Wednesday, April 9, 2014

Simon Kuznets at Econlog - an agreement and a disagreement

Bryan Caplan and David Henderson have two interesting posts up (here and here, respectively) on Simon Kuznets, who was responsible for building the national accounts in the United States (along with many other important contributions).

I agree strongly with David's praise of something Kuznets pushed for in the national accounts and disagree strongly with Bryan's praise.

Let's start with David. He notes that very early on Kuznets advocated including household production in the national accounts. He was overruled at the time. This is a major oversight, given how much production occurs in the household, and the relationship between household production and market production. One guess I have as to why he was overruled at the time was that not many people were talking about household production yet and those that were were principally labor economists (it's relevant for labor supply decisions and at the time especially female labor force participation). Macroeconomists didn't really start getting interested until several decades later when RBC and other theorists were trying to explain some unusual labor market and consumption behavior over the business cycle. I review much of this in a paper that I am revising and resubmitting to the Journal of Family and Economic Issues on household production over the business cycle and its relationship to home price fluctuations.

One last point on this is that the Commerce Department is beginning to make amends. There have been working groups on the subject and people are generally positive about developing these data, perhaps in a separate module like they do for research and development. This is for the best, I think. Household production impacts macroeconomics obviously, but a lot of macroeconomics turns on income-expenditure identities and the idea of an aggregate output market. Importing non-market behavior into theories of the market is possible, but you cannot confuse exchanged output with non-exchanged output (unless you want to scrap the theories that we currently have about human exchange). So I think the BEA is well placed to measure (really, to estimate) this, and they should but I would keep it as a distinct series.

Kuznets is not to be praised, I think, for something that Bryan discusses - his advocacy of using GDP as a measure of welfare and excluding things like armaments spending that he sees as reducing welfare. There are two enormous problems with this position, both grounded in what ought to be non-controversial welfare theory.

The first and most obvious is that welfare is not a measurable quantity (unless we get some way of measuring utils - perhaps in units of dopamine? - and adding them up across individuals). This is the standard interpersonal utility comparison issue. You cannot get an aggregate welfare measure because you cannot measure welfare in a way that can be summed across a population. Even if you could (and admittedly it would be fantastic if you could), the concept has nothing to do with the national accounts and has no business in the national accounts. The national accounts measure p*q, price times quantity of goods and services. Any given p*q could be associated with a wide range of welfare levels depending on the shapes of the supply and demand curves. Sure they're related in that you get both concepts from a supply and demand model, but they are related like apples and oranges are related because they're both fruit that grows on trees. So it's not a very plausible goal to begin with, and even if it were plausible it's not something that should be mixed into the national accounts.

However, the interpersonal utility comparison problem rears its head in another way. Exactly who gets to decide what is really welfare enhancing and what isn't? I think a lot of armaments funding is welfare enhancing. Why is Kuznets and Caplan's view privileged over mine? Caplan calls this proposal "impolitic wisdom". Maybe it's impolitic, maybe it's not. I don't think it's wisdom. A better term for it is "objective value theory," and that doesn't have any business in economics. Why stop at armaments? Why not guns held by private households. Sure, many privately held guns are used for recreation but a lot of them are also used for precisely the same purpose that larger armaments are used. Should we subtract out gun production? What about home security system? Should police uniforms be subtracted out of the textile industry and police cars be subtracted out of the automobile industry? I really only have a lock on my door for security reasons too - should locks be subtracted out of output? Or do we have to somehow distinguish between legitimate and illegitimate security spending - and again who gets to decide what's legitimate?

Security is just the tip of the iceberg of course. What about alcohol and tobacco? What about trans fats? What about Jersey Shore (the show, not the location)? What about the house of the guy that lives behind me. It's an eyesore and I'm glad at least that I don't have to look at it out of my front window.

You get the picture.

It's a bad idea, and it's a good thing Kuznets was overruled on that one.


  1. The "these things shouldn't be counted as part of GDP because they don't really add to well-being" meme has been one of my pet peeves for over 30 years. Among other things I have seen suggested for exclusion have been police and fire services, spending on prisons/jails, hospital emergency rooms, and expenditures on environmental protection. The basic argument is that all of these things are aimed at remediating or forestalling "bads". My immediate rejoinder is somewhat different from yours, but is a complementary argument, I think. If there were no crime, or no fires, or no emergency medical needs, then there would be no demand for the services that respond to them. And we could use those resources to produce other goods and services that are not, given the state of the world *as it is*, as highly valued. So in a different state of the world, we would be producing a different set of goods and services? To which I shrug, and sort of say, "If that's your point, it's a meaningless one. In different states of the world, *of course* we would produce different sets of goods and services. But GDP is designed to measure how much we produce, not to make judgments about what would be *better* if the state of the world changed."

  2. In all fairness, Kuznets eventually repudiated the idea of trying to measure welfare with GDP because of the technical problems you are talking about.

    From a HET perspective I think the issue Kuznets has is really interesting because national accounting starts to be developed when government spending is like less than 5% of GDP and then by the time it is a widely used tool government spending is like 20% of GDP so Kuznets had to kind of philosophically catch up with history.

  3. Units of dopamine, I like that! heh heh


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