“Accounting for GDP: The history and politics of Financialization”
by Lucas Ballestín, Ph.D. candidate in Philosophy at The New School for Social Research
In January, the World Bank predicted that global growth — a measure of aggregated Gross Domestic Product (GDP) — would accelerate to 2.7 percent in 2017.
As New School for Social Research Economics Department Ph.D. alumnus and United Nations economist Jacob Assa explains, to really understand the significance of this figure (and to think more critically about why we use GDP in the first place) it’s important to get the history behind the numbers. According to Assa, such historical perspective reveals that the near-universal acceptance of GDP as a measure of national wealth constitutes a relatively recent phenomenon; and that it has origins in specific methodological and political choices.
His central concern in this history is to track the growing influence of one sector’s impact on measures of GDP: finance. According to Assa’s work, the “financialization” of GDP — a process by which the finance industry has taken over an increasing share of the economy — has significant implications for how economists and policy-makers should think about and regulate the global economy.
In Assa’s account, the idea of creating empirical measures of national wealth has origins in the seventeenth century, when states first used a kind of economic analysis “to measure [their] wealth and strength compared to [their] enemies.” The word statistics designated the measurements used by the state to conduct these calculations, and that the idea of measuring the size of an economy ostensibly served to safeguard the interests of the nation and the prosperity of the sovereign’s people. The purpose of national statistics may have varied by nation, but the novelty of statistical analysis resulted in the promulgation of official statistical bureaus throughout Western Europe, and then throughout the world. At the level of individual states, measures of national wealth evolved into political tools that informed debates over specific economic policies.
By the Twentieth Century, “National Income” had become the prevailing measure of state wealth. Gross Domestic Product only emerged in the 1930’s and 1940’s, promising to help economists and policy-makers avoid catastrophes like the Great Depression.
The heart of Assa’s work concerns the second half of the Twentieth Century, when the mix of economic inputs used to calculate GDP rapidly began to skew toward finance. While initially comprising less than 10 percent of the American economy, today the finance, insurance and real-estate (FIRE) sectors account for roughly one-third of the United States’ GDP. Moreover, interpretations of finance’s relationship to overall economic productivity shifted for half a century. It wasn’t until 1993 that finance was first counted as “explicitly productive” in measures of GDP.
“That’s actually how I got interested in these questions about [national wealth],” Assa says. “I wanted to find out when finance became part and parcel of GDP and when it became the most important sector of the economy.”
He suggests that economists should press back against orthodox thinking about the role of finance in order to better understand growth, volatility, and economic health.
“The mainstream view of finance is that it is an unmitigated blessing,” he says. Those espousing this view advocate policies that entail the relaxing of government regulation of the financial services industry. In Assa’s view, an over-reliance on finance has artificially inflated GDP and has covered over “important stagnatationist or even recessionary tendencies” in the global economy. Removing finance from measures of GDP reveals, for example, that there has been no moderation in the volatility of global markets over the last several decades, and that the Chinese economy may be converging with the American economy faster than many economists estimate. Assa also notes the GDP numbers have been criticized for badly reflecting people’s own perception of their economic wellbeing: even in times of continuous GDP growth, many consumers feel their own wellbeing stagnating or even shrinking.
Alternative takes on finance’s role in measures of GDP do exist, but in Assa’s estimation they fall short because they often “come from a theoretical or ideological point of view.” He suggests that they also fail to address the historical context necessary to find meaningful and effective alternative measures of economic wealth. As Assa puts it in his book The Financialization of GDP:
While these works are clearly critical of the latest national accounting systems, they more often than not neglect to look at the overall historical trend, thus failing to explore exactly how and why the accounts they critique came to be that way.
Building on the research of Duncan Foley, the Leo Model Professor of Economics at The New School, Assa aims to articulate a “more instrumental critique of GDP […] that is more empirical than ideological,” and that offers, “a more balanced approach” to economic forecasting and modeling.
Assa’s response to these findings is to urge the development of more consistent national accounting measures, mainly by redefining financial activity either as unproductive or as neutral. His proposal draws from, and builds upon, Professor Foley’s and Deepankar Basu’s, “Non-financial value added” measure of GDP, which effectively neutralizes the role of financial activity in the GDP measure. This approach would lead, Assa says, to a “more somber and realistic picture of where the economy is and where it may be going.” Assa’s on proposed measure — Final GDP — actually treats finance as an intermediate input, i.e. a cost to the rest of the economy.
This empirical work emerges from heterodox approach that Assa says is emblematic of The New School’s Department of Economics, and the stakes for policy-makers and economists are quite clear in his rendering of the argument. His approach aims to reveal the “historically and politically contingent art” of national accounting. Above all, he challenges us to question the received wisdom about how national income should be measured, and raise questions about the processes that help define what activities society deems to be productive.
Assa continues his work at the United Nations, where he meets regularly with ministers of banking and finance of developing nations across the globe. In addition to this work, he has continued to build upon the research he began here at The New School for Social Research.