- As the World Economic Forum launches the video-podcast Stakeholder Capitalism, host and author Peter Vanham looks at GDP, the focus of episode 1.
- Gross Domestic Product (GDP) is the sum of the value of all goods and services produced in a country each year.
- Against the backdrop of the Great Depression and World War II, it became the main tool for measuring a country’s economy.
- Peter Vanham discusses its history and relevance in this book excerpt taken from Stakeholder Capitalism: A Global Economy that Works for Progress, People and Planet.
- Watch and hear all episodes of the Stakeholder Capitalism podcast here.
What if your invention changes the world, but not in the way you intended it? That is what happened to Simon Kuznets, a Russian-born US economist, who helped develop the concept of gross domestic product, or GDP, almost a century ago.
For Kuznets, who tried to make sense of the Great Depression and its impact on the economy, GDP was a useful measure. It helped account how much goods the US economy produced, and how quickly it rebounded after the crisis. But the economist also warned it was a poor tool for policymaking – to no avail.
For many markets and policymakers, GDP growth has become an all-consuming metric, even though it is counterproductive to solve some of the world’s biggest problems: inequality and environmental degradation, which are getting worse over time.
The crises we are facing may be the ultimate “I told you so” of an oft misunderstood economist, and could be summarized as “Kuznets’ Curse”. But before we get deeper into this “curse”, let’s examine who exactly Simon Kuznets was, and when and how he invented GDP.
Who was Simon Kuznets?
Simon Kuznets was born in Pinsk, a city in the Russian Empire, in 1901, and studied economics and statistics at the University of Kharkiv (now in Ukraine). But despite his promising academic record there, he would not stay in the country of his birth for long after reaching adulthood.
In 1922, Vladimir Lenin’s Red Army won a years-long civil war in Russia. With the Soviet Union in the making, Kuznets, like thousands of others, emigrated to the US. There, he first got a PhD in economics at Columbia University, and then joined the National Bureau of Economic Research (NBER), a well-respected economic think tank.
His timing was impeccable. In the decades after his arrival, the US grew to become the leading world economy. Kuznets was there to help the country make sense of that newly found position. He pioneered key concepts that dominate economic science and policymaking to this day and became one of the world’s most prominent economists.
Backdrop of boom and bust
When Kuznets arrived in the US, the country was on an economic high; it came out of the First World War swinging. US manufacturers introduced goods, such as the car and the radio, to the country’s huge domestic market, selling them to a public hungry …….