It was because of the war. In the summer of 1940 the British government needed to understand many things, including their war costs and where the money would come from to finance a defence of England.
Simon Kuznets was tasked with working it out. The idea was to use accounting… the same bookkeeping developed 300 years before for the merchants of Venice… in a really big way to account for everything.
Kuznets called these national income statistics the Gross National Product (GNP or sometimes GDP for regional calculations). Variations of this idea have become the key measure of the success of nations, provinces and states. In the same way the quality of business decisions depend on good bookkeeping and accounting, national accounting is a critical component of institutional infrastructure that government and politicians need to face the challenges and opportunities of our economy.
But this singular economic tool used to analyze economic cycles and as the basis of budgeting, planning and forecasts – the single number used by government and media to underpin and justify all our foundational political decisions – was known to be wrong almost from the start.
Today the GNP or GDP has very few friends and many good alternatives.
“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”
In March of 1968, two days after he declared that he would run for president, Robert Kennedy talked publicly for the first time about National Accounting in a speech in Kansas.
For thousands of years up until this point accounting had been a secret language, and an esoteric cabal for accountants only.
So sacred is the GNP number that, even today, complex and strictly guarded rituals have arisen around the accountant priests of the temple who appear from their sanctum once each quarter to say the holy number, which is then repeated by the media across the land so that each citizen can know if they are prospering or not. But the religious metaphor is not apt. Accounting is spoken in numbers. Numbers give a modern air of science and certainty.
The problems of national accounting go far beyond uncertainty. There are intractable problems in theory and practice.
Kennedy spoke of national accounting in a new skeptical way; in terms anyone could understand.
“Even if we act to erase material poverty, there is another greater task, it is to confront the poverty of satisfaction - purpose and dignity - that afflicts us all.
Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things. Our Gross National Product, now, is over $800 billion dollars a year, but that Gross National Product - if we judge the United States of America by that - that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage.
It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl.
It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.
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 our marriages, the intelligence of our public debate or the integrity of our public officials.
It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.
And it can tell us everything about America except why we are proud that we are Americans.
If this is true here at home, so it is true elsewhere in world.”
Less than three months later Kennedy was killed.
Concerns about bias, partiality, and the shortcomings of economic growth as a measure of prosperity - or anything we care about outside war - should provoke more debate and skepticism. The future of national accounting must fundamentally change.
Kuznets, and the great economic minds of the time including Keynes and others, knew the problems and questioned them from the beginning.
Kuznets believed national accounts should include the value of unpaid housework and all efforts spent on the household. Of course it should. This ‘account’ includes basically everything human, cultural and societal we care about and determines who we are as people and what we will become.
Keynes believed that in the same way businesses account for raw materials, governments should value and account for natural resources. Of course it should. This, more than anything else, is the ‘scarce resource’ that Adam Smith, the first and foremost modern economist, was talking about when he defined economics and The Wealth Of Nations.
By the late 1940’s Kuznets broke his association with the US Commerce department and spent much of the rest of his life trying to expose GNP for the misstep it was. In 1971, when he won the Noble Prize in Economics he spoke out about the dangers of economic growth and the impact on people’s lives when it was looked at as an end in itself. His concern was that the true costs of economic development were not being accounted for at all as governments focused only on the short-term, quick fix, easy way out, offered by economic development schemes.
How could we have gotten things so wrong?
How can we account for the government revenues of gambling without considering the household cost of addiction and the tragedy it rains down on families? How can we collect the taxes on alcohol without accounting for cost of workplace absenteeism and lost productivity?
In order to know which way to go one has to know where they are. We're lost. How can we know if we are gaining wealth or not if we don’t know the changing value our forest, waters, fish stocks, and other resources?
Few of us have the luxury of being forgiven our personal debts that we’ve created. Yet increases in government debt are not used to offset reported growth. Worse, the debts – the burden on rising generations – created by declining health, out-dated infrastructure. and degraded environment are not counted in the national system.
The result is a profoundly misleading, inscrutable, and flawed system of measuring our prosperity and the things we actually care about.
So now what?
Now enough of us must become sufficiently informed about the idea Robert Kennedy was beginning to share and the numbers that concerned Kuznets, Keynes and the rest, so that we can push back. Adjustments and tinkering are not enough. National accounting and the obsession with growth as currently understood is wrong and can't be adjusted to be right.
We know this intuitively. We see the signs and symbols of prosperity. The high rises, flash cars, new stuff, and the fashions. We hear the numbers. The economy is “growing”. We have our cell phones, and connectivity. But there’s a real sense that something is lost. In the language of religion, we’ve suffered a fall. The rising generation, for all the lights that will flash around us, will be left with less than what we were given.
We must stop and begin again with a new end goal in mind.
Economics is the story we tell ourselves about where our wealth comes from and where it goes. Accounting is the tool we use to write that story – to account for where we’ve been and where we’re going. By definition it is an accounting and we are accountable.
The crisis is so severe, globally and locally, that all the brilliant scientists, political leaders, eco-warriors, hipsters and religions can’t save us from ourselves. The military is powerless. The bureaucracy is cancerous. Even the songwriters can’t seem to come up with a protest song for the age. It may well be that our last hope for life on earth is accountants.
Accounting could make or break the planet
The old ways of measuring value have become irrelevant.
“...once we allow ourselves to be disobedient to the test of an accountant’s profit, we have begun to change our civilization.” John Maynard Keynes
We’ve incurred a social, cultural and environmental bill which we’ve not only failed to pay but we’ve failed to even recognize. Simple bookkeeping has morphed into a blinkered calculus that creates a culture that doesn’t care.
The great mistakes?
- Not taking the broadest possible view of our policies and decisions on all people and on the land itself.
- Not accounting for the costs of poverty.
- Not valuing the work done in and for the household, which should be the key foundation stone of all our economic thought. The word economics itself comes from the Greek words for household management.
- Not valuing our limited natural and human resources and therefore not being able to measure their rise or fall.
The accountants can’t start this work at the top of national accounting. We'll start at the household level. We start with a new story. That households are the central building block of the economy. That the things they value are the things that should be accounted for. Government policy, to the extent that it can help, will concern itself with encouraging the real growth and prosperity of the household rather than the growth of government, corporations, unions, banks, and all the other big box institutions that were intended to work in the service of households, not the other way round.
Corporations, governments, and the financial institutions should exist only in service of raising household prosperity. That's how the accounting should work, by understanding who is accountable to whom.
We can consider a value for the oceans, air, forests, rivers, and wilderness. We can concern ourselves as easily with the growth of that value as we have concerned ourselves for 75 years with the meaningless growth numbers revered by government today.
The good news is that there are several alternatives to GDP being actively developed, discussed, and used. One of these is the Genuine Progress Indicator (GPI).
GPI starts with personal consumption expenditures — a major component of GDP — and adjusts it using 25 components. These adjustments include incorporating the negative effects of income inequality on welfare; adding positive elements not considered in GDP, such as the benefits of household work, volunteer work, and higher education; and subtracting environmental costs and social costs like the costs of crime, unemployment, and pollution. In doing so, it paints a more accurate picture of how far we’ve come
In 2010, Maryland was the first state to officially adopt the GPI as an alternative to GDP. The state’s goal was “to measure whether or not economic progress results in sustainable prosperity”. Since its beginning, Maryland has actively implemented policies to encourage the increase of GPI.
The media has also taken up the challenge of shedding light on the true picture of societal welfare, with media coverage now regularly reporting on changes in GPI.
It all begins with the accountants. Our books of account just need to record our transactions with the earth and the prosperity and growth of our households.
Writing about life, citizenship, and Nova Scotia.