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The Dawning of GDP's Hegemony

October 12, 2011 ·

When the Great Depression hit, Congress lacked any tools with which to accurately measure just how the economy as a whole was faring.

Maryland's government is embracing an alternative way to monitor the state's wellbeing called the Genuine Progress Indicator, which brings depth to the analysis of the state's economic growth. At the Institute for Policy Studies, we are looking for lessons in Maryland, as well as in similar exercises being undertaken elsewhere. This is the first in a series of posts about this work.

Simon Kuznets warned that GDP was not a valid instrument of social policy, but his creation became a barometer for the entire global economy. Archive photo.It was the height of the Great Depression and policymakers could see the symptoms of economic malaise everywhere. Unemployment soared to 25 percent. Food lines at soup kitchens wrapped around city blocks. Farmers watched helplessly as crop prices plummeted, then lost their farms. The evidence was clear, yet in the 1930s, Congress lacked any tools with which to accurately measure just how the economy as a whole was faring. With no commonly accepted national income data, they had no guideposts upon which to base sound economic policy.

And so Congress turned to a young and promising Russian-American economist. U.S. lawmakers asked Professor Simon Kuznets of the National Bureau of Economic Research, who would go on to win the Nobel Prize in economics, to develop a data set to assess the state of the national economy. In 1937, Kuznets presented a vast volume of data on income to Congress. It became the Gross National Product (GNP).

With remarkable foresight and humility, Kuznets warned that his newly minted GNP shouldn't be used as an instrument of social policy. It could never adequately measure the things we value, he said, such as housework or caring for elderly parents. Nor, he warned, could the GNP distinguish between the growth of good and bad jobs. The data would be the same if workers earned their pay from employers who endangered their lives or guarded their health and safety. "Goals for more growth should be more growth of what and for what," Kuznets said.

Alas, Kuznets' warnings on the GNP — later renamed the Gross Domestic Product (GDP) — went unheeded. Instead, the GDP became the barometer of health not only for the U.S. economy, but for the entire global economy.

To be continued…

Daphne Wysham is a fellow at the Institute for Policy Studies (IPS) and the founder and co-director of the Sustainable Energy and Economy Network (SEEN). She is conducting research around ways in which alternative metrics to the GDP, such as Maryland's "Genuine Progress Indicator," can be used to build a more sustainable society.