Book Review: ‘GDP’ by Diane Coyle; Imagine deciding which nation produces what in a global supply chain. Or correcting price for quality improvements. The mind boggles

Book Review: ‘GDP’ by Diane Coyle

Imagine deciding which nation produces what in a global supply chain. Or correcting price for quality improvements. The mind boggles.

James Grant

Updated March 12, 2014 12:40 a.m. ET

Represented as a stack of $100 bills, America’s $17.1 trillion gross domestic product would weigh in at 188,000 tons. Only then would it be tangible. GDP, the most ubiquitous macroeconomic datum, is otherwise as abstract as the thing it purports to measure. You can’t see “the economy.” Neither can you touch or taste it. Reading this little charmer of a book, you begin to apprehend that you can’t really measure it either.

“GDP: A Brief but Affectionate History” is just what the title promises. Diane Coyle tells us where GDP came from, how and why it is compiled, what it counts, and what it fails to count. “Of course it is a flawed measure,” she admits. She’s stuck on it anyway.

It helps to know that, according to Ms. Coyle, the word “statistics” is an etymological first cousin of “state” and that the earliest statistics had to do with tax collections. So informed, one is not surprised to learn that war provided the impetus for the formative attempts to compute national output (in Britain in the 17th century and in America, in a more systematic fashion, at the start of World War II). It tells you something about the mindset of the early American bean-counters that they chose to treat government expenditures as if they, too, contributed to the nation’s production rather than thwarting, wasting or redistributing it. As Ms. Coyle both observes and implies, GDP is a political statistic.

Sir John Cowperthwaite (1915-2006), Britain’s longtime financial secretary of Hong Kong, wanted none of it. He batted away attempts to compile the Crown colony’s gross output on the grounds that the resulting figures would be untrustworthy and that their very existence would constitute a standing temptation for the government to “manage” an economy that seemed to be doing quite well on its own.

GDP: A Brief but Affectionate History

By Diane Coyle
(Princeton, 159 pages, $19.95)

“One of the honorable Members who spoke on this subject,” said Cowperthwaite in 1970, addressing the Hong Kong Legislative Counsel, “said outright, as a confirmed planner, that he thought they [GDP-related numbers] were desirable for the planning of our future economic policy.” Such numbers, Cowperthwaite went on to say, might well lead “to policies designed to have a direct effect on the economy. I myself would deplore this.”

Taking the other side of the argument, Ms. Coyle joins the Commerce Department in celebrating her pet datum as “one of the greatest inventions of the twentieth century.” GDP may or may not measure human happiness, but it does measure growth, she says, and on the rate of growth in output no small part of human satisfaction depends. The unspoken corollary is that, if growth falls short of some politically desired minimum, it’s incumbent on government to spend money and/or to print it.

Cowperthwaite himself would nod in agreement over Ms. Coyle’s informed discussion of what the GDP misses and how it misfires. The statisticians can’t see into the underground economy. They struggle to measure services (a problem in a service economy). They go through mathematical contortions to try to capture changes in production quality and innovation. Such criticisms aren’t exactly new— Oskar Morgenstern, in his pioneering work, “On the Accuracy of Economic Observations,” made many of them as long ago as 1950. Ms. Coyle—a graceful and witty writer, by the way—recounts familiar problems and adds some new ones.

Prices—in which GDP is measured—present a problem both old and new. It’s not so easy to gather them (do you shop online as well as off-?), still less to adjust them for inflation or deflation and perhaps for oscillating exchange rates. One is reminded of Bismarck’s quip about sausage-making.

Put yourself in the econometricians’ place: How much does a smartphone cost? More or less than the sturdy black rotary model you held up to your ear in 1958? More, perhaps, in dollars, though that hypothetical price premium would constitute a grave injustice to the magical additions of digital technology. Ms. Coyle invites us to imagine the difficulty of correcting the retail price for quality improvements—so-called hedonic adjustment. The mind boggles.

Consider, too, the author proceeds, the complexity of sorting out which nation produces what in the age of the global supply chain. One country makes the hardware—in collaboration with four or five other countries—while another country writes the software. The finished product is made where, exactly? And what is the value of the things you find on the Web? YouTube is free; Google GOOG +0.43% search, ditto. How to assign a meaningful price when none is asked? The accurate calculation of the modern, lightweight GDP would seem to be a feat beyond difficult.

“The databases of GDP in many countries over decades, used so often by economists to develop theories and policies, lead us to think that GDP is a natural object that we can measure with increasing accuracy,” Ms. Coyle writes. “But the accuracy is spurious, and the ‘object’ being measured is only an idea, not something with an independent existence waiting to be discovered and counted.”

Though it was evidently not Ms. Coyle’s intention, I read her book as a brief for “positive non-intervention,” the Cowperthwaitian approach to macroeconomic management. If one really can’t measure economic activity, perhaps it’s better not to meddle in it.

Only last fall, Christina Romer, the former head of President Barack Obama‘s Council of Economic Advisers, proposed that the Federal Reserve add GDP to the list of targets at which it shoots its trillions of newly materialized dollars. In so doing, Ms. Romer contended, the Fed would boost the public’s confidence in monetary policy. It would not boost the confidence of that portion of the public who closely read the excellent Ms. Coyle.

Mr. Grant is the editor of Grant’s Interest Rate Observer.