Gross domestic product--an index of economic welfare or a meaningless metric?

• Author: Higgs, Robert
• Position: Etceteras ...

The blind transfer of the striving for quantitative measurements to a field in which the specific conditions are not present which give it its basic importance in the natural sciences... not only leads frequently to the selection for study of the most irrelevant aspects of the phenomena because they happen to be measurable, but also to "measurements" and assignments of numerical values which are absolutely meaningless.

--F. A. Hayek, The Counter-Revolution of Science

It is almost impossible to imagine the development of economics since World War II apart from the availability and pervasive employment of the national income and product accounts (NIPA). Before the war, however, such measures remained strictly in the development stage, as economists such as Colin Clark and Simon Kuznets worked for years to produce estimates of the sort that any elementary economics student or newspaper reader now encounters daily in frequently updated form. Estimates of gross domestic product (GDP), along with its variants and detailed components, became an essential part of economic analysis only when the Great Depression, the emergence of Keynesian macroeconomics, and the Western powers' engagement in World War II brought such estimates to the fore in the late 1930s and early 1940s. After the government undertook the preparation of these metrics for use in its management of the wartime command economy, and Paul A. Samuelson and others soon adopted them for presentation in widely used textbooks, it became common for GDP to serve as the almost universally accepted concept of the level of overall economic performance in a national economy. For professional economists, the estimated value of real GDP simply is aggregate output, the main focus of macroeconomics insofar as that branch of economics involves empirical description and analysis.

When Kuznets and others were engaged in pioneering the development of the national accounts, substantial controversy arose regarding a variety of related issues. How should the national product be defined? What criteria should be used in deciding what to include and what to exclude? How should final and intermediate outputs be distinguished? How should various forms of output be valued? Of course, an endless array of practical questions also arose about the sources of data that should be employed in making the estimates; how and how often these sources should be updated; how unavailable data should be estimated, projected, and interpolated; and so forth. Some of the world's leading economists, including Kuznets, Samuelson, John Hicks, Richard Stone, Moses Abramovitz, and others, engaged in debating the relevant theoretical and empirical issues. Kuznets in particular argued strongly against the way in which the Commerce Department had answered the various questions related to the NIPA, especially the question of whether government spending should be included in whole or in part in the GDP total and how unsold government...