Bryan Caplan  

The Impolitic Wisdom of Simon Kuznets

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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.
By the way, if you are unfamiliar with Kuznets' life story, it's fascinating.  But so are the variants of the Kuznets Curve and his proto-Simonian population economics.



COMMENTS (5 to date)
Andrew_FL writes:

Had this idea prevailed, we would speak of the "War Depression"-or perhaps think of the Depression as a triple dip recession that lasted until after the war. Although the former makes more sense, since it has distinct origins.

We'd also be forced to acknowledge that hypothetical world's version of Okun's law broke down in that situation-unemployment was very low and yet GDP - G (essentially equivalent to Kuznet's idea during the war years) was deeply depressed. We'd have to acknowledge that "full employment" was essentially achieve involuntarily, as a consequence draft and draft exemption for war "production."

I think our understanding of economics was significantly impoverished-and remains so-because Kuznet's idea here didn't prevail. Not only that but our history books are arguably tainted by this as well. So much talk of the war "ending the depression."

The other major issue with the second World War in terms of how our interpretations have been mislead by the data, however, would not really be helped by Kuznets' recommendation, is the issue of inflation being hidden by extensive price controls, which exaggerates the real values during the war relative to those after it. That issue unfortunately is not as easy to fix. I can figure out what was "really" going on nominally by taking G out, but back dating the inflation that only appeared to occur suddenly when controls were lifted, is much trickier.

I would also just say, a lot of people emphasize diminished consumption during World War II, but actually, private investment dropped off much more sharply. A clearcut case of crowding out.

Ed Hanson writes:

I have always been fascinated by history, especially that which I am unaware of comes to light. I assume if I look at contemporary statistics of past economy now, they have all been adjusted to current formula, but if I read past writings of economists, they are using compilations of statistics as done in their time. Knowledge of changes between then and now is vital to more full understanding.

I am not an economist, nor historian for that matter, but am curious of well versed modern economist are of past significant changes? I suspect books such as Coyle's are important but under utilized.

Ed

Ed Hanson writes:

David

I hope you post more on the subject of the war years and post war years. I read your paper "US Postwar Miracle" and found it informative and even enlightening, and think you should bring here to your blog.

I believe the title "Greatest Generation" for those who fought and those who stayed home and produced quite correct. Understanding that those who stayed home produced, tolerated shortages, and outright unavailability of items we, today, think as necessities, is an noble example of sacrifice for a greater good. I believe that no government law of control could have succeeded in creating this sacrifice for long without voluntary compliance.

My belief of this is augmented by what happen in 1946. Congress and the President fought for and over continuation of price controls. As I learned from your paper, during a short time the price control was not law due to a Truman veto over sunset provisions, many prices rose swiftly. I surmised that rather being outrage at the higher prices, the people were happy as products began to appear in more abundance. Later a watershed midterm election, replacing a Democratic Legislature with a Republican Legislature gives evidence of this. As you note in the paper, executive orders to remove price controls from meat was not enough to stop this electoral change, and after the election, Truman responded to the desires of the nation, ended all price controls.

Fairly evident that people were better off with available products at higher prices than shortages at lower prices. That "Greatest Generation" definitely were not sheep in opposing government edicts and law when the greater good changed.

Ed

Ed Hanson writes:

Bryan

OOPS. I had just read David Henderson's paper and assumed that the references of Kuznets was from there. Please change the above post to asking that David bring his paper to blog and thanking you Bryan for bringing and introduction to changes of economic thinking about government expenditure.

My bad,

Ed

Ed, I've also invited David Henderson to expand on his paper on the post war economy.

As Ed knows from Econbrowser, I've been recently interested in that measurement. Especially since I received this e-mail from a prominent economist associated with the NBER;

I received a message from our webmaster this morning concerning your question about the NBER's dating of a recession in 1945. I am afraid that the modern "business cycle dating committee," which issues statements when it announces a turning point in the economy and often addresses data issues of the sort that you raise, has only been in operation since 1978. For earlier periods, the NBER turning points are based on the work of the late Geoffrey Moore and Victor Zarnowitz, and we do not have any announcement records of those dates. There weren't announcements to my knowledge before 1978.
So I'll be interested to see what Ms. Coyle has to say about the WWII era.
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