A Good Thing

It's taken me a while, though I hadn't forgotten. Here's a first follow up to my Inefficiency Boost piece about voltage stabilizers and questioning GDP.

Also, a comment on that previous piece pointed to a related Jug Suraiya article which I think is worth reading.

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In Tamil Nadu, there's a town that may be the hosiery capital of the world. Millions of pieces of underwear come out of Tirupur every year. It's a good bet that whatever you're wearing as you read this probably did so. Tirupur's hosiery factories are profitable successes, small jewels in India's economy.

But the transformation of Tirupur into this hosiery machine over the last couple of decades has had a downside. Its water sources are either hopelessly polluted by the hosiery factories or have dried up altogether, unable to keep up with the demand. For some years, Tirupur has had to truck in water for its residents, at a substantial cost.

You guessed it: paying that cost adds to India's GDP. Someday, someone may have to pay to clean up the pollution. (Or may already be doing so). You guessed it again: that transaction will also add to the GDP.

You might say, it's not just Tirupur's production that contributes to our GDP, but its pollution as well, and twice. First, when it happens and has consequences; second, when money must be spent to clean up. You might say, Tirupur has robbed from its future to pay for its present success. But even that theft is considered a gain for the economy.

What's perverse about the GDP is not just that it counts every transaction of money as a gain. It is also that it counts only transactions of money. It is also that it ignores the environmental and social costs society must inevitably pay for depleting natural resources or ignoring social issues. The way it goes is almost conventional wisdom by now: the more we use up -- or ruin -- our natural resources, the more the GDP rises.

There must be something wrong with a measure in which depleting your capital counts as current income, in which disaster is seen as gain.

But that's the GDP for you.

Yet the GDP been so closely identified for so long with a country's economic advance that people think of it as written in stone, an unquestioned standard. In reality, it is little more than a relic of an earlier era, when compulsions hardly relevant today drove its definition.

The Gross Domestic Product is actually an avatar of the old Gross National Product, and both are oddly perverse measures. To understand why, consider the origins of the GNP.

In 1932, the US Commerce Department gave a bright young economist, Simon Kuznets, the task of devising a way to account for how well the economy was doing. The Department had no real way to monitor the performance of the economy, which was a problem in those Depression years. This is not the space, and I'm hardly the person, to explain Kuznets's approach in minute detail. But it's enough to understand that he focused squarely on production and spending, important in the shuddering economy of the time. Kuznets's work was the foundation for what became the GNP and later the GDP.

And then WWII came along. Plunged into fighting on two major fronts, the US looked at GNP as the primary way to keep track of its economy. As the country's wartime factories pumped out planes, tanks and guns, Kuznets's system helped locate and make use of unused production capacity. Famously, this huge engine of production not only prepared a nation for war, but also brought the US charging out from the Depression like an express train.

And the GNP played a crucial, if usually overlooked, role in winning WWII. Lacking an accounting system such as Kuznets had devised, Hitler had set far lower production targets for Nazi Germany. The US entry into battle, by itself, meant that German production would be overwhelmed inexorably; thus, that the Allies would win the war.

This close identification of GNP with pure production, married to victory in the war, set a course for economic policy for the next half-century. Because the war had been won, because US industrial output had been a major factor in that triumph, and because GNP measured that output, the craze for production became the peacetime model too. Production was a Good Thing.

And while during the war, the military was the great consumer, in peacetime it was ordinary citizens who consumed the products factories were churning out. So production was more than a Good Thing, it was Progress itself. Therefore the GNP, that measure of production, became a measure of progress too. That was the mantra, the conventional wisdom.

It took many years, but eventually people began questioning that mantra.

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In a future piece or possibly two -- and I hope it won't take me as long to get to them -- I'll take this further.