The Impolitic Wisdom of Simon Kuznets
By Bryan Caplan
Highlight from Diane Coyle’s GDP: A Brief but Affectionate History:
Kuznets, however, saw specifically his task as working out how to measure national economic welfare rather than just output. He wrote:
It would be of great value to have national income estimates that would remove from the total the elements which, from the standpoint of a more enlightened social philosophy represent dis-service rather than service. Such estimates would subtract from the present national income totals all expenses on armament…
Why didn’t Kuznets’ view prevail? Coyle:
With this aim, Kuznets was out of tune with his times. Welfare was a peacetime luxury. This passage was written in 1937, when his first set of accounts was presented to Congress. Before long, the president would want a way of measuring the economy that did indicate the total capacity to produce but did not show additional government expenditure on armaments as reducing the nation’s output. The trouble with the prewar definitions of national income was precisely that as constructed they would show the economy shrinking if private output available for consumption declined, even if the government spending required for the war effort was expanding output elsewhere in the economy. The Office of Price Administration and Civilian Supply, established in 1941, found that its recommendation to increase government expenditure in the subsequent year was rejected on this basis. Changing the definition of national income to the concept of GDP, rather than something more like Kuznets’s original proposal, overcame this hurdle.