A Weekly Dose of Hazlitt: The GNP Fetish

The GNP Fetish” is the title of Henry Hazlitt’s Newsweek column from January 5, 1959. Here, Hazlitt shows the arbitrary nature of GNP (Gross National Product) statistics. Indeed this is a subset of all of the problems associated with aggregation in economics. Aggregation is the result of simplistic thinking that vainly attempts to distill the actions of millions of people into a handful of variables that can then be used to construct mathematical models. The dismal performance of such models both in forecasting and even ex post facto (think about how all macro economic statistics are adjusted months afterwards) show the futility of such endeavors. However, if the mainstream economics profession ever admitted to this, what would happen? Clearly, most of them would be out of work as the economics profession would necessarily shrink. In fact, it would be interesting to find out how many economists were working in Hong Kong during the governorship of John Cowperthwaite when he discontinued the collection of economic statistical data.

The “national income approach,” once part of the abracadabra
of a few statisticians, has now become so widely
popularized, not only in economic textbooks but in
newspaper discussions, that almost anyone is likely to
ask you, or tell you, what “GNP” (gross national product,
for the still benighted) is going to be for 1959. Yet
a close examination does not justify the exaggerated
reliance now placed on these figures. At least five major
cautions ought to be kept in mind. Here are two of
them:

1—The national income or gross national product
figures are arbitrary, and from a strictly scientific standpoint,
indeterminate. This was recognized in the pioneer
studies. Simon Kuznets, in his two-volumed book
National Income and Its Composition, published in 1941,
pointed out: “The statistician who supposes that he can
make a purely objective estimate of national income,
not influenced by preconceptions concerning the ‘facts,’
is deluding himself; for whenever he includes one item
or excludes another he is implicitly accepting some
standard of judgment, his own or that of the compiler
of his data. There is no escaping this subjective element.”

What Do We Include?

Kuznets went on to show that estimates of the national
income necessarily involve legal and moral considerations.
Should we include “the compensation of robbers,
murderers, drug peddlers, and smugglers”? And how
shall we “draw a line between economic activity and
economic goods on the one hand and active life in general
and its stream of satisfactions on the other”? Should
“washing, shaving, and playing for amusement on the
piano” be treated as economic activity? “When judged
by the attributes of satisfaction-yielding, scarcity, and
disposability, they do not differ from the same activities
carried on for money as services to other people (nursing,
barbering and giving concerts).”

And yet Kuznets decided (as do practically all
national-income statisticians) to include only items that
“are dealt in on the market.” This of course excludes all
do-it-yourself activities, which in total are now probably
enormous. More, it excludes all the products of the
family economy, including the activities of housewives.
So we get such paradoxes as these: When a man marries
his cook, the value of her work disappears from the
national-income accounts. When an opera singer sings
professionally, she is considered as adding the equivalent
of her salary to the national income. When she
sings for charity or for friends, it doesn’t count.

Gross vs. Net

2—So what we include in or exclude from national
income involves arbitrary decision. But a second serious
problem is how and where to set the difference between
gross and net. How are we to prevent double counting
at a thousand points? A married man earns an income
of $10,000. That is the joint income of himself and his
wife. He becomes a widower and hires a housekeeper
for $4,000 a year. His income, and their joint income, is
still $10,000; but the national-income accounts would
now call it $14,000. The same problem occurs daily
and everywhere. If we count the income of doctors and
dentists should we, or should we not, deduct it from the
income of patients?

Sliding by this awkward point, how do we separate
gross national product (the famous GNP) from
national income? Our official statisticians do it by
deducting from their GNP figure a “capital consumption”
allowance, mainly a “depreciation” charge, and
also “indirect business tax and non-tax liability.” But
depreciation charges are the results of estimates. The
“right” amount of depreciation is never precisely known.
Contrary even to the belief of many businessmen, a
depreciation deduction is not so much an estimate of
past loss as a forecast of future probabilities. It is never
known, for example, when an old machine is going to
be made obsolete by a new discovery or a new invention.
And particularly in a period of monetary inflation,
orthodox depreciation charges fail to allow for ever mounting
replacement costs.

There are even more serious defects in national income
estimates, but they will be reserved for a subsequent
article.

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