For economists, the problems raised by the Second World War centred on how to direct resources for a possible long war effort while controlling inflation. This led John Maynard Keynes and Richard Stone to release their famous 1940 pamphlet, ‘The National Income and Expenditure of the United Kingdom, and How to Pay for the War’.
It recommended the widening of the tax base as the best measure to finance the war effort.46 To determine the necessary levels of taxation an estimate of national income was required. Since the British Treasury could not produce such statistics, Keynes, in collaboration with Erwin Rothbarth and working on estimates previously published by
45
According to Mulberg (1995), initially the utilitarian philosophy claimed that a social ethic could arise from positive methodological individualism since ethics could be measured scientifically. However, once it became obvious this could not occur, the only way to maintain both a positivist analysis and a value- free science was to avoid considering ethics.
46
Although for different reasons, interestingly the need for a widened tax base takes us back to what inspired Petty to attempt to develop estimates almost 350 years ago.
Colin Clark, produced his own estimates. An altered version of Keynes’ tax proposal was passed in the 1941 budget which, Moggeridge (1995) claims, signalled a revolution in public finance by shifting the criteria for balance from the public accounts to the economy as a whole.
Keynes was not alone in working on aspects of national income. Earlier, the American economist Simon Kuznets had written a short article in 1933, where he set out possible definitions and classifications of the various items entering the national accounts. This resulted in the release in 1941 of the National Income and its Composition 1919–1938. In addition, Milton Gilbert, chief of the National Income Division of the Department of Commerce, also released an article titled Measuring National Income as Affected by the War in 1942, which measured gross national product (GNP) using the Keynesian model.
Gilbert’s paper demonstrated that under the Keynesian model, unlike the results of existing national income figures, it was possible to raise the necessary money for war. Hence, the case for GNP-style accounting won out (Waring, 1988).
The need for nations to adopt national income estimates was internationally recognised. This was reflected by the League of Nations desire to investigate international comparability problems. A standardisation of data was actively pursued after the UN formed. For this task, the UN turned to Richard Stone.
Richard Stone, who initially assisted Keynes’ work on national accounts at the Central Statistical Office, contributed significantly in the development of the standardised SNA that was subsequently adopted by the UN. In fact, he was awarded the Nobel Memorial Prize in Economic Science in 1984 for his fundamental contributions to development of national accounts.
In 1947, Stone’s report to the League of Nations on national income statistics titled, ‘Definition and Measurement of National Income and Related Totals’ (Stone, 1947) was published as the Appendix to the UN publication. It provided the basic framework for the SNA. It was a standardisation of methods based on American and British
accounts which was to be adopted by most countries. Only the Soviet bloc countries maintained a separate material product system.
As Pesaran and Harcourt (2000) explain, Stone’s work on national income accounts synthesised three types of study, which were currently studied in isolation: the discovery and preparation of data, the theoretical appraisal of problems such as the framing of hypotheses suitable for quantitative testing, and the development of appropriate statistical methods, which Stone labelled a ‘systematic synthesis’.
Stone argued that the main aim of economics was to increase human welfare by the investigation and analysis of real world problems. The economy, he added, was a system of interlocking transactions of appropriate national aggregates. Stone’s aim was:
… to develop a system of social accounts that was flexible enough to be of relevance to different countries at different stages of their economic development, while at the same time … have the proper logical structure for use in empirical analysis. (Pesaran and Harcourt, 2000, p. F152)
Stone fulfilled his aim when the UN statistical office became the main source for a nation’s wealth and progress, producing the SNA in 1953. From this came the GDP. The SNA has since been revised in 1968 and in 1993.47
However, both Kuznets (1962) and Stone (1986) were quite aware of the measure’s shortcomings regarding its use as an indicator of wealth. In fact, Cobb, Halstead and Rowe (1995) argue that as early as 1934, Kuznets warned the US Congress that the welfare of a nation could scarcely be inferred from this type of measurement.
The national accounts of this era reflected six strategic factors identified by Keynesian theory48 which could be employed to assist in shaping the size and structure of the economy: volume of consumption, volume of investment, quantity of money, interest rates, government spending and tax collections (Studenski, 1958). Hence, measurement undergoes another transformation. No longer are national income factor shares
47
The SNA is to undergo revision once again. The revision process, which will focus on incorporating the role of information and communication technologies in production and the growing role of intangible assets, is expected to be complete by March 2008 (OECD, 2007b).
48
The Keynesian nature of the national accounts has been questioned. An overview of this debate can be found in Patinkin (1976), Tomlinson (1991) and Miller (1986).
employed, rather macroeconomic aggregates are preferred which leaves the national income indicators subject to government policy.49
The Keynesian influence remained strong until Paul Samuelson led the push to integrate Keynesian macroeconomics with mainstream microeconomics.