value of the materials which he works upon, that of his own maintenance, and of his master’s profit. The labour of a menial servant, on the contrary, adds to the value of nothing…. A man grows rich by employing a multitude of manufacturers: He grows poor, by maintaining a multitude of menial servants.’
More from Mauldin:
Simon Kuznets was a Russian-American economist and a true giant in the field. Much of what we regard as economics today was developed under his aegis… when Kuznets originally developed an approach for measuring GDP he didn’t want to include expenses on “… armaments, most of the outlays on advertising, a great many of the expenses involved in financial and speculative activities, and much of government activity.”
Unfortunately, such thinking did not make the politicians happy… There was a “heated debate between Kuznets and other economists, especially Milton Gilbert of the Commerce Department… Gilbert and his colleagues were clear that the aim was to construct a measurement that would be useful to the government in running its fiscal policy.”
GDP is a huge undertaking, full of rules, with almost as many exceptions to the rules, changes, fixes, and qualifications, so that, … GDP is in reality so complex there are only a handful of people in the world who fully understand it, and that does not include the commentators and politicians who pontificate about it … If you pay someone to mow your lawn and report wages paid, that adds to GDP. If you pay that person under the table, it doesn’t… If you pay your maid to clean your house, it adds to GDP. Except if you marry her, then it doesn’t… In England, sex with your wife does not add to GDP, but sex with a prostitute does – even if it is unreported. Go figure.
Read the full article by John Mauldin here: Thoughts from the Frontline: GDP: A Brief But Affectionate History
You May Also Like:
- Gap Developing: Demographic Trends and GDP
- Yellen’s Wand Is Running Low on Magic
- How’s the Wealth Effect Really Doing?
- Central Bank Smackdown
From Amazon:
- GDP: A Brief but Affectionate History
- The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor
