Part [part not set] of 4 in series "'Good Markets' book interviews"

Historical economist Floris Heukelom is optimistic that we can change the way in which we evaluate national economies – thanks to the detailed analysis that sociologist Andrew Yarrow presents in “Measuring America; How Economic Growth Came to Define American Greatness in the Late Twentieth Century” (2010). A book interview.

Floris, you are trained as economist and then got your doctoral degree in the history of economic thinking. This book is in line with that specialization. What is it about?

“Measuring America (2010), of sociologist Andrew Yarrow, shows how thinking about the vague, broad and general idea of ‘American greatness’, the flourishing of the country and its population, changed over time. In the early 20th century it was defined in a very moral way, in terms of its great freedoms, its great culture, and its religion. It also had an economic basis, but that did not define its self-understanding. During the 20th century thinking about what made America great, the nation’s success, became increasingly dominated by the Gross Domestic Product (GDP) as a benchmark. This book shows how that happened, a story that is relevant to one of the sub-projects in our research project ‘What Good Markets are Good for’, which focuses on human flourishing and how to define and operationalize it. Also for economists more generally this is a valuable book. How can you, as an economist, look at society in a different way? What are the constraints of the economic view?”

This book of Yarrow is from 2010. The criticism that GDP is a bad indicator of well-being was already voiced way before that. Nobel Prize winner Amartya Sen, for example, wrote an influential essay on it in 1979. What does this book add?

“True, that discussion had already been started up by Sen in the 1970s. And Sen and others have also worked on alternatives to measure individual and national well-being. Unfortunately, the point that he made is too often presented in an absolute, moralistic way. As if ‘economists’ – including policy makers with an economic background – all fully identify welfare with this wrong GDP benchmark.

“This book is not normative […], it’s not about which measures are good and which are bad.”

The response from the side of economists often becomes quite defensive: “We know, there are limitations to this measure, but …” And then they give are reasons for continuing to use GDP.

This book is not normative, it does not take a stand, it is not about which measures are good and which are bad. What it does in an excellent way is giving a very detailed explanation of why the GDP benchmark gradually became dominant, clarifying the causes and timing of these changes.”

Can you elaborate a bit, what kind of new insights does Yarrow give us?

“What is crucial is an interaction between the state of affairs in the world, policies that are being made, institutions that develop and habits that form. Yarrow describes that interaction very nicely, gives us a deep understanding of it.

“That choice for GDP had no moral reasons. It had nothing to do with well-being and happiness.”

Yarrow focuses on the post-war period, the rise of the GDP concept as a result of World War II. In such a war situation you need to know how much production you can shift, for example from clothes to aircrafts. And how much tax you can charge to pay for your war efforts. A very pragmatic approach, very legitimate too, because the war was won. That choice for GDP had no moral reasons. It had nothing to do with well-being and happiness. The economists who used to work on the latter topic at the time did not support the GDP measure, but were pushed aside. Subsequently, Yarrow shows that GDP was a useful benchmark in post-war construction. Even then, as a government, you have to deal with resources and production; should you give priority to homes and roads, or shoes and food?

Partly this was already known. Where Yarrow really adds something new, is his careful description of how the OECD and other international organizations initiate a standardization process, driven by the question of who is entitled to how much emergency aid. The ranking of countries was started up in the post-war period, and gradually the application of GDP became more universal.

In the 1980s Sen came with his Human Development Index (HDI) as an alternative. The reaction was by and large: “Good idea, we agree, let’s do it.” And so that measurement was introduced. But for organizations such as the World Bank and the IMF the key question remains who is most entitled to a new loan. They just want to make their budget calculations and need GDP for that purpose. But maintaining GDP as a key measure is also a matter of habit, the Dutch government for example made it mandatory for the Netherlands Bureau for Economic Policy Analysis to work with GDP.”

So a very descriptive book. But if we do want to discuss morality and markets, if we want to focus on human well-being and want to change something in how we evaluate economic phenomena? What good does this book do us then?

“Yarrow shows why change is difficult, but at the same time that it is possible. In newspapers and books, at symposiums and conferences – it is always assumed that economists naturally focus on GDP. This book shows that our current, strong economic interpretation of how we are doing is not entirely self-evident. Once upon a time it was different and so it could change again.

You can make a comparison with bringing about an energy transition. You can easily defend that we need to get rid of the gasoline engine as fast as possible, electric cars are a much better idea. But nowadays we also know that existing technology has a history, it has become part of socio-technical systems that have grown historically. There is a path dependency that you cannot change instantly. You need to understand what interactions take place between components of these systems.

The same is the case with economic ideas and tools. Rather than expressing criticism in broad and general strokes of all that is wrong, we should look at small steps that are feasible. For example, how exactly does the Ministry of Finance write up its reports?”

Authors / contributors

Series "'Good Markets' book interviews":

Which books – classics or recently published – should you read to acquire a deep understanding of markets and morality? In this series of interviews researchers from the project ‘What Good Markets are Good for’ make their personal recommendation.

Articles in this series:
  1. The Psychological Mechanisms behind the Workings of the Invisible Hand
  2. Inevitable that We Occasionally Hurt Each Other in the Market
  3. The Market Requires Social Structures, Not Radical Individualism
  4. Why GDP Gradually Became Dominant in Economics