The Invisible Handcuffs of Capitalism: How Market Tyranny Stifles the Economy by Stunting Workers (28 page)

Kuznets and a former student, Robert Nathan, rose to the challenge, showing that the military could siphon more from the domestic economy than the military command had estimated. Based on this analysis, the government ramped up military spending to nearly 45 percent of the GDP.

Unlike Petty, whose calculations the military did not seem to appreciate, Kuznets’s work was held in high regard. John Kenneth Galbraith later told Nobel Laureate Robert Fogel that people in Washington commonly said that Kuznets and Nathan were the equal of several divisions of soldiers.
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Given the war, the narrow purpose of the GDP was understandable. The goal was not to create a measure of welfare but to learn how much military spending the economy could bear.

Even during the war, however, Kuznets continued to acknowledge the limits of his project, warning, “Exclusion of the products of family economy, characteristic of virtually all national income estimates, seriously limits their validity as measures of all scarce and disposable goods produced by the nation.”
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His later
National Product in Wartime
was still more explicit in cautioning his readers that the methods developed for the wartime economy were inappropriate during times of peace:

National product cannot be measured for the years of a major war as it is in peacetime because the customary long-run assumptions concerning the goals of economic activity are not basic. Is provision of goods to ultimate consumers in fact the sole purpose that guides and should be used to evaluate economic activity? When the very life of a social system is at stake the everyday purposes of economic activity are overshadowed. Yet
since from the longer-run viewpoint they are dominant, we retain the peacetime goal-provision of goods to consumers.
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Just as the authorities ignored Kuznets’s recommendation that unpaid household labor be included, so too was his advice regarding the treatment of the military.

As the measurement of the GDP became more refined in later decades, Kuznets was celebrated as a pioneer in working with economic data. Unfortunately, his reservations about the statistic were largely forgotten.

For example, in their influential introductory economic textbook, Paul Samuelson and William Nordhaus confidently informed their students, “Without it [the GDP] macroeconomics would be adrift in a sea of unorganized data.”
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The problem is that the GDP still leaves economics adrift insofar as matters of work, workers, and working conditions are concerned, reinforcing the damage done by conventional economic theory.

The GDP doubly serves the business community, by reinforcing the illusory promise of market efficiency and supplying useful transactional information for business. In addition, putting a precise number on the GDP provides an undeserved scientific veneer to economics at the same time that it lends confirmation to the exclusion by economists of work, workers, and working conditions from consideration.

Married Maids

Because the GDP statistic is now available for a relatively long period of time, it is helpful in getting a feel for movements in commercial economic activity, especially during times when the economic structure is relatively stable. But as far as Kuznets’s objective of creating a measure of well-being, the statistic falls short. Even if economists could perfectly measure the nation’s GDP, welfare would depend upon its distribution. If the bulk of the economy belonged to a single individual
and the rest of society lived in misery, an increasing GDP might simply improve welfare for that one fortunate individual.

The economists who work in generating this statistic have great professional expertise. However, many dimensions of economic performance are ignored. The distinguished economic historian Stanley Lebergott commented, perhaps only half facetiously:

The arbitrary … definition of the national product … does not derive from any measurement of wealth or illth [a word that economists use for things that create bad effects]; nor is it limited to the production of goods or useful products. It measures merely the value of certain market transactions…. The baby has contributed more to the gaiety of nations than have all the nightclub comics in history. We include the comic in the labor force … as we include [his] wages in the national income but set no value on the endearing talents provided by the baby.
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Counting the joy that babies contribute might seem farfetched, but it reminds us that many non-commercial activities are vital. Of course, business would be delighted to commercialize them, which could increase profits, as well as the GDP.

Years before Kuznets began his work, Alfred Marshall’s successor, Arthur Cecil Pigou, offered a famous example of how shifting the boundaries between commerce and direct social relations affects what would become the Gross National Product a couple of decades later. Pigou noted that a maid’s activities properly belong in that measure because maids earn wages; however, if a man marries his maid, her now unpaid labor would disappear from the view of the economists, even though she continues to do the same work as before.
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Introductory textbooks still use the paradox of the married maids.

What Else the Gross Domestic Product Ignores

Although the married maids would not have a noticeable effect on the GDP, housework would. In 1968, when the Gross National Product
was $864 billion, one estimate of the market value of the goods and services produced in the U.S. households was $212 billion.
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Such figures of household production are by necessity imprecise. For example, Robert Eisner estimated that the value of household production ranged from 20 to 50 percent of the measured Gross National Product.
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Based on Canadian data, including the value of unpaid household work would increase the GDP from somewhere between 35 and 55 percent.
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One factor that creates such wide divergence is the choice of the measure used. We could count what women might earn working for wages for an equivalent amount of time or, alternatively, the cost of hiring someone else to do the work—something comparable to the imaginary rent that homeowners pay to themselves.

As women have entered the labor force in large numbers and have taken jobs providing goods and services that they used to provide to their households themselves, the GDP rises, despite the fact that social welfare might not have changed and even might have declined. For example, if women work in restaurants or in plants manufacturing ready-to-microwave dinners instead of cooking meals at home, they would be functioning like the unmarried maids.

The share of women in the labor force is rapidly approaching that of men; by 2007–8, the husband was the sole worker in only 19.5 percent of married-couple families.
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The surge of women into the labor force has created a substantial increase in commercial transactions,
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increasing the GDP and creating the illusion of an enormous burst of economic activity.

Prior to the mass entry of women into paid labor, earlier data had suggested a long-term increase in the relative importance of unpaid housework. James Tobin and William Nordhaus estimated that the ratio of nonmarket to market consumption had increased by 14 percent between 1929 and 1965.
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What explains this apparent trend?

Despite the labor-saving household appliances, household tasks have frequently become more complex. Budgeting and shopping are good examples.
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Household work might also be becoming more demanding because of the stresses resulting from the Procrustean regimen.
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As we saw above, it is possible to estimate the value of work done within the household. However, several factors work against this. First and foremost, the purpose of the GDP statistic is to support the interests of the commercial sector, as opposed to those of the public at large. Like Lebergott’s babies, household work contributes to the quality of life, but does not necessarily produce profits for business interests.

Business concerns itself with the growth of markets, not the quality of life. Because household work often substitutes for the potential purchase of commercial goods or services, it represents a barrier to the expansion of markets.

Obviously, work in the home is an important component of economic activity. Though the goods and services markets deliver count as evidence of their effectiveness, what people have to do to produce these goods and services does not enter into the evaluation of efficiency. Who does the work, how they do it, and what it does to them goes unnoticed in this statistic. Work only counts insofar as it shows up in a transaction on the labor market.

The GDP statistic suffers from other challenges. Calculating how the GDP evolves over time creates a difficult challenge. To do so requires that we compare the same product at different dates, even when the nature of the product is rapidly changing. Today we use CD or MP3 players and not records. If a record and a CD have the same price, has GDP remained unchanged? If the CD is cheaper than the record, has the GDP declined? The statisticians have to estimate the contribution of new products to the economy. To do so, they must disentangle the many qualities of the new version of the good from its price. This calculation is a matter of judgment, not science.

Even without considerations of technical change, questions of quality complicate the calculation. Most people would agree that a dinner at an expensive restaurant with excellent service represents a greater contribution to welfare than a meal from a drive-through fast-food restaurant. This difference would hold even if the quality of the food were comparable at both establishments.

Yet in other kinds of retail commerce, no account is taken of lower-quality service. Instead, government statisticians treat a lower price at
a big box store as an unalloyed benefit for consumers, despite the fact that the poorer quality might accompany the lower price. Deteriorating service is more common than economists concede, for example, the endless phone mazes that now await a consumer who needs to contact a company for service and the lack of help for a shopper in a big box store.

Equally difficult challenges stand in the way of any attempt to compare the GDPs of different countries. In one country wages might be lower, but workers might have excellent public housing, convenient public transportation, and national health care. Accounting for such differences in national economies is virtually impossible.

Inadequate reporting also contaminates measurement of the GDP. Unreported cash transactions escape calculation. Massive tax avoidance distorts the data. For example, multinational corporations can reduce their reported domestic profits by inflating the costs of inputs from their foreign affiliates and deflating the revenue from their exports. Suppose a U.S. company produces a car made only from domestically produced components, with the exception of an imported steering wheel. To reduce taxes, the company claims the steering wheel cost $1,000 more than its actual price. Because of this deception, contribution of this car to the GDP will be $1,000 less than it would be with honest accounting.

The GDP assumes that all commercial activities serve people’s needs, making no distinction between commercial transactions that add to well-being and those that diminish it, as would be the case with tainted food. In terms of evaluating well-being, merely summing up commercial transactions is not particularly informative.

Here we see the influence of economic theory on how we regard our lives. Underlying the calculations of the GDP is the assumption that people are informed consumers who purchase the commodities that will give them the most satisfaction (utility). That assumption may not be true. For instance, pharmaceutical companies sometimes market medicines successfully, despite dangerous side effects, even when generic products, which are both cheap and safe, are available. The purchase of the generic medicine would lower the GDP.

Besides uninformed or irrational purchases, the GDP includes indirect purchases that consumers unintentionally make. Thr GDP also includes unnecessary packaging, while ignoring the inconvenience of plowing through layers of plastic to finally arrive at the purchased commodity. Also, corporations spend billions of dollars on advertising to make people buy things they otherwise would not. Advertising expenses then become part of the cost of the goods, which are then counted into the GDP. Parenthetically, although the alleged objective of the economy is to maximize utility, much of advertising is designed to create dissatisfaction with one’s existing possessions, thereby annihilating utility.

Finally, people rationally make some purchases because they must do so as a requirement for their work. They must purchase specific attire for their workplace they might not otherwise wear, such as a necktie. Some companies permit people to dress casually on Fridays, allowing employees to demonstrate the disutility of neckties.

In the case of this undesired clothing, the expense represents a cost rather than a benefit. Other workers must partake in activities not of their own choosing to further their careers. Some workers even undergo plastic surgery for that purpose, again adding to the GDP.

Take this logic a step further. Suppose a person purchases a car just to commute many miles to work. Unlike a vacation or an addition to a house, this car has no attraction for its owner except as a means of commuting to work. Surveys indicate that people regard commuting as the least pleasant activity of the day.

Imagine, however, that our commuter has purchased some special touches that make the commute more bearable, for example, a top-of-the-line stereo system. Theoretically, the stereo belongs in the GDP, although the rest of the car may not belong in a statistic intended to measure welfare.

Even without the challenge of the stereo adjustment, the car raises a host of other measurement problems. What about the extent to which the car creates pollution or congestion or contributes to global warming? Economists refer to such matters as externalities, meaning that they remain external to the price system—and therefore invisible as far as the GDP is concerned.