by From Ken Zimmerman (originally a comment) If you had asked somebody 100 years ago, ‘How’s the economy doing?’ they would not have known what you were talking about. At the time, people talked about things like banking panics, and national wealth, and trade. But, according to Zachary Karabell, this thing we call the economy — this thing that we constantly measure with specific numbers — was not really invented until the 20th century. Specifically, around 1930. “It was invented because of the Great Depression,” says Karabell in his book called The Leading Indicators. He writes: It was invented because there was clearly a perception that there was something really, really bad going on but they didn’t really know what. You could see there were homeless people on the street, you could see
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from Ken Zimmerman (originally a comment)
If you had asked somebody 100 years ago, ‘How’s the economy doing?’ they would not have known what you were talking about. At the time, people talked about things like banking panics, and national wealth, and trade. But, according to Zachary Karabell, this thing we call the economy — this thing that we constantly measure with specific numbers — was not really invented until the 20th century. Specifically, around 1930. “It was invented because of the Great Depression,” says Karabell in his book called The Leading Indicators. He writes:
It was invented because there was clearly a perception that there was something really, really bad going on but they didn’t really know what. You could see there were homeless people on the street, you could see there were the Okies heading from their Dust Bowl farms off to California by the tens of thousands, but there was no way of really grasping it. So the government begins calculating this single, official number called national income. It is the forerunner of today’s Gross Domestic Product, or GDP, and it is basically the value of all the goods and services produced in the country in a year. When it is released in the depression, this wonky statistic becomes an overnight sensation. A report on national income submitted to Congress becomes a bestselling book. And soon, you cannot turn on the radio without hearing those numbers and what they are measuring.
In the decades that follow, national income becomes gross national product and eventually GDP — and it sweeps the world. “The first thing you do in the 1950s and ’60s if you’re a new nation is you open a national airline, you create a national army, and you start measuring GDP,” Karabell says. You need to calculate GDP because if you want help from the World Bank or the United Nations, they are going to want to know: What does their help do for your country’s economy?
It is somewhere around this time, Karabell says, that people start to make too much of GDP. Rather than a limited measure of the economy, it becomes this Cold War gauge of who is doing better, who is winning. And, so, perhaps inevitably, all that success leads to a backlash. In one of the most famous moments of that backlash, Robert Kennedy enumerated the shortcomings of what was then known as Gross National Product.
“Gross National Product does not allow for the health of our children, the quality of their education, or the joy of their play.” “It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate, or the integrity of our public officials.” The original GDP was never intended to measure overall well-being or a nation’s standard of living. “It does what it says on the tin: It measures the economy,” says Diane Coyle, an economist who just wrote a book called GDP, A Brief But Affectionate History. “We shouldn’t make it do something it was never intended to do.” Despite this warning still a frequent occurrence for many of the cultural constructs people create to structure the world. One problem with GDP: Certain things that are clearly bad make GDP go up — like hurricane damage that costs a lot to fix and drug addiction mitigation.
Even figuring what to count in GDP can be tricky. For example: Should you count the black market, which means everything from off-the-books babysitters to mafia drug deals? The U.S. does not. Other countries do. Back in the ’80s Italy started counting its black market and overnight the Italian economy became bigger than the UK economy. The Italians celebrated. They called it Il Sorpasso.
These problems with GDP demonstrate the origins of such constructs as GDP. With the full notion of economy, in fact. We tend to think about economy (e.g., GDP) as a natural object. Like a mountain, and we have methods of measuring it that are better or worse and more or less accurate. And like a mountain the economy cannot be assessed or measured until humans conceptualize it. Humans invent these and many other ‘things’ to populate and explain people and events around them. Anthropologists call these inventions cultural constructs. Humans live in a social constructs world.
The shareholder theory of value (SHVT) is one such cultural construct. Shareholder value thinking is endemic in the business world today. Fifty years ago, if you had asked the directors or CEO of a large public company what the company’s purpose was, you might have been told the corporation had many purposes: to provide equity investors with solid returns, but also to build great products, to provide decent livelihoods for employees, and to contribute to the community and the nation. Today, you are likely to be told the company has but one purpose, to maximize its shareholders’ wealth. This sort of thinking drives directors and executives to run public firms like BP with a relentless focus on raising stock price. In the quest to “unlock shareholder value” they sell key assets, fire loyal employees, and ruthlessly squeeze the workforce that remains; cut back on product support, customer assistance, and research and development; delay replacing outworn, outmoded, and unsafe equipment; shower CEOs with stock options and expensive pay packages to “incentivize” them; drain cash reserves to pay large dividends and repurchase company shares, leveraging firms until they teeter on the brink of insolvency; and lobby regulators and Congress to change the law so they can chase short-term profits speculating in credit default swaps and other high-risk financial derivatives. They do these things even though many individual directors and executives feel uneasy about such strategies, intuiting that a single-minded focus on share price may not serve the interests of society, the company, or shareholders themselves.
Their unease is justified. So, why do they do it? Some say it is the power, others say it is the wealth, others the social prestige. None of this is relevant until the directors, CEOs, and business teachers accept that SHVT is not just appropriate but justified and morally correct. That process (called socialization) began in the 1970s and continues today. Driven by economists and politicians (both recipients of large money donations from shareholder groups), graduate educators in business and economics (mostly in pursuit of academic prestige and power), potential CEOs looking for bigger pay days, and ‘true believers’ in shareholders as the necessary foundation of American business domination in the world. And little of this support and proselytizing is based on clear empirical evidence. Socialization is so powerful that its messages continue to command even if the results kill those who are socialized and the culture of which they are a part and was the original source of the socialization. SHVT is likely to continue its dominance of American and most world economies, firms, and societies even if it destroys the persons, firms, economies, and even societies involved. Successful socialization leaves little ‘wiggle room.’