Diane Coyle, GDP, A Brief But Affectionate History (Princeton 2014)
The following should not be taken as a review of Diane Coyle’s recent book. It already has many by respected reviewers. Instead it is more a comment on how the profession can improve both its presentation as well as the content of the discipline.
Since I began studying economics, at first mainly agricultural economics in an agricultural program, the discipline has made big strides, some forward, some sideways and some into the wilderness. Complexity, sophistication for some, has been associated with the increased use of statistics and mathematical modeling. There has been and always will be a use for both. Graduate programs in particular have tended to emphasise these two. MA graduates from respectable programs in Canada, and elsewhere I imagine, will tell you that they learn the tools of applied mathematics, but with instructors who may be unable to explain the economic significance of the model being studied. It’s like a surgeon knowing how to make an incision but not why it should be made.
If you treat economics as a discipline with similarities to medicine, which I often do, then a combined knowledge of theory and the results of empirical studies are necessary to advance knowledge. When methodology displaces theory, the value of the policy advice given is limited, even hazardous.
Macroeconomics took a severe hit in the 1930s with a failure to understand the reasons for the depression years and the appropriate remedies. It took another hit after 2007. The depression ended due to a world war which ramped up defense production and drew women into the workforce, rather than by the subtle use of fiscal and monetary policies. The loss of manpower due to death and injury plus the physical destruction of assets caused by war, especially in Europe, Russia (USSR) and Japan created fertile conditions for restoring economic health.
The US and Canada, which suffered human casualties but where almost no physical destruction took place, benefited from postwar demand for their capital, goods and services. Marshal Aid by the US – “an estimated $148 billion – in 2004 dollars from 1946 to 1952.” (Coyle p.18) – provided a means to finance the economic restoration. Marshal saw what Keynes had warned about at the end of WW1, that if the reparations imposed on Germany were too severe, it would not only prevent restoring the economic and political health of Germany, but create conditions for future wars, which unfortunately it did.
Diane Coyle explains the postwar (WW2) periods of growth and recession in clear prose using the tools of economic analysis and making it understandable to the interested lay person. Like medicine, where there is still much to be discovered about the causes and cures for certain conditions but much has already been learned, so with the present state of a nation’s economic health especially at the macro level.
Failure to prescribe appropriate remedies for economic problems where there exists a good understanding of likely cures is often due, in my view, to the strength of groups to lobby politically for their interests and for the growing sense of entitlements which the public now has. These arise in part due to the sense that individuals want more from their governments, especially more for themselves as opposed to others in society. But they also occur because politicians in a democracy offer voters more in order to attract support. Consider a typical income tax return, if such a thing exists. There are provisions according to the level of income earned (a progressive rate structure), deductions for childcare, health services, education, single parents, living in rural areas, flood prevention and so on. Each deduction does two things. It creates a sense of entitlement for those who benefit from the tax treatment, and it encourages others to seek them by lobbying politicians and officials. Up to a point, a democracy thrives on a diet which satisfies entitlements, but at some point obesity sets in with harmful results.
GDP, A Brief But Affectionate History, is mainly about what GDP measures, how reliable and useful it is and what might be used in its place. Despite serious shortcomings, Coyle thinks it should be retained for now, and that contending measures don’t provide the necessary information for economic policy making. In making this case, the author’s explanations of economic circumstances are so clear and understandable that the book should be read by economists for form as well as content.
If a case is to be made for replacing the present system of national accounting, it would be in my view, because of the growth of services relative to goods. In its original development, economies were more involved in the production of goods where measurement is easier. Many services are not only difficult to measure but are obtained either free or at low cost but still are part of GDP. For the price of a laptop or pad and internet service, I can receive communications, music, video, newspapers, magazines, books, access to websites, financial and many types of services for free. The benefits exist but they are not measured in GDP. All of this is recognized and discussed by Coyle.
One final thought. The recent financial disaster has forced economists to reexamine their discipline with interesting debate and discussion taking place other than in academic journals. These include numerous blogs where a problem for readers is to decide which ones to follow. One thing which remains unchanged is 24 hours in the day and the need to decide how to use the waking hours. The economic blogs which I find useful are The Conversable Economist, Thought du Jour, Brad de Long and now Enlightenment Economics Managed by Diane Coyle.