Tuesday, April 28, 2015

"Let’s stop making a fetish of national income statistics and percentage rates of growth”

by Henry Hazlitt.

Rates of Growth

August 25, 1958

Is it true, as we are now so frequently told, that Communist Russia’s economic “rate of growth” is faster than ours, or that we cannot survive unless we increase our own “rate of growth”? There are at least five main reasons why rate-of-growth comparisons are untrustworthy.

1—In the midst of daily glib comparisons of national income and particularly “gross national product,” or GNP, it may come as a shock to many to learn that these figures are in large part arbitrary. It is impossible to compare the national income of Russia with that of the U.S. We do not know whether the Communists are telling the truth about specific output figures. Even if they were, their figures would have little comparative meaning. They have no true market prices, but only arbitrary government prices and wages. The production of specific goods is not determined by consumer demand. The comparative purchasing power of the inconvertible paper ruble and the U.S. dollar can only be guessed at.

2—It would take a book to describe all the arbitrary judgments and guesses that enter into even our own national income figures. They measure only the values that pass through the market. When a man marries his cook, for example, the money value of her services disappears from the national-income accounts. Inflation constantly changes the value of the dollar in terms of which everything else is measured.

The President’s last annual Economic Report boasted in its opening paragraph that the nation’s output of goods and services in 1957 totaled $434 billion, “5 percent larger than in the preceding year.” Only later in the report were we explicitly told that “four-fifths of this increase was accounted for by rising prices,” and that therefore “in physical terms, the increase was only about 1 percent.” This July, however, all nationalincome estimates were revised again. It seems the government statisticians now think our GNP in 1957 was not $434 billion but $440 billion and that our 1956 GNP was not $415 billion but $419 billion. Yet in “1957 prices” our 1956 GNP was $435 billion.

3—It may be thought that we can make meaningful comparisons between the Russian economy and our such as pure metals in ingot form, this may be possible. But in most things there are enormous qualitative differences that never get into quantitative statistics. Not how much clothing but what kind of clothing; not how many square feet of housing but what kind of housing; not how much food in bulk but in nutrition, variety, flavor, and quality is what counts for economic welfare. Even in military weapons, quality may be the decisive factor.

4—Prof. G. Warren Nutter has pointed out that there is “a long-run tendency . . . for the industrial growth rates to slow down, or retard, as the level of production gets higher.” There are several basic explanations of this. One has to do with a trick of percentage figures. Another has to do with a physical satiety point in human needs. If only one family in a country has a bathtub, and the next year 50 families get one, the rate of growth is 5,000 percent. But when everybody has a bathtub net growth stops. This principle applies to houses, automobiles, radios, television sets, and so on.

5—Here we come to a more subtle point. Larger crops often have a smaller total dollar value than smaller crops. (Hence crop-restriction schemes.) But this merely illustrates a wider principle. Economists have pointed out since the time of Adam Smith that it is not “value-in-use,” but scarcity, that determines “value-in-exchange,” or money price. Water is an indispensable commodity that ordinarily commands no price at all. If more and more things became plentiful (except dollars), the national income, as measured in dollars, might begin to fall. If we could imagine a situation in which everything we could wish for was in as adequate supply as air and water, we might have no (monetary) national income at all!

Let’s stop making a fetish of national income statistics and percentage rates of growth.


Peter T said...

Isn't that what Google is for?

Sandwichman said...

Ha ha! You're welcome to Google -- just don't post the answer.

blissex said...

But GDP, in the proper sense of physical production, has a sensible if ambiguous meaning, as long as one remembers it is "gross" of depreciation. Because GDP is (usually!) strongly related to GVA and value added is also the income of the population.

But "nominal" (monetary) GDP and to some extent "real" (montary deflated) GDP are very popular for a significant reason: news and discussions of Economics are carried out from the point of view of investors, that is owners of business and property, and the impact on share prices and property prices.

And "nominal" (or "real") GDP is a good proxy for total (monetary) business sales, and total spending capacity which has a bearing on share prices and property prices.

That's why GDP-per-head (of any type) is so rarely reported and discussed: it does not matter that much as to share prices and the interests of owners of businesses and property. What matters is total turnover and value added.

So for example for owners of businesses and property an increase of 150% of GDP with an increase of 200% of population (decrease of 25% in GDP-per-capita) is better than an increase of 125% of GDP with no increase in population (increase of 25% in GDP-per-capita).

When GDP-touting commentators focus on GDP growth they use it as a proxy for the growth of business sales and property rents, and the significance of that growth for share and property prices.

Sandwichman said...

"news and discussions of Economics are carried out from the point of view of investors..."