Who invented GDP?
Like many powerful management tools, the idea to compile data on a nation’s output was born not as an academic theory but out of a pressing practical need — in this case, the need to manage Britain’s meager resources in the desperate early stages of World War II.
In a series of three articles published in The Times of London, Nov. 1939, economist John Maynard Keynes noted that in World War I, excessive money creation stemming from defense spending led to inflation, which greatly hurt the working classes. Can we avoid this in World War II? asked Keynes. We can. But how? First by calculating “the maximum current output we are capable of organizing from our resources” (i.e. GDP). Next, “by estimating how fast we can safely draw on our foreign reserves by importing more than we export” (i.e. Imports minus Exports). Next, by estimating the minimum necessary capital formation needed to maintain plant and buildings (Gross Capital Formation). Next, by estimating how much will be required by our war effort” (Public Defense Consumption). What is left is “the size of the cake which will be left for civilian consumption” [i.e. both personal and public]. Keynes recommended using taxation and compulsory saving to ensure that consumption spending did not exceed that ‘cake,’ so that demand-pull inflation should not emerge. Keynes’ little 1940 book How to Pay for the War provided some initial estimates for Britain, 1940 (building on data collected by Colin Clark):
GDP = £4,850 m. = Personal and Public Consumption plus Exports – Imports (£ 4,140 m.) plus Gross Investment (£ 710 m.).
Partly as a result of Keynes’ influence, Britain did finance World War II with relatively little inflation, far less than in World War I.
If management begins with measurement — how in the world did governments build economic policy without knowing GDP, before 1940? And why did not economists invent the GDP metric centuries before Keynes?
Perhaps my fellow economists can provide some answers.