A Brief History of GDP and its Limitations

According to Merriam Webster, economics is the science of production, consumption,

and distribution of goods and services. These activities are carried out (surprise, surprise) for

economic gains, ie, wealth, unless governments step in and de-optimize conditions to make

things more equitable. However, to keep increasing wealth, to make your country more equal,

or to compare yourself with other countries, it is necessary to know where you stand. GDP is

a tool that does just that.

The IMF definition is as follows: “GDP measures the monetary value of final goods

and services—that is, those that are bought by the final user—produced in a country in a

given period of time (say a quarter or a year). It counts all of the output generated within the

borders of a country.” It is a Herculean task, but well worth the effort. GDP and its

components are used to direct government policies and monitor growth. But was it always

like this?

The first known use of GDP can be attributed to British noble William Petty (“Petty

Impressive,” 2013). His motivation for calculating this figure was twofold: firstly, in his

travels across England, Ireland, and the Netherlands, he noticed a lot of differences he could

not explain - England was prosperous, Ireland was struggling, and the Netherlands was

threatening to catch up. Second between 1652 and 1674, England and the Netherlands fought

three protracted wars over trade routes and control of overseas colonies (“Anglo-Dutch

Wars”). This, combined with the Great Plague of 1665, meant that the British economy was

struggling, and so the Crown increased taxes on landholdings.

William Petty, himself a landowner with a soft heart, thought this unfair, and set

about calculating what we would now call the GDP of England and Wales. In doing so, he

developed the expenditure approach to estimation - by determining that an average person

spent about 4.5 pence a day on necessities, and multiplying this with the population - and
arrived at the figure of 40 million pounds (about 35 billion 2010 dollars) (Nye, “Historical

Conversion of Currency”). But he did not stop there: he postulated that total expenditure in an

economy must equal total income, and calculated the income accruing to assets and capital

stock and that to wages as 15 million and 25 million pounds respectively, so that the tax

burden could be shifted proportionally away from land holdings.

In 1695, the passive taxation advantage of GDP was superseded by warfare (Andreas,

2015). British economist Charles Davenant wrote in his work, An Essay Upon The Ways and

Means of Supplying the War, “In the course of this war we are engaged in with France,

nothing seems more to have hurt our affairs than an opinion, which from year to year has

been entertained among some people of authority, that the war could not last; which they

were brought into by the vanity, natural to our nation, of overrating our own strength, and

undervaluing that of our enemies.“ Basically, overestimating your wealth can lose you the

war. Hence, GDP began to be regarded as an important statistical tool to be realistic about a

country’s global position, and to dispel jingoistic rumours spread by those in power about a

country’s might.

It is especially disheartening then, to see the row and confusion over India’s GDP

numbers for the past several years due to discrepancies in survey methods (Ajaz, 2016). With

the Lok Sabha elections coming, those who place a premium on economic development from

their representatives will first have to painstakingly sort through the political mudslinging

between the BJP and Congress to arrive at our actual GDP growth, something we are used to

taking for granted.

For a couple of centuries after, things are quiet. Then the world suffers the worst

economic disaster in modern history: The Great Depression. Amidst meltdown in 1934, the

US takes the stage. Simon Kuznets, an eminent economist, was tasked with assessing the

United States’ vital statistics after the crash and estimating what could be done to battle its
effects (“Simon Kuznets,” Econlib). This is perhaps the first use of GDP for welfare rather

than warfare. Kuznets estimated the United States GDP by developing the production

method, and breaking down the figures according to industry as well as final use of products.

Though he and the National Bureau of Economic Research were the first to collect and

analyze data so extensively, Kuznets also vehemently opposed the use of GDP/GNP as a

welfare measure, stating that it was only meant to measure how much the US economy was

producing and, later, its preparedness for World War II (Kuznets, 1934).

When the war broke out in 1939, GDP was once again placed in the familiar arena of

measuring military might through economic data, and this was probably the biggest push in

centralizing GDP as the prime statistic for comparison and interpretation. Enter one of

history’s most loved economists, John Maynard Keynes. Assigned to the UK Treasury in

wartime, he published a paper much like Davenant’s, titled How to Pay For the War, wherein

he stated (much like Kuznets) that governments since World War I were using unscientific

guesses at GDP, and no agency before theirs had undertaken a data collection and

computation effort of this scale. He, along with his new Central Statistics Office, adopted in

1940 an official method for GDP estimation, and caused most of Europe to quickly follow

suit (Coyle, 2014).

When the war ended, the Axis forces were devastated, Europe was in ruins, and the

United States stood poised to gain control of the world economy. Whatever their states were,

at the 1944 Bretton Woods Conference, 44 Allied Nations came together to form the World

Bank and the IMF, to fix the values of their currencies and exchange rates, and to accept

GDP as the bonafide measure for comparing countries (Laurent, 2014). Though the Woods

system took about 15 years to perfect due to indebtedness and unequal balance of payments,

GDP would reign supreme for decades.

statistics and data collection, at much more detailed and accessible data on GDP than ever

before. Consider the following graph, which plots GDP over time for various countries:

This is a good example of how powerful and tempting a tool GDP really is, because

one look at this graph instantly answers several questions pertinent to economic growth and

global politics. It affirms the position of the US as an economic superpower, it confirms the

technological superiority of Germany, it impresses just how successful and enduring the

Industrial Revolution was in the UK, and shows one also where their country lies in

comparison for them to make their own deductions. Naturally, this graph is not the only thing

leading to such conclusions - they are based on a wealth of knowledge commonly agreed

upon by several economists. However, GDP is definitely an essential component to these

answers.

Thus, through historical examples, we see two major motivations emerge for

investing so many resources into calculating this exhausting number: welfare and warfare.
 Diane Coyle, author of GDP: A Brief but Affectionate History argues that GDP was a

great tool of measuring economic health in the twentieth century, but requires an expansion,

or to be read along with other metrics, in more recent times (Laurent, 2014). This makes

sense, as there are no big wars to fight anymore (hopefully), and, according to the UNDP,

economic inequality rose significantly in developing nations between 1990 and 2010

(“Humanity Divided,” 2014). Hence, countries are looking for more diverse ways of

representing their economies.

Kuznets’ apprehensions were noted in the 30s itself in his first report to the US

Congress along with the national income accounts. He immediately realized that GDP in only

a measure of economic production, and discounts non-monetary activity that could be

productive. Further, and more pertinent to knowing about welfare, it tells us nothing about

income distribution (Kuznets, 1934). Moses Abramovitz, another prominent American

economist, publicly opposed the use of GDP in 1959. He stated more broadly in his essay,

The Allocation of Economic Resources, that social well-being cannot be said to grow with

economic growth.

In the decades that followed, several prominent economists and thinkers developed

addendums or alternatives to GDP. The first and was a seminal economic/philosophical

approach by Amartya Sen and Martha Nussbaum in the 1980s called the capability approach,

which attempts to characterize growth by the expansion of individuals’ capabilities rather

than simply economic growth, but this had limited appeal to the masses and limited impact on

“real politics” (Osmani, 2016).

In the 1988s, Mahbub-ul-Haq, as Special Advisor to the then UNDP Administrator,

developed the much more accessible and popular Human Development Index, a now widely

used alternative to GDP in measuring social well-being. It uses social indicators like life

expectancy at birth for health, mean years of schooling for education, and gross national
income per capita for standard of living. However, it still does not factor in inequalities

(Human Development Reports). Amidst the debate on better numbers, environmentalists have

critiqued GDP for not reflecting environmental degradation caused by development. In

September 2006, China is the first to calculate a “green GDP,” and discovers that if

environmental damage entered GDP as a cost, it would reduce the number by 3%, which is

no small amount (Dickinson, 2011).

Finally, we have the peculiar case of Bhutan, where, since 2008, the government has

been officially calculating a vital statistic that guides policy and governance in the country:

Gross National Happiness. They collect subjective survey data, and compile national

happiness based on a few key factors agreed upon in their Constitution. The King,

Wangchuk, famously said that, to Bhutan, GNH is more important than GDP (UN

Sustainable Development Goals). Perhaps this is indeed the future of GDP and economic

accounting - factoring in the damage we do along the way not just to the world around us, but

also to our quest for knowledge and harmony. Economic data is definitely a double-edged

sword, and can be used for growth and development in several other spheres such as science

and politics that are equally important to modern society.

Callen, Tim. Gross Domestic Product: An Economy’s All. International Monetary

Fund, 18 Dec 2018. Retrieved from

https://www.imf.org/external/pubs/ft/fandd/basics/gdp.htm

Petty Impressive. The Economist, 21 Dec 2013. Retrieved from

https://www.economist.com/finance-and-economics/2013/12/21/petty-impressive

Anglo-Dutch Wars. Encyclopaedia Britannica. Retrieved from

https://www.britannica.com/event/Anglo-Dutch-Wars

Nye, Eric W. Pounds Sterling to Dollars: Historical Conversion of Currency,

accessed Monday, April 15, 2019. https://www.uwyo.edu/numimage/currency.htm

Andreas, Jonathan. GDP Was Designed For Warfare Not Welfare. Medianism, 27 Jun

2015. Retrieved from https://medianism.org/2015/06/27/gdp-was-designed-for-warfare-not-

welfare/

Ajaz, Taufeeq. The Reality of India’s Rising GDP Numbers. The Wire, 24 Feb 2019.

Retrieved from https://thewire.in/economy/the-reality-of-indias-rising-gdp-numbers

Davenant, Charles. An Essay Upon The Ways and Means for Supplying the War,

1695. The Political and Commercial Works of Charles Davenant, 1771. Retrieved from

https://www.academia.edu/24411537/Charles_Davenant_An_Essay_upon_Ways_and_Means

_for_supplying_the_War_1695_

Simon Kuznets. The Library of Economics and Liberty. Retrieved from

https://www.econlib.org/library/Enc/bios/Kuznets.html

Coyle, Diane. Warfare and the Invention of GDP. The Globalist, 6 Apr 2016.

Retrieved from https://www.theglobalist.com/warfare-and-the-invention-of-gdp/

Laurent, Eloi. GDP at 70: What’s Next? The Globalist, 13 Apr 2014. Retrieved from

https://www.theglobalist.com/gdp-at-70-whats-next/
 Humanity Divided: Confronting Inequality in Developing Countries. United Nations

Development Programme, 29 Jan 2014. Retrieved from

https://www.undp.org/content/undp/en/home/librarypage/poverty-reduction/humanity-

divided--confronting-inequality-in-developing-countries.html

Osmani, S.R. The Capability Approach and Human Development: Some Reflections.

UNDP Human Development Report, 2016. Retrieved from

http://hdr.undp.org/sites/default/files/osmani_template.pdf

Dickinson, Elizabeth. GDP: a brief history. Foreign Policy, 3 Jan 2011. Retrieved

from https://foreignpolicy.com/2011/01/03/gdp-a-brief-history/

Human Development Index (HDI). UNDP Human Development Reports. Retreived

from http://hdr.undp.org/en/content/human-development-index-hdi

Defining a New Economic Paradigm. United Nations Sustainable Development

Knowledge Platform, 2012. Retrieved from

https://sustainabledevelopment.un.org/index.php?page=view&type=400&nr=617&menu=35