A brief and dispassionate note on 'GDP'

The book, not the concept. I've been reading "GDP: A Brief but Affectionate History." First, I should say I personally like brief and simple. Better than long, drown-out and complex. That's why I'm not sure why it's presumed that brief must somehow be antagonistic, and brevity should be tempered by affection. At any rate, I do like the GDP concept.

It measures material production, which is a key feature of capitalist economies, centered on the accumulation of material wealth. It was not designed to measure everything. Certainly not sustainability. Or happiness, for that matter. And although Diane Coyle, author of the book, suggests that it can't be used as a measure of well-being, GDP per capita is certainly employed as an index of welfare, even though no serious (I don't mean mainstream) economist would take GDP per capita as the only indicator of development. Finally, it isn't a measure of inequality, but functional income distribution, the shares of labor and capital compensation in total GDP, is actually one of the best measures of inequality. So yes, GDP does have its flaws (for an accessible discussion of the limitations of GDP go here, and for my views here).

Note that Kuznets apparently was against including government spending, in particular defense expenditures, as part of GDP, according to Coyle, since in his view it didn't increase well-being. That proposition is not uncontroversial. A lot of government spending, including in defense, is central for technological innovation, and, hence, for higher productivity growth and increasing living standards. The internet (as well as driverless cars and many other things) that I'm using to post this piece is the result of DARPA's investment -- the Defense Advanced Research Projects Agency, a defense department agency.

This suggests to me that we owe more to the British Keynesians, Richard Stone and James Meade, that basically created the methodology of of the National Accounts during World-War-II, than to Kuznets (all three won the Sveriges Riksbank Prize, by the way, but Meade's wasn't related to national accounting). And, in a sense, it is what Coyle suggests when she argues that:

“It [Keynesian economics] became the basis for a more interventionist approach to government economic policy from the 1940s onward, using both fiscal policy (the level of tax and spending) and monetary policy (the level of interest rates and availability of credit) to target a higher and less volatile rate of growth for the economy. The use of these tools was developed more fully by other economists after Keynes’s early death in April 1946. Postwar policymakers still bore the scars of the Great Depression and pounced on the economic theories of Keynes and his successors as a means of averting a repetition of that crisis. Crucially, the development of GDP, and specifically its inclusion of government expenditure, winning out over Kuznets’s welfare-based approach made Keynesian macroeconomic theory the fundamental basis of how governments ran their economies in the postwar era. The conceptual measurement change enabled a significant change in the part governments were to play in the economy. GDP statistics and Keynesian macroeconomic policy were mutually reinforcing. The story of GDP since 1940 is also the story of macroeconomics. The availability of national accounts statistics made demand management seem not only feasible but also scientific.”

This is essentially correct, yet it might be misinterpreted as suggesting that the National Income and Product Accounts (NIPA) are intrinsically Keynesian, as some far right supply-siders have argued. Nothing in the NIPA implies that causality goes from autonomous spending to income, as in Keynes' Principle of Effective Demand, and the accounts are compatible with a model based on Say's Law (not that I personally think that's a good idea).

It only means that by the time the National Accounts were developed, a version of Keynesian economics, as it turns the Neoclassical Synthesis, had more or less become the mainstream interpretation of how the macroeconomy works. The same is true of say econometrics, and macro econometric models, like the Klein-Goldberger, which was Keynesian, and would not lead a reasonable person to conclude that econometrics is Keynesian (Keynes was, in fact, skeptical about it).

Galbraith on Piketty's Capital

I'm still reading the book, so I will not say much at this point. The history of ideas at the beginning of the book is just embarrassingly bad, and suggests that mainstream economists do not have the faintest idea about the history of their own discipline. Just a short example would suffice to show what I mean. Piketty says: “Marx totally neglected the possibility of durable technological progress and steadily increasing productivity.” Note that the book is named Capital, and Piketty is quite critical of Marx. So you would expect some reasonable understanding of what is in the other Capital. If you open chapter XV of Marx's Capital, on Machinery and Modern Industry he tells you:

"Like every other increase in the productiveness of labour, machinery is intended to cheapen commodities, and, by shortening that portion of the working day, in which the labourer works for himself, to lengthen the other portion that he gives, without an equivalent, to the capitalist. In short, it is a means for producing surplus value."

So machinery and increasing productivity are essential for the production of surplus value and the explanation of profits. It is evident that if Piketty read Marx, he didn't understand much. And that is true of almost any citation that involves history of economic ideas (so Roncaglia, previous post, is right, Piketty should take a course in the history of economic thought).

Also, Piketty is in many passages clearly contradictory, taking positions that are not compatible with other assumptions made just before. These contradictions derive basically from his adherence to neoclassical theory, and his desire to transcend it, and say something relevant about inequality. In neoclassical theory inequality results from technical change, and different levels of skills, since workers and capital receive according to their productivity. Political factors should NOT play an important role. Other than the data on inequality, in the collecting of which he has been central together Emmanuel Saez, even if it is far from true that he is the only follower of Kuznets, there is little merit in this book it seems.

Jamie Galbraith provided a good review in Dissent (see here). An important point that Jamie makes is that Piketty botches the argument on the capital debates (again, given the title of the book, it is a bit ironic). Jamie notes: "Piketty devotes just three pages to the 'Cambridge-Cambridge' controversies, but they are important because they are wildly misleading..." and Piketty doesn't get that: "as the rate of interest falls, there is no systematic tendency to adopt a more 'capital-intensive' technology, as the neoclassical model supposed." The implications of the capital debates (for more on that go here) for understanding inequality are associated that once intensity and remuneration are not connected in the way neoclassical theory suggests the bare bones of the social conflicts that are behind income and wealth inequality are exposed.

An appreciation of the limitations of the neoclassical view of capital would lead, according to Galbraith, to a broader understanding of the policies needed to overcome inequality, beyond the tax on wealth proposed by Piketty, and a better understanding of how in a previous era -- of the New Deal and the Welfare State -- it was possible to reduce equally staggering inequities.

Bernard, Gervorkyan, Palley, Semmler: A Review & Critique of Long Wave Theories

In a previous post (see here), I had argued that the capitalist world economy can be conceived as resting on the dependence of historically-specific hegemonic institutions, whose rise and fall follow the trajectory of long waves, what Giovanni Arrighi defined as systemic cycles of accumulation (SCA's), periods of approximately 40-60 years, separated by A phases and B phases (see here). Lucas Bernard, Aleksandr V. Gervorkyan, Thomas I. Palley, and Willi Semmler, however, offer a penetrating critique of this central tenant of the world-systems tradition.

From the abstract:

This paper explores long wave theory, including Kondratieff’s theory of cycles in
production and relative prices; Kuznets’ theory of cycles arising from
infrastructure investments; Schumpeter`s theory of cycles due to waves of
technological innovation; Goodwin`s theory of cyclical growth based on
employment and wage share dynamics; Keynes – Kaldor – Kalecki demand and
investment oriented theories of cycles; and Minsky’s financial instability
hypothesis whereby capitalist economies show a genetic propensity to boom-bust
cycles. This literature has been out of favor for many years but recent
developments suggest a reexamination is warranted and timely. 

Read rest here.

Economists with K, or rediscovering something never lost

So there is a certain buzz about the two old Ks, Keynes and Kalecki, and what Krugman and Konczal, the new Ks, have been saying about their theories. Mike is more of a journalist, and it is certainly good that journalists get Keynes right. And even better if they get Kalecki. On Krugman I said enough. He should take a page from Keynes and learn that by 1936 he was:

"no longer of the opinion that the concept of a 'natural' rate of interest, which previously seemed ... a most promising idea, has anything very useful or significant to contribute to our analysis."

In all fairness, for heterodox economists this rediscovery of Keynes/Kalecki is both welcome and a bit frustrating (check the comments in Quiggin post; someone thinks that DeLong was the first to point the relevance of Kalecki's "The Political Aspects of Full Employment").

But here is my advice to recovering neoclassical economists, check these other economists with K, you might learn something: Kahn, Kaldor, Keyserling, Klein, Knapp,  and Kondatriev. Kuznets is often remembered, so no need for rediscovering him, I think. And you can always go back to Gregory King, if you're so inclined. A good active economist with K, that understands both Keynes and Kalecki and how their theories are related to the old classical economists and Marx is Heinz Kurz. I have a list with the Ms and Ss for you to 'rediscover' too.

PS: Just three books on Kalecki published a few years after he passed away that you may want to check out are George Feiwell's The Intellectual Capital of Michal Kalecki: A Study in Economic Theory and Policy, Malcolm Sawyer's Macroeconomics in question: the Keynesian-monetarist orthodoxies and the Kaleckian alternative, and The Economics of Michał Kalecki. For a discussion of Kalecki's views on economic development see this paper by Jayati Ghosh.