The GNP Fetish

January 5, 1959

The “national income approach,” once part of the abracadabra of a few statisticians, has now become so widely popularized, not only in economic textbooks but in newspaper discussions, that almost anyone is likely to ask you, or tell you, what “GNP” (gross national product, for the still benighted) is going to be for 1959. Yet a close examination does not justify the exaggerated reliance now placed on these figures. At least five major cautions ought to be kept in mind. Here are two of them:

1—The national income or gross national product figures are arbitrary, and from a strictly scientific standpoint, indeterminate. This was recognized in the pioneer studies. Simon Kuznets, in his two-volumed book National Income and Its Composition, published in 1941, pointed out: “The statistician who supposes that he can make a purely objective estimate of national income, not influenced by preconceptions concerning the ‘facts,’ is deluding himself; for whenever he includes one item or excludes another he is implicitly accepting some standard of judgment, his own or that of the compiler of his data. There is no escaping this subjective element.”

WHAT DO WE INCLUDE?

Kuznets went on to show that estimates of the national income necessarily involve legal and moral considerations. Should we include “the compensation of robbers, murderers, drug peddlers, and smugglers”? And how shall we “draw a line between economic activity and economic goods on the one hand and active life in general and its stream of satisfactions on the other”? Should “washing, shaving, and playing for amusement on the piano” be treated as economic activity? “When judged by the attributes of satisfaction-yielding, scarcity, and disposability, they do not differ from the same activities carried on for money as services to other people (nursing, barbering and giving concerts).”

And yet Kuznets decided (as do practically all national-income statisticians) to include only items that “are dealt in on the market.” This of course excludes all do-it-yourself activities, which in total are now probably enormous. More, it excludes all the products of the family economy, including the activities of housewives. So we get such paradoxes as these: When a man marries his cook, the value of her work disappears from the national-income accounts. When an opera singer sings professionally, she is considered as adding the equivalent of her salary to the national income. When she sings for charity or for friends, it doesn’t count.

GROSS VS. NET

2—So what we include in or exclude from national income involves arbitrary decision. But a second serious problem is how and where to set the difference between gross and net. How are we to prevent double counting at a thousand points? A married man earns an income of $10,000. That is the joint income of himself and his wife. He becomes a widower and hires a housekeeper for $4,000 a year. His income, and their joint income, is still $10,000; but the national-income accounts would now call it $14,000. The same problem occurs daily and everywhere. If we count the income of doctors and dentists should we, or should we not, deduct it from the income of patients?

Sliding by this awkward point, how do we separate gross national product (the famous GNP) from national income? Our official statisticians do it by deducting from their GNP figure a “capital consumption” allowance, mainly a “depreciation” charge, and also “indirect business tax and non-tax liability.” But depreciation charges are the results of estimates. The “right” amount of depreciation is never precisely known. Contrary even to the belief of many businessmen, a depreciation deduction is not so much an estimate of past loss as a forecast of future probabilities. It is never known, for example, when an old machine is going to be made obsolete by a new discovery or a new invention. And particularly in a period of monetary inflation, orthodox depreciation charges fail to allow for ever- mounting replacement costs.

There are even more serious defects in national- income estimates, but they will be reserved for a subsequent article.