How Economics Failed the Economy
The Difficult Art of Reckoning With the Human Good
When, in the 1930s, the great economist Simon Kuznets created GDP, he deliberately left two industries out of this then novel, revolutionary idea of a “national income”: finance and advertising. Don’t worry, this essay isn’t going to be a jeremiad against them, that would be too easy, and too shallow, but that is where the story of how modern economics failed the economy — and how to understand how to undo it — should begin. Kuznets’ logic was simple, and it was not mere opinion, but analytical fact: finance and advertising don’t create new value, they only allocate, or distribute existing value — in the same way that a loan to buy a television isn’t the television, or an ad for healthcare isn’t healthcare. They are only means to goods, not goods themselves.
Now we come to two tragedies of history. What happened next is that Congress laughed, as Congresses do, ignored Kuznets, and included advertising and finance anyways for political reasons — after all, bigger, to the politicians’ mind, has always been better, and therefore, a bigger national income must have been better. Right? Let’s think about it.
Today, something very curious has taken place. If we do what Kuznets originally suggested, and subtract finance and advertising from GDP, what does that picture — a picture of the economy as it actually is — reveal? Well, since the lion’s share of growth, more than 50% every year, comes from finance and advertising — whether via Facebook or Google or Wall St and hedge funds and so on — we would immediately see that the economic “growth” that the US has chased so desperately, so furiously, never actually existed at all.
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