by Michael Roberts
At the recent ASSA 2020 conference there was a session on whether
Gross Domestic Product (GDP), the ubiquitous measure of national
output, was adequate as a gauge of “well-being or social welfare”.
Various proposals have been put forward for attempting to measure social
welfare, including “dashboards” of economic and social indicators as
well as approaches that are more explicitly tied to economic theory.
The US Bureau of Economic Analysis (BEA) initiated a discussion at ASSA
to consider the pros and cons of alternative approaches.
Gross domestic product (GDP) is the basic mainstream measure of a
country’s level of output and even prosperity. It is a monetary measure of the market value of all the final goods
and services produced in a specific time period. The measure goes back
to the earliest of days of classical political economy, with William
Petty developing the basic concept in the 17th century. The modern
concept was first developed by Simon Kuznets in 1934 to measure the
national output of the US.
There are three ways to measure GDP. The first is the production
approach, which sums up the outputs of every enterprise. The second is
the expenditure approach which sums up all the purchases made; and third
is the income approach which sums up all the incomes received by
producers.
These three different approaches broadly match the three main schools
of economic thought. The production approach has an affinity with
neoclassical school, which sees national output as the sum of all
micro-agents’ production. The expenditure approach has been adopted by
the Keynesian school, which looks at investment, consumption and saving
at a ‘macro level’ to measure “effective demand”. The income approach
has the closest connection with Marxist and classical political economy,
because it distinguishes wages and profits as the main categories of
national income and thus exposes the class divisions in the distribution
of GDP; and the driving force for investment and production in
capitalism ie profit.
Ever since the development of GDP, multiple observers have pointed
out limitations of using GDP as the overarching measure of economic and
social progress. GDP does not account for the distribution of income
among the residents of a country, because GDP is merely an aggregate
measure. Neither does it measure unpaid housework, the level of
happiness or well-being. That is why there have been various attempts
to replace GDP with other ‘broader’ measures.
One recent attack on GDP as a measure of national ‘wealth’ or well-being has come from Vint Cerf via this Wired article. Cerf makes the usual complaint that “the
measure does not capture the level of pro bono work that pervades many
societies, by homemakers whose unpaid labour is an integral part of most
functional societies, and non-profit organisations whose work also
contributes to the benefit of society.” He goes on “Moreover,
GDP does not capture the many negative effects of some economic
activities such as pollution, including carbon dioxide and other
greenhouse gases. Their consequences should be factored into any measure
of economic well-being if we are to accurately assess the state of the
planet and its population.” And finally,“As an average
measure, GDP also fails to capture wealth and income disparities within a
society, often negatively correlated with the health of that society.”
All this is true. But is that the purpose of GDP as a measure? At
the time of its launch, Kuznets specifically warned against considering
GDP as a measure of ‘welfare’ in a society. Vint’s critique, echoed by
others, fails to recognise that the value (or wealth) that modern
economics wants to measure is the ‘market value’ of national output not
the welfare of labour, women and children. Capitalism has no direct
interest in measuring that. GDP has a specific purpose for capital not
labour.
Household work provides a massive contribution to the welfare of
communities. And it delivers unpaid labour to sustain labour power in
work for capitalist enterprises. But because it is not a cost for
capital, it does not need to be included in GDP. Similarly, the
grotesque (and rising) inequalities of income and wealth that exist
within most countries is not a relevant factor for capitalist investment
and production and so again does not need to be included in GDP.
Finally, the ‘externalities’ of capitalist production: eg, diseases,
industrial accidents, pollution and climate change are not immediate
costs to the profitability of capital (private ownership of
production). Indeed, if these ingredients were included in a revised
measure of national ‘value’ they would become confusing obstacles to
measuring properly the ‘health’ of capitalist production in a country.
And that is what matters in capitalism: having good measures of
capitalist accumulation for policy decisions by capitalist enterprises
and government and monetary authorities.
Of course, even within that paradigm, the GDP measure has its faults. Diane Coyle
is one economist that has criticised strongly GDP as a sufficiently
accurate measure of production and investment. She argues that GDP does
not capture changes in investment that involve ‘intangibles’ and innovation.
In other words, national output and productivity growth may be much
higher than GDP exposes. However, even here, the argument that the
failure to measure intangibles explains the productivity puzzle (low productivity growth) is not convincing.
Mariana Mazzucato got a lot of traction out of her recent book, The value of everything,
where she complains that in GDP, finance is regarded as productive when
it is really an ‘extractive’ sector and government investment is not
given the ‘utility’ it deserves in GDP. But this is to misunderstand
the law of value under capitalism. Under capitalism, production of
commodities (things and services) are for sale to obtain profit.
Commodities must have use value (be useful to someone), but they must
also have exchange value (make a sale for profit). GDP is biased as a
measure of value created in an economy for that good reason.
For Marxist analysis, there are many issues with using GDP. National
output in Marxist terms is c+v+s. C is ‘constant capital’ (raw
materials, intermediate products used up in production plus the
depreciation of machinery etc). V is wages spent on the labour force + S
(profits made on sales of the commodities produced). In theory, GDP
data can be converted into these Marxist categories because in an
economy total prices of all goods in aggregate must equal total values
in labour time, even though that equality will not exist in sectors of
the economy.
The practical complexities of turning GDP as measured by government
statistics in national accounts into the Marxist formulae have been
comprehensively explained in works like that of Shaikh and Tonak. But
when it comes to the world economy and the transfer of value between
countries and companies globally, GDP is inadequate and misleading. As John Smith has pointed out, “it
is impossible to analyse the global economy without using data on GDP
and trade, yet every time we uncritically cite this data we open the
door to the core fallacies of neoclassical economics which these data
project.” The key concept within GDP is ‘value added’ by ‘agents of
production’, but that means GDP does not expose value that is
transferred or redistributed between countries or companies as a result
of competition in markets.
Just as more technologically advanced companies get a transfer of
value from less advanced companies through competition on the market
(Marx’s transformation of values into prices of production), so
imperialist countries get a transfer of value from peripheral countries
through the unequal exchange of value in international trade and through
transfer pricing within companies. GDP does not capture that.
However, recent Marxist research has made progress in measuring this
transfer in the imperialist countries (see Carchedi and Roberts, Ricci and URPE_CHN_2019).
These suggest that the GDP of the major capitalist economies is
exaggerated by transfers of value through international trade and
multi-national pricing equivalent to 3-5% of GDP every year.
Then there is the issue of productive and unproductive labour,
something that Mazzucato took up but in a misleading way. Mazzucato
argues that the government sector creates value, but that is because she
considers only use-value and does not recognise the dual character of
value under capitalism, where profit through exploitation is value.
Marxist value theory maintains that many sectors and people are
supposedly generating value-added but are really engaged in
non-productive activities like finance and administration that produce
no value at all. And for capital, that includes the government sector:
it may be necessary, but it is not value-creating for capital.
As Marx put it: “Only the narrow-minded bourgeois, who regards
the capitalist form of production as its absolute form, hence as the
sole natural form of production, can confuse the question of what are
productive labour and productive workers from the standpoint of capital
with the question of what productive labour is in general, and can
therefore be satisfied with the tautological answer that all that labour
is productive which produces, which results in a product, or any kind of
use value, which has any result at all.”
For the neoclassical theory, any labour whose outcome can secure
remuneration in the market is considered productive and contributes to
the creation of new value. Thus, not only activities in the sphere of
commodity circulation, but also those aimed at maintaining and
reproducing the social order, are considered to produce new values and
increase the level of prosperity and wealth of an economy
In contrast, as Shaikh and Tonak explain: “Economists of the
classical political economy tradition pay particular attention to the
fact that the non-production sectors of trade and finance as well as
government in order to perform their socially useful functions employ
labour and other inputs while at the same time their capital stock
depreciates; such expenses are drawn out from the surplus generated by
the productive sectors of the economy.” (Shaikh and Tonak 1994, p61).
As Tsoulfidis and Tsaliki put it: “The
main problem with orthodox national accounts is that they present many
activities as ‘production’ while they should be portrayed as ‘social
consumption’. As the ‘personal consumption’ sphere contributes to the
reproduction of individuals in a capitalist society, the non-productive
activities, such as trade, financial services or private security, in
turn contribute to the reproduction and development of the capitalist
system; however, their necessity does not negate the fact that as the
total consumption (personal and social) increases, the part of surplus
destined for the accumulation of capital is reduced and by extent the
social wealth diminishes.”
So measuring the relative expansion of productive and unproductive
activities is crucial to gauging the growth potential of capitalist
economy, because only investment in productive sectors can sustain
expansion under capitalism. Indeed, a rising share of unproductive
activity will exert a downward effect on the profitability of capital
over time.
Again, this is an area where Marxist research has made strides in measurement: (Moseley; Roberts; Paitaridis, Tsoulfidis and Tsaliki, Peter Jones and others). In this way, we can obtain the value in GDP.
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