“According to Kuznets, the purpose of the economic system was to provide the citizens of a country with goods and services. What was decisive in the recording of national income was the moment at which individuals in the economic cycle achieved their income. Kuznets had a clear and realistic concept: national income had to be thought of in terms of the incomes individuals get, and not as the total value of production.” — Philipp Lepenies

This week, we are featuring two exciting new economics titles: Economic Thought: A Brief History, by Heinz Kurz, and The Power of a Single Number: A Political History of GDP, by Philipp Lepenies. For the final post of the feature, we are happy to present a short excerpt from The Power of a Single Number, in which Lepenies tells the story of how Simon Kuznets got his conception of national income into the 1933 edition of the Encyclopaedia Of The Social Sciences.

“National Income” in the Encyclopaedia Of the Social Sciences (1933)
Philipp Lepenies

It was thanks to his brother that Kuznets—not well known among researchers for his work on national income—was entrusted with the entry for the Encyclopaedia of the Social Sciences. Salomon Kuznets was one of the editor’s closest members of staff, and awarded the contract to Simon, who seized the opportunity to present his view of the topic. His entry presented what was, until then, the most comprehensive methodological and theoretical statement on national income. As opposed to most of the other publications on national income, his was not aimed at an expert audience. It was written in a generally comprehensible way, and made do with few technical details. With this, Kuznets was able to get his views across to a wide audience.

For Kuznets, it was not only income (which could be calculated as consumption, its distribution, and the value of production) that made up the figure national income. He added a fourth category, “income enjoyed,” or the sum total of all subjective feelings, which each individual has in his dual function as producer and consumer. In so doing, Kuznets extended the range of interpretation of national income with a subjective component: the satisfaction resulting from one’s own economic activity. Such feelings, however, were not measurable, so in order to quantify national income, one had to concentrate on the cruder benchmarks of income received and consumed.

At first sight, Kuznets maintained, national income seemed to provide an objective survey of economic strength. It could be read as an index of production capacity and would enable a comparison of the productivity of different countries. The per capita income could be an indicator of a country’s economic welfare, and if sufficient data was available, it would be possible to describe the trend over a longer period of time, to make statements about how much richer or poorer a country had become, and to show how income was distributed across certain groups in society. But Kuznets deliberately wrote in
the conditional. He warned about overestimating the potential of this type of calculation: “However used, figures like those . . . appear to be quite serviceable; they seem to measure in comparable units something quite definite and significant. Further investigation reveals, however, that the clear and
unequivocal character of such estimates is deceptive.”

Demonstrating the difficulties inherent in the method of calculation was important to him. In order to avoid misinterpretations or wishful thinking, one had to be familiar with the “gap” between what can be measured and what should be measured. Kuznets saw national income as a sum that presented a snapshot of a particular moment in time, one that could in no way replace deeper analysis or render it superfluous.

According to Kuznets, the purpose of the economic system was to provide the citizens of a country with goods and services. What was decisive in the recording of national income was the moment at which individuals in the economic cycle achieved their income. Kuznets had a clear and realistic concept: national income had to be thought of in terms of the incomes individuals get, and not as the total value of production. However, Kuznets realized that this
definition didn’t solve all problems with the measure. It was difficult to evaluate incomes for which no specific amount of money had been paid, and the concept of “income” was ambiguous, inasmuch as there were different motivations for achieving income. Individuals, for example, need an income in order to support themselves and maintain their standard of living. Companies, though, want to generate profits.

From these thoughts, Kuznets deduced what should be calculated as income and what should not: national income comprised the sum total of wages and salaries, pensions, interest, dividends, and so forth—any item, that is, with a measurable market price. The value of goods manufactured for one’s own final consumption, without money being paid, or of services such as unpaid housework were not taken into consideration, although they directly benefited individuals. This was done for pragmatic reasons and resulted from the necessity to differentiate between economic activities and individuals’ private lifestyles. Such a dividing line could only be determined from country to country, and could shift over the course of time. Comparing calculations of a country’s national income made at different times, or comparisons between different countries, could be misleading. The national income of countries with a very disparate distribution of income also could hardly be compared. Furthermore, there was no objective criterion for how public authority services not traded on the free market should be valued, or whether the value of the goods produced should be calculated on a net or a gross basis. For observations conducted over a short period, the gross value was more accurate, because in this case the depreciation of capital was difficult to estimate.

Just how important it was for Kuznets to see national income as the entirety of concrete individual incomes and not simply as an abstract sum is also revealed by the fact that he did not stop at the aggregated recording of incomes. For him, the distribution of income also was an integral part of national income recording. He spent almost half of his Encyclopaedia entry on this. Because individual welfare was dependent on the level of income an individual had at her disposal, recording of national income had to be linked to a recording of income distribution. Only both, together, enabled statements about a country’s welfare.

The recording of national income was therefore dependent on a social consensus as to what was meant by economic activity. Consequently, certain social and institutional structures influenced the way national income could and should be calculated. In different contexts, the term “national income” meant different things.

This applied to families as an economic unit as well. Whereas in modern Western countries families no longer played any significant role in economic production (even if only for their own needs), in most parts of the world, families were still a constitutive element in the economic structure. The economic standing of families and household production not only changed over the course of time, as had been demonstrated in Europe, but also was different from region to region within a country. As such, the method of recording had to be adapted to the local circumstances in each case. Kuznets categorically ruled out a universal method for recording national income, possibly even worldwide, as an option.