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Episode 522: The Invention Of 'The Economy'

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Episode 522: The Invention Of 'The Economy'


Episode 522: The Invention Of 'The Economy'

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Hey, it's Jacob Goldstein. Today's show is a rerun of a story I reported with David Kestenbaum back in 2014. Here it is.


GOLDSTEIN: If you'd walked up to somebody on the street a hundred years ago and asked them how's the economy doing, they would not have had any idea what you were talking about.


Sure, people talked about how many ships came into New York Harbor or how the wheat harvest was that year. But this idea that we take for granted today, that there is this thing out there called the economy, that idea did not exist a hundred years ago,

GOLDSTEIN: And today, not only do we talk about the economy, we talk about it with a single number. So without even really thinking about what it means, we can say last year the U.S. economy grew by 1.9 percent.

KESTENBAUM: I was hoping for 2.5 - at least. Today on the show, how we started boiling down entire nations to a single number, and how that number made people think they could control everything - or at least the economy.


KESTENBAUM: So, Jacob, we are not making this up. It really does seem like the economy - at least as we know it, that notion - really was born at a particular moment in history. You can use Google to go back hundreds of years and search through old books for the phrase the economy. And if you do that what you find is 1700 - basically nothing. 1800? Nothing. 1900? Nothing. And then a few decades after 1900, people suddenly felt this really compelling need to talk about the economy, this giant invisible thing that was all around them.

ZACHARY KARABELL: It was invented because of the Great Depression.

GOLDSTEIN: This is Zachary Karabell. He just wrote a book called "The Leading Indicators." And he actually does that Google trick in his book.

KARABELL: And it was invented because there was clearly a perception that there was something really, really bad going on but they didn't really know what. I mean, you could see there were homeless people on the street. You could see there were farmers, you know, the Okies heading from their dustbowl farms off to California by the tens of thousands. But there was no way of really grasping it.

KESTENBAUM: You can imagine, say, FDR saying to his advisers boil it down for me. How bad is it? What's the big picture? But to answer them they, needed a number, the number that today we call GDP, gross domestic product.

GOLDSTEIN: It's not like no one had thought about this kind of thing before. For hundreds of years, there would be moments when, say, the king of England would tell some adviser to go ride through the countryside and figure out how much stuff England had. Add up all the wheat and all the horses and all the swords and figure out basically if England had enough stuff to go invade France.

KESTENBAUM: But during the Great Depression, the U.S. government decides to do this in a much more serious way. They're going to go way beyond sending out a guy on a horse. They're going to try to add up everything that gets made in the entire country in a given year - all the houses that get built, all the beers sold in bars, every fedora, every Studebaker, every visit to the doctor.

GOLDSTEIN: And to do this, they need a numbers guy, a guy who is willing to devote his life to wading through really boring reports and figuring out how to add up lots and lots of numbers. And they find just the right guy. His name is Simon Kuznets.

KESTENBAUM: We called up economist Glen Weyl, who has written about him, and we asked, what was Kuznets like?

GLEN WEYL: Extremely, extremely serious and dry.

KESTENBAUM: (Laughter) Not surprising, I suppose.

WEYL: No, no, no. I mean, but not just like economists are serious and dry. Like, he was extremely, extremely sober, totally data-driven, just the ultimate careful, sober scholar.

KESTENBAUM: So even less fun than your average economist at a dinner?

WEYL: Oh, much, much less. Yeah.

KESTENBAUM: Adding up all this stuff is harder than it may sound. First of all, you just have to figure out everything that you need to count.

WEYL: Just trying to define what things need to be included, it's an incredibly complicated task. I mean, the steel industry association had figures on how many tons of steel were being sold. The agricultural associations knew how many tons of grain were being produced. But no one had made an attempt to actually put that all together into an integrated picture of all the economic activity that was going on.

KESTENBAUM: Do you imagine at some point they'd added it up and they're like, oh, wait, we forgot ice cream parlors?

WEYL: Yes (laughter).

GOLDSTEIN: Once you figured out what to count, you have to figure out how to count it. For one thing, you have to make sure you're only counting what the U.S. is producing. So if someone buys a Hershey bar in New York City but the cocoa to make that chocolate bar came from Brazil, you have to subtract out the cost of the cocoa because it didn't come from the United States. That cocoa is part of Brazil's GDP.

KESTENBAUM: So Kuznets and a bunch of other numbers guys go to work on this stuff. And in 1934, at the request of Congress, they publish this report. It actually makes me yawn to read the title. It is called "National Income, 1929-1932." And this report - this report becomes a best-seller. Thousands of copies are printed and they sell out. Here's a sampling of what Americans were so eager to read.

Quote, "the economic changes that occurred in this country during recent years are sufficiently striking to be apparent to any observer without the assistance of statistical measurements. There is considerable value, however, in checking the unarmed observation of even a careful student by the light of a quantitative picture of our economy."

GOLDSTEIN: Well done, David. You can see why this very wonky statistic, which at the time was called national income, becomes sort of an overnight sensation. More than anything before it, national income is an answer to this really basic question - what the hell is going on? How bad are things? Are they getting worse? Are they getting better? And pretty soon you can't turn on the radio without hearing these new numbers and what they're measuring, this new thing called the economy. Here's Zachary Karabell.

KARABELL: By 1937, Roosevelt starts talking about the economy. And he starts talking about national income going up.


FRANKLIN DELANO ROOSEVELT: National income had amounted in the year 1929 to $81 billion. By...

KARABELL: You'd never hear Abraham Lincoln or Teddy Roosevelt or George Washington talking in this way. One of the things that's remarkable to me is how quickly we went from a world where none of these terms and none of this conversation was part of our national consciousness to it being at the center of our national consciousness.

KESTENBAUM: This number that Kuznets is adding up becomes part of a kind of intellectual revolution. Over in England, the Brits are also adding up this number. And the British economist, John Maynard Keynes, starts talking about the economy as something that the government can control because if you can name something, if you can boil the economy down to a single number, a single number that rises or falls every year, it starts to occur to people, maybe we can change it. Maybe we can control it.

KARABELL: You've got a lot of people who really start believing that there's this thing called the economy that's a mechanical system that obeys laws just like physics. And that if you can get the - if you can describe the system and the variables correctly, it's very mechanistic. Like, input in, output out. And so part of the reason for measuring is the belief that all this fuzziness that had attended human history around waves of, you know, bursts of growth and then collapse and money going up and money going down, that we could capture it and control it the same way scientists were capturing and controlling physical reality.

GOLDSTEIN: This new idea, this idea that economists and the government could really control this new thing called the economy was about to be tested in a huge way. In 1941, the U.S. enters World War II and the government basically takes over the U.S. economy to fight the war. And fighting an all-out war is not just risky for soldiers. It can mean massive food shortages at home. It can mean rampant inflation. It can bankrupt a country almost overnight.

KARABELL: If you're going to turn all of this domestic industry into war industry - car plants into tank plants, parts plants into gun plants, you know, clothing factories into military apparel - how much - how far could you go in the direction of war output before you imperil domestic production? And how far could you go before people started freaking out and worrying that prices would rise and goods would become scarce?

GOLDSTEIN: Fortunately, the U.S. has a secret weapon - the most boring economist on the planet, Simon Kuznets. Kuznets becomes the chief economist on the planning committee of the war production board.

KESTENBAUM: But FDR has apparently not consulted with Kuznets. And in 1942, he gives his State of the Union speech laying out incredibly specific plans for what he wants to do in terms of war production. He says, this year we're going to make 60,000 planes and 45,000 tanks. And he goes on and on with specific numbers for ships and anti-aircraft guns.

GOLDSTEIN: Kuznets looks at those numbers. He really crunches them. He uses those tools that he put together to make his early version of GDP. And he goes back to the Roosevelt administration, and he says, I've got some bad news for you. Your big plan - it isn't going to work.

Kuznets looks at how much steel and aluminum and copper the U.S. is producing. He looks at how many factories there are, and he realizes the U.S. economy just is not big enough to make all the planes and tanks and everything else that Roosevelt is planning. And if the U.S. tries to do that, it could lead to shortages. It could lead to massive inflation. It could wreck the U.S. economy.

KESTENBAUM: It was the generals versus the economists, and the economists won. That's who Roosevelt listened to.

KARABELL: There are many people who have said - and I would agree with them - that the invention of GDP was one of the prime factors in winning the war. The ability to with some confidence be able to dedicate all these resources - because a lot of the reasons why America won the war wasn't because we fought particularly better than anyone else. It's because we had such a massive industrial machine that dwarfed the capacity of anybody else. And it was because we were able to use that with confidence that we weren't going to create huge domestic destruction.

GOLDSTEIN: The war ends, and after the war, GDP really sweeps the world. There are all these new international organizations - the United Nations, the International Monetary Fund, the World Bank. And the people running these new global groups - they love GDP.

KARABELL: First thing you do in the 1950s and '60s if you're a new nation is you open a national airline. You create a national army, and you start measuring GDP. And you start measuring GDP because if you want to go to the World Bank or you want to go to the U.N. and you want some sort of economic aid, the sole criteria for those is if we give you money, you have to show that it helped your GDP.

KESTENBAUM: And of course once you have a single number summing up your country's economy, it's tempting to rank countries by GDP like it's some kind of Olympic competition, which people do, especially during the Cold War, which - you know, the Cold War as much as anything was this battle of economic systems. Who's winning, communism or capitalism? Let's ask GDP. Politicians around the world start to focus on this thing. How do we make our GDP bigger? How do we win this competition? How do we move up in the rankings?

GOLDSTEIN: And by the 1960s, GDP is such a big deal that it get's its own backlash. Robert Kennedy calls out its shortcomings in 1968.


ROBERT KENNEDY: Yet the Gross National Product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of marriages, the intelligence...

KESTENBAUM: Kennedy wasn't the only one complaining about how GDP was being used. Simon Kuznets, the super serious, sober economist who had helped create it - he eventually won the Nobel Prize in part for that work. But he was not entirely happy with how his creation was being used. Again, Zachary Karabell...

KARABELL: Just like Robert Oppenheimer who helped create the nuclear bomb later kind of recoiled at the proliferation of nuclear weapons and strength being defined by that, Kuznets himself said, look; the fetishization of numbers and the use of this number as a proxy for everything is what politicians do. It's what people do. I would never have recommended that. I would - and it's the easy way out, avoiding hard discussions, and it can be easily abused.

GOLDSTEIN: In just a few decades, GDP went from being a useful Depression-era tool to World War II weapon to a piece of Cold War propaganda to facing its own backlash in the 1960s. And of course GDP is still with us today. So in the end, what should we make of it? What does GDP really do?

DIANE COYLE: It does what it says on the tin. It measures the economy. We shouldn't try to make it do something it's not intended to do.

GOLDSTEIN: Diane Coyle is an economist who just wrote a book called "GDP: A Brief But Affectionate History." And she says, look, GDP was never intended to measure overall well-being or a nation's standard of living. Certain things that are bad actually make GDP go up, like hurricane damage that costs a lot to fix.

KESTENBAUM: Sometimes it's not even clear what should count as GDP. For example, suppose, Jacob, you and I both stay home to take care of our kids. That labor by the current rules does not count as GDP even though it's pretty clearly work. But, Jacob, if you come take care of my kids and I go take care of your kids and we pay each other, then it does count.

GOLDSTEIN: And then there's the black market, which means everything from off-the-books babysitters to mafia drug deals. In the U.S., the black market does not count toward GDP. But in some other countries it does. Back in the '80s, Italy started counting its black market. And overnight, the Italian economy became bigger than the U.K. economy. The Italians celebrated. They called it il sorpasso. But of course, nothing had really changed. Here's Diane Coyle again.

COYLE: We tend to think about GDP as if it's a natural object. It's like a mountain. And we have methods of measuring it that are better or worse than more or less accurate. But there is a thing there to be measured. Actually, that's just not true with the economy. There's no natural entity called GDP in the universe.

GOLDSTEIN: In other words, maybe the most important thing to remember about GDP is it's not a thing. It's an idea. And that idea keeps changing. Just last year, the U.S. tweaked the way it calculates GDP. And in an instant, the economy was $500 billion bigger.

Hey, it's Jacob back in 2017. There is one last thing about Simon Kuznets, the man who invented GDP. He may be more famous today for something else he invented. It's called the Kuznets curve. It was his explanation for income inequality. More on that in just a minute.


GOLDSTEIN: So OK, Kuznets inequality and the Kuznets curve. Simon Kuznets came up with the curve in the 1950s. This was a moment when income inequality was falling in the U.S. and in other developed countries. So Kuznets, he looked at the data, he thought about the world, and he said, OK, there are basically three phases to historical inequality. Phase one, pre-industrial societies. There was almost no inequality because almost everybody is poor. Phase two, along comes industrialization. Some people get really rich, most stay poor, inequality shoots up. And then phase three. This is what was happening in the '50s. People moved to the cities. Education improves. A middle class emerges. Inequality falls.

The story fit the data of the time. It seemed so true. The idea became widely accepted. People named this curve of rising and then falling inequality after Kuznets, the Kuznets curve. But of course, a few decades later in the U.S. and in other developed countries, inequality started rising again and the Kuznets curve kind of went out the window. Recently, though, one economist said, maybe we should think about the world in terms of Kuznets waves. Over the very long run, inequality rises then falls then rises then falls and maybe so on.

What's your favorite economic indicator? And don't say gross national happiness. You can tell us on Facebook or on Twitter. You can email us at Today's show was originally produced by Jess Jiang. The rerun was produced by Elizabeth Kulas. If you're looking for something else listen to, try NPR's podcast Embedded. The host is Kelly McEvers, and right now they're looking at videos of police encounters and the strange afterlife that they can have. You can find Embedded on the NPR One app or wherever you get your podcasts.

Also, if you love PLANET MONEY or Embedded - or any other podcast, for that matter - do us a favor and tell people on social media about the podcast that you love. Use the hashtag #trypod, T-R-Y-P-O-D. I'm Jacob Goldstein. Thanks for listening.


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