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April 2018

DRAFT CHAPTER FOR HANDBOOK OF CLIOMETRICS

Historical Measures of Economic Output

Alexander J. Field

Department of Economics

Santa Clara University

Santa Clara, CA 95053

USA

afield@scu.edu

ABSTRACT

This chapter begins with an overview of the logic and conceptual underpinnings of national

income and product measures (part I). Part II describes developments beginning in the 1930s

that led to the modern approaches and conventions regarding how we should measure these

aggregates. Part III reviews contributions made by quantitative economists, new economic

historians, and Cliometricians to our understanding of economic epochs prior to the second half

of the twentieth century. The principal focus is on the United States, although there is some

reference to developments in other countries.

Keywords

National Income, National Product, Economic Growth, National Income and Product

Accounting, United States

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Introduction

This chapter assesses the contributions of Cliometrics and Cliometricians to historical

measures of economic output. The emphasis is on the United States. There has been

considerable recent and exciting work on Europe, Latin America, Africa and Asia. But we have

available an excellent survey of these contributions (Bolt and van Zanden, 2014) and it is

unlikely that can be improved upon it at this point. Bolt and van Zanden are central participants

in the Maddison Project, an attempt to keep alive and extend decades of work undertaken by

Angus Maddison to develop estimates of both output and population back in time and to new

areas of the world. After Maddison died in 2010, a number of his colleagues and other scholars

banded together to make his estimates widely available and to provide updates as the result of

new work. These data are available at http://www.ggdc.net/maddison/maddison-

project/home.htm, and the Bolt and van Zanden paper provides an accessible summary of the

latest emendations, which involve the use of new methods as well as new data.

Maddison’s basic approach was to start with a single modern cross-national comparison of

income/output levels (his final benchmark year was 1990) and extrapolate backwards using

country level estimates of rates of growth. Bolt, Inklaar, de Jong, and van Zanden (2018)

describe limitations of this method. As one gets further and further away from the benchmark,

comparative levels in the past can become increasingly unreliable. These authors have thus

developed two separate databases, one optimized to provide the best cross-national comparisons

at different moments of time, the other optimized to provide the best growth rate measures for

individual countries or regions over time.

Comparing output levels between countries at a moment of time (cross nationally) can be

challenging. Simply using exchange rates to convert output in the two countries may mislead.

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Valuing the outputs by a common set of prices can be better. But which prices? Comparing the

product of a less developed country with one that is more developed using the less developed

country’s prices will generally exaggerate the income differences between them, whereas using

the developed country’s prices may make the gap seem unrealistically small. The tradeoffs

reflected in developing these new approaches to Maddison’s legacy are a reminder of the

challenges faced in generating historical measures of economic output, both cross nationally and

over time.

The focus of this essay will be on developments within the United States. It was in the

United States that the modern framework for national income and product accounting originated,

although its progenitors can be found in a number of countries. The architecture of this system

was to a considerable degree the work of Simon Kuznets, an immigrant from the Soviet Union.

Kuznets won the Nobel Prize in Economics in 1971 for his efforts. He died in 1985.

In defining this essay’s scope, it matters how broad a net we cast in terms of who are to be

considered Cliometricians. Must the individual, for example be or have been a card-carrying

member of the Economic History Association or the Cliometrics Society? Cliometrics can be

understood most generally as the application of statistical data and methods to historical studies

of growth and development. The term is also sometimes used synonymously with the new

economic history, an intellectual movement that began in the late 1950s and flourished during

the 1960s. New economic historians were certainly Cliometricians, but they went beyond simply

the examination of quantitative as well as qualitative data, also typically applying sophisticated

econometric methods to such data, allowing hypotheses motivated by economic theory to be

tested and model parameters estimated. Notable questions explored in the US context included

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the profitability and efficiency of southern slave agriculture, and the contribution to US

economic growth of the steam railroad (this involved estimating the railroad’s ‘social saving’).

This essay casts a relatively broad net in terms of who is considered a Cliometrician. Thus

Simon Kuznets and his students, John Kendrick and Robert Gallman are considered

Cliometricians. So is Angus Maddison. Each applied statistical data and methods to the study of

the historical process of growth and development. So too are Paul David, Peter Lindert,

Christina Romer, Jeff Williamson and Tom Weiss, among others.

Cliometricians played central roles in developing national income and product accounting

systems, in the process judging what should and should not be included and how certain

production and payment flows should be handled. From the late 1930s onward, as the logic,

methods, and objectives of these systems became more widely understood and accepted, the task

of measuring economic output, previously undertaken by individual scholars or, in the early

twentieth century, private research organizations, was assumed by government statistical

agencies. Should government economists and statisticians be considered Cliometricians? I think

the answer, in general, is no, because their primary concern is to illuminate current, not historical

conditions. But this distinction is not without ambiguity, because byproducts of government

statisticians’ efforts have been data that eventually illuminate economic history.

The entire twentieth century, in particular, is now history. The databases maintained by the

U.S. Department of Commerce’s Bureau of Economic Analysis, which contain quarterly macro

data going back to 1947, annual data series extending back to 1929, fixed capital stock data back

to 1925, and investment flow data back to 1901, greatly facilitate exploration of this period. A

primary concern of policy makers is indeed to produce accurate and timely data, but they also

have a subsidiary interest in history. Historical macro data is used to construct econometric

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models that may be used for forecasting or policy simulations. In some cases interest in history

goes beyond that, as policy makers try to reason by analogy in comparing current challenges to

episodes in the past.

Nevertheless, the key driver in the transition to government responsibility was the desire of

policy makers for higher frequency data available with a much shorter time lag. Government

economists’ and statisticians’ first responsibility is to produce current estimates, because without

such estimates, with preliminary numbers available soon after the end of a quarter, national

income and product estimates are unlikely to have great value for those determining fiscal or

monetary policy.

The priorities of government statisticians are thus not exactly the same as those of

Cliometricians. But even though refining the historical record is not a central concern of

government statisticians, as a consequence of the work they do, our understanding of economic

history has been and is greatly enriched, at a minimum because contemporaneous estimates of

product and income come eventually to define the (recent) historical record for us. The numbers

may not be produced with the objective of helping us write economic history, but they ultimately

serve this purpose. The same can be said of the decennial censuses of population in the United

States, undertaken to determine representation in the lower house of Congress, as well as

government censuses of agriculture, manufacturing, and other sectors. They did not have as their

primary objective assisting future economic historians. But they have nevertheless done so,

providing most of the raw materials from which estimates of product and income in the

nineteenth and early twentieth century have been constructed.

This essay begins with an overview of the logic and historical development of national

income and product measures (part I). Part II describes the developments beginning in the 1930s

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that led to the modern approaches and conventions regarding how we should measure these

aggregates. Part III reviews contributions made by quantitative economists, new economic

historians, or Cliometricians to our understanding of economic epochs prior to the second half of

the twentieth century.

Part I. The logic and early history of national income and output estimation.

The best overview of the early history of national income and product accounting is still to

be found in Kendrick (1970). Kendrick, drawing heavily on Studenski’s (1958) book-length

compendium of efforts in different countries, divided the intellectual history into two periods,

with World War I the demarcation line. In the earlier (and much longer) period, estimates were

constructed almost entirely by individuals, and were limited to a few relatively advanced

economies. With developing agreement on concepts and methods, and improved statistical data,

responsibility was eventually shifted to teams of government statisticians and expanded to many

other countries. After the Second World War the United Nations, building on League of Nations

efforts, played an important role in standardizing and diffusing these systems across the globe.

In surveying the history of national accounting systems, Kendrick, following Studenski,

distinguished two main flavors, material product and comprehensive. Ultimately it is the latter

that has become the internationally accepted standard, but the former, which focused (as the

category name would suggest) on tangible output, informed the statistical systems of the USSR

and other COMECON countries throughout much of the twentieth century. Comprehensive

frameworks aimed (and aim) to include not just physical goods, such as business equipment and

structures and consumer durables and nondurables, but also services delivered to final

consumers. Examples of the latter include shelter (housing) services, personal care, and legal,

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educational and medical services. Technically speaking, both transportation and the electricity

producing sectors, for example, should also be considered part of services production, as are

wholesale and retail distribution, finance, insurance and real estate, and communication. None

of these sectors produces tangible goods. The COMECON countries included services that

contributed to final goods production, but not those consumed directly by households: thus

freight but not passenger transport, communication services purchased by firms but not

individuals, energy consumed in the production of physical goods but not by households, etc.

Modern comprehensive national income and product accounting systems approach the

task of measuring output flow using three distinct approaches. The first involves aggregating

value added by individual economic units. Value added is defined as gross sales less purchased

materials and services (this aggregate is referred to by the Bureau of Economic Analysis (2017)

as “intermediate purchases”). Intermediate purchases include raw or semi-processed inventories

as well as fuel or energy inputs. They also include labor services provided by outside contractors

or businesses. In considering the deduction for services bought it is important to distinguish

between those provided by employees of the organization itself and those purchased or rented

from other individuals or organizations. Only the latter are to be deducted from gross receipts.

Thus legal services purchased from an outside law firm would be deducted from gross sales in

calculating value added, whereas those provided by in-house counsel would not.

If one calculates value added in this fashion for every unit engaged in producing goods and

services for the market, and then aggregates, one will have an approximate measure of gross

domestic output. It is approximate because a few imputations for non-marketed services, such as

the housing services produced in owner-occupied residences, are, by convention, added to this.

It is gross because it includes that portion of private investment necessary to maintain the

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physical capital stock against the ravages of wear and tear and other forms of depletion. It is

domestic because it calculates value added irrespective of the nationality of the owners of the

factors of production. National, or citizenship measures, such as gross national product, exclude

value added attributable to foreign-owned factors of production, but include value added by

factors of production, both labor and capital, owned by nationals but situated outside of the

country.

This value added approach is sometimes called the production method of measuring

output. It measures value added as it is generated by corporations, partnerships, and individual

proprietorships. Economic organizations add value to purchased materials and services by

combining these with the services provided by the organization’s employees and owned physical

capital. The goods or services produced are sold forward, ultimately (perhaps after further

transformation or change in physical location) reaching a final consumer.

With proper aggregation, the approach yields data on the respective shares of different

sectors (e.g. manufacturing, transportation, agriculture) in gross value added, or output.

Kendrick and others call this, perhaps confusingly, the “income originating method”,

because it is out of the flow of value added at each stage of production and distribution that

organizations generate flows of income to the labor they employ as well as the households that

own the economic entity, and thus its capital assets. The identity of gross income originating

with value added for each economic unit guarantees the equality between aggregate measures of

gross domestic product and gross domestic income. An economic unit makes wage and salary

payments to the labor it employs. If a corporation, the entity will, on behalf of its owners, hold

title to buildings, equipment, stocks of inventories, and other non-human assets such as patents

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or trademarks. In addition to the wages and salaries it pays out, it will ultimately generate

income flows to the owners of these assets.

Subtracting wage and salary payments and indirect business taxes (taxes on production and

imports less subsidies) from value added yields what the BEA calls gross operating surplus.

Deducting corporate income tax and capital consumption (depreciation allowances) takes one to

net after tax income. Deducting net interest payments arising from debt finance yields net after

tax corporate profits, which will be distributed to owners of the corporation as dividends or

retained as net saving done on behalf of the households that own the company. Unincorporated

businesses/ individual proprietors make periodic withdrawals from business accounts to owners’

accounts, distributions which reflect compensation both for the labor services provided to the

business and a return to the capital invested.

Thus, as economic units produce goods and services reflected in and measured as value

added, they simultaneously generate income flows to the owners of factors of production.

Measuring value added as it is paid out to owners of factors of production is sometimes called

the income method, or as Kendrick and others put it, the “factor income” method. This second

method, which underlies the construction of ‘social tables’ described below, requires measuring

and then aggregating the income flows generated by each organization as they are actually

received by households. This approach to tracking value added produces aggregates for wage

and salary income, including pension and health insurance contributions, as well as the employer

portion of social insurance payments. It also includes payments to non-labor factors or

production, income to capital (and a small amount to land). Value added less employee

compensation yields the gross flow of income to capital. With aggregation and deduction for

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capital consumption, this second approach allows the calculation of the share of labor or capital

in national income.

The BEA defines gross operating surplus as value added less employee compensation less

taxes on production and imports. These indirect business taxes are taxes not levied directly on

corporate or personal income. They include excise taxes, import duties, state and local sales

taxes, and local property (real estate) taxes. Subsidies, such as those paid to farmers or to some

public housing authorities, are subtracted from indirect business taxes: in a sense they are the

opposite of indirect business taxes. Why? Taxes are payments made to government for which no

directly identifiable excludable good or service in the current period is provided in return.

Subsidies or other transfers are the opposite, for they are payments from the government to

households for which no corresponding good or service is tendered, at least during the current

period.

Subtracting capital consumption allowances from gross operating surplus leaves net

operating surplus. Subtracting the costs of debt finance (net interest payments) yields corporate

profits, which ultimately flow into one of three bins: corporate income tax payments, dividends

to equity holders, and retained net business earnings, which represent corporate saving on behalf

of the households that own the corporation. Rent paid to real estate corporations shows up as

part of the gross operating surplus of such corporations. The remainder flows directly to

households as rental income of persons. Income to unincorporated businesses, which represents

a return to both labor and invested capital, is listed separately in the accounts as proprietors’

income. At least for the modern period, product measured from the output or expenditure side is

generally considered more accurate than that from the income side. The totals developed using

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the income method tend to come in slightly below those reached using the product or

expenditure methods (see below); the difference is treated as a statistical discrepancy.

National income is simply gross national income less consumption of fixed capital, or

gross domestic income plus net factor income from abroad less consumption of fixed capital.

(Note: contrary to what is stated in many textbooks, taxes on production and imports are now

included in national income, rather than part of the wedge separating national income from gross

national income. See BEA NIPA Table 1.7.5, for example.) It should be noted from the

previous discussion that not all gross income flows immediately and directly to households, or is

available to them for consumption, or is actually consumed. Taxes leak out, and these include

indirect business taxes less subsidies, corporate income tax payments, and personal income tax

or payroll tax flows. Saving is another leakage, and includes firm depreciation allowances, a

component of national (gross) saving. Nor will all after tax corporate profits necessarily be

distributed to households as dividends. Some may be retained as net business saving, a

component, along with personal saving, of private saving. Not all of a business unit’s gross

interest payments will necessarily find their way to households, since businesses borrow and lend

amongst each other.

Personal income measures what actually flows to households. Like national income, it

includes all labor compensation, all proprietors’ income, and all rental income of persons. It

also includes personal income receipts on assets, which is the form 1099 dividend and interest

income actually received by households, and personal current transfer receipts, which consist

mostly of government transfer payments (Social Security and Medicare benefits, interest on the

national debt, etc.). Thus, a substantial portion of the payroll taxes from the household sector to

the government are remitted to the (consolidated) household sector as social insurance transfer

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payments. Similarly, a portion of the remaining gross government tax receipts (corporate and

personal income taxes, etc.) is remitted to the consolidated household sector as interest on the

national debt. In both cases, the government effects interhousehold transfers: from those

working to those aged or retired, and (largely) from those working to bondholders. Unlike

national income, personal income does not include corporate profits, indirect business taxes,

payroll taxes for government social insurance programs, net interest paid by businesses, and a

couple of other minor items.

Personal income ultimately resolves itself into one of three bins: personal income taxes,

consumption, or personal saving.

The third method of reckoning output is the expenditure approach. It is not obvious why

gross expenditure should necessarily be equal to gross domestic income, given the leakages into

taxes and saving described above. There is moreover an additional leakage: some spending will

be on goods and services produced outside of the country (imports).

The reason GDE, if measured correctly, should nonetheless be equal to GDI and GDP,

subject to small statistical discrepancies, is that there are, as pioneers of national income

accounting came to understand, three sources of spending that don’t emanate directly from

households. These are traditionally considered injections, and the sum of these injections should

just match the sum of the leakages. Why? Each leakage category has a corresponding injection

category. In the case of taxes, it is government spending on goods and services. In the case of

imports it is exports, and in the case of saving it is investment (understood in the macroeconomic

sense as acquisition of new structures, equipment or net accumulation of inventories).

Nevertheless, there is no guarantee that each of these pairs will balance; indeed it is likely they

will not. There can for example be a government deficit or surplus or a current account deficit or

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surplus, and private saving might fall short of or exceed private investment. But the sum of the

injections must just equal or balance the sum of the leakages.

How do we know this? Because the gross income flowing to individuals must ultimately

resolve itself into one of three bins: consumption, saving, or net taxes: Y = C + S + T. And

on the output side, breaking down the aggregate by type of expenditure, we know that the total

will equal the sum of consumption, investment, government spending, and net exports: Y = C +

I + G + X – M. Setting the two right hand sides equal to each other, and subtracting C from each

side, we have S + T = I + G + X – M. Rearranging by adding imports to both sides, we have S

+T + M = G + I + X or, in a useful rearrangement, S = I + G – T + X – M: private domestic

saving must finance the sum of gross private domestic investment, the government deficit, and

the current account surplus, which represents the net acquisition of foreign assets.

We can all apparently breathe a sigh of relief. In what seems like an affirmation of Say’s

Law, supply does indeed seem to create its own demand.

Not so fast, however. It turns out that there is a bit of a trick involved in guaranteeing this

balance, and that is to consider any net acquisition of inventories, whether intended or otherwise,

as part of gross expenditure as well as gross private domestic investment. Firms are viewed as

purchasing additional inventories on their own account, whether or not their acquisition was

planned. During the 1930s, the decade during which Kuznets was developing the logic of the

national income and product accounting system, Keynes was working on the General Theory.

By distinguishing between inventories voluntarily or involuntarily acquired, and assuming some

sluggishness in price adjustment, one could develop a coherent explanation of how sizable output

gaps (a difference between actual and potential output) might persist. Most 19th century and

earlier economists were not excessively concerned with output gaps (Malthus was an exception)

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and whether or not there might be a deficiency of aggregate demand predisposing toward

recession, even though at every moment of time expenditure would match output and income.

We cannot claim that they understood the detailed logic of why the three different national

income and product accounting approaches should sum to the same annual magnitudes.

Precursors to moderns did however stumble upon each of the three estimating approaches used

by modern national income and product accountants.

The expenditure approach measures final expenditure flows, including spending by

households on goods and services (personal consumption expenditure, or PCE), by businesses on

plant and equipment plus any inventory investment (gross private domestic investment, or

GPDI), by governments on goods and services (G) and by foreigners on a country’s exports less

what is spent on imports (net exports). This approach facilitates the calculation, for example, of

the share of output appropriated by government at different levels, or the share of consumption in

gross domestic product.

Kendrick makes the point that antecedents for each of these three approaches (output,

income, and expenditure) can be found in the pre-World War I period. The three approaches

were refined during the second quarter of the twentieth century. In the process, understanding of

their interrelationship improved, permitting a coherent explanation of why in principle each

should total to the same magnitude. To review: why should total income, for example,

necessarily equal total output? Because for each economic organization, it is out of the flow of

value added that gross income flows to owners of both labor and capital originate. If income

generated equals value added for each economic unit, then in principle it should be true in the

aggregate. Why should aggregate expenditure (including any change in inventories, considered

spending by the firm that accumulates them) equal total output, given the leakages out of gross

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income that flow to taxes, saving, and imports? Because the sum of these leakages will be

matched by the sum of three categories of spending that don’t originate directly in domestic

households: spending by governments on goods and services, investment spending by

businesses, and exports.

Those studying economic output prior to the twentieth century did not understand all of

this, but they understood enough, at least intuitively, to go about making estimates of output and

income. Kendrick, following Studenski, counts thirteen countries for which measures of

economic output had been calculated prior to 1920. Seventeenth century pioneers in England,

especially William Petty and Gregory King, approached the problem from the income side,

constructing social tables and using an approach that has come to be known as Political

Arithmetic, and which we will see resurrected in work by Lindert and Williamson (2016). King

and Petty’s work provides a useful contrast with much of the work on the nineteenth century in

the United States, which is built up from the production side.

Petty published estimates for Britain in 1665 of what we would now call national income.

He estimated income from land at £8 million, and from other personal estate at £7 million, with

total income, based on an informed guess about population and average income, equaling £40

million. With the “Annual Proceed of the Stock or Wealth of the Nation”, consisting of rent,

interest and profits, at £15 million, he attributed the residual of £25 million to the “Annual Value

of the Labor of the People.”

Several decades later (1696), Gregory King calculated national income by dividing the

population into 26 occupations or classes, estimating the number of families in each grouping,

the average number of persons in each type of family, and the average per capita income for each

type of household. He multiplied within each category, aggregated, and then added in an

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estimate of the revenues of the Crown. He did this first for 1688, and, based on estimates of

spending, was able to calculate the gap between income and consumption, which yielded saving

or capital accumulation.

He subsequently constructed a time series through 1698, using it to cast light on the capital

consumption engendered by military conflicts with France. He used similar techniques to

estimate income for France and Holland in 1688 and 1695, and the relative burden of the wars in

each of the three countries. Unfortunately, his work, although circulated privately at the end of

the seventeenth century, and utilized by Adam Smith in the Wealth of Nations, was not available

publicly until 1802. To the degree that their income estimates were proxies for output, neither

Petty or King denigrated the output of final services. They can thus be considered as falling into

the “comprehensive” camp in terms of their conception of output.

The same cannot be said of the French Physiocrats, who believed that only agriculture was

capable of producing a net product. The Physiocrats reflect a unique and unusual variant of the

material product approach, focusing on income and product within agriculture, which was of

course the bulk of the French economy. Since they studied intersectoral flows, the Physiocrats

can be interpreted as foreshadowing Leontief’s work on input-output matrices. They also

contributed an understanding of the necessity of reserving a portion of a country’s gross product

(in their case, grain) for the replenishment, and ultimate expansion of a country’s physical capital

stock. That understanding would ultimately be reflected in the distinction between gross and net

product or income.

Adam Smith should also be placed in the material product camp. Acknowledging his

views, in particular his distinction between productive and unproductive labor, also helps us

understand why Karl Marx was a classical economist, and how Smith, in spite of his opposition

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to Mercantilism and association with laissez faire economics, can be said to have foreshadowed

the accounting system of the former Soviet Union more so than that of the United States. Smith

believed that productive labor fixed itself in vendible material products, whether structures,

equipment, consumer durables or non-durables. Labor generating services for final consumers

was for Smith unproductive, a view that was shared more or less by Ricardo and Mill as well as

eventually by Marx.

One might try to explain Smith’s biases as based on his desire to deepen capital (increase

the physical capital to labor ratio) through saving and accumulation, combined with the obvious

fact that only goods can be accumulated. Services, as he noted, perish in the instant of their own

creation. It does not follow, however, that favoring goods production at the expense of services

will necessarily result in higher levels of capital accumulation (and, presumably, welfare), since

goods can also be consumed.

Smith is revered today for his rejection of Mercantilist views. Mercantilism stressed that a

country desirous of aggrandizing its national power should aim to accumulate precious metals by

running export surpluses. Smith, in contrast, argued that the strength of a nation’s economy

should be measured not by its holdings of precious metals but by its stocks of productive

resources: labor, capital, and land, and the flows of output and income they enable. We should

also, however, acknowledge that Smith’s emphasis on the distinction between productive and

unproductive labor, a leitmotiv of classical economics up through and including Ricardo, Mill,

and Marx, represented a detour, with detrimental consequences for countries committed to it.

Thus, for example, the material product system of national accounting can be plausibly blamed

in part for stinting wholesale and retail distribution sectors within socialist economies, resulting

in enormous waste.

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Marx built on Smith’s distinction between productive and unproductive labor, and also

used it as a vehicle for focusing on the desirability of accumulating physical capital. Among the

classical economists he had distinctive views about the objective of production in a capitalist

economy, which was, he argued, to produce a net income (or surplus value) only for the

capitalist class. In his view nonwage income (rent, profits, dividends, interest) did not represent

a legitimate return for the employment of a productive factor, but the extraction of surplus value

made possible via the employment of wage labor. If Ricardo viewed landlords as living at the

expense of the rest of society, for Marx it was industrial capitalists who were the principal

parasites.

Marshall represented the decisive turning away from variants of the material product

approach in Anglo-American economic thought, refocusing on the comprehensive approach to

product and income accounting reflected in Petty and King, and emphasizing that the objective

of an economic system was ultimately to satisfy household wants, and that the accumulation of

physical capital should ultimately be understood only as a means to that end.

Part III. US Estimates of Output and Income Prior to the Second Half of the Twentieth

Century.

Samuel Blodget (1806) is generally credited with producing the first estimate of US

national income. Using methods echoing those employed more than a century earlier by

Gregory King, and more recently by Lindert and Williamson, he divided the US employed

persons into classes, in his case seven, estimated annual per capita income for each, multiplied,

and aggregated (see Blodget 1806; Sutch and Rhode 2006).

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The 1840 US census was the first to ask a series of detailed questions providing a more

solid basis for income and output estimation from the production side. George Tucker (1843)

used that census to estimate commodity output in the aggregate and by state. He updated his

work in 1855 based on data from the 1850 census. Ezra Seaman published similar estimates

based on the 1840 and 1850 censuses. For the years 1880 and 1890, Charles Spahr developed

more comprehensive estimates, and included calculations of the size distribution of incomes in

the two years, which he used to draw conclusions about inequality trends. Wilford King (1915),

using Spahr’s framework, extended estimates to 1910. He concluded that labor’s share of

income was rising, leading him to doubt that inequality was increasing, although the former is

not necessarily evidence against the latter proposition.

Simon Kuznets’ work during the early 1930s helped define the architecture of a more fully

developed, logically consistent accounting system for national output and income. Not all of the

decisions he made about what to include and what to exclude, however, were ultimately

incorporated into what became the now internationally accepted approach.

Here is the history. As the Depression worsened in 1931, government economists

complained that estimates of output and income from the National Bureau of Economic Research

appeared many months or years after the fact, and were consequently of little use for business

cycle forecasting or policy analysis. The National Industrial Conference Board published

somewhat more timely estimates, prepared under the direction of Robert F. Martin, but they still

were not available soon enough to be of real assistance to policy makers.

In February of 1932, officials in the Department of Commerce’s Bureau of Foreign and

Domestic Commerce joined forces with individuals working with Senator Robert LaFollette, a

progressive senator from Wisconsin. These discussions resulted, on June 8, 1932, in the

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introduction of a Senate resolution calling for the production of annual estimates of national

product and income for the years 1929, 1930, and 1931. The work was to be conducted within

the Bureau of Foreign and Domestic Commerce, and was begun under the direction of J.

Frederick Dewhurst. When, by November of 1932, it became clear that Dewhurst and his

limited staff would not be able to carry forward the project, an agreement was reached with the

NBER for Kuznets to take over. Kuznets had been working on estimates of national income for

the NBER since 1929, and was in the process of developing improved procedures more explicit

about definitions and more careful about citing original data sources. He transitioned to the

government in January of 1933, and on January 4, 1934, roughly a year later, delivered his report

to the Senate. National Income, 1929-32 detailed two measures of national income, one

excluding and one including retained business earnings. Within 8 months, approximately 4,500

copies had been sold (Carson, 1975, p. 159). For a Senate document, it was a bestseller.

Almost immediately the Commerce Department took steps to assume responsibility for

maintaining these estimates on an ongoing basis.

In these estimates Kuznets excluded some categories of income that King had included.

Among these were service flows from consumer durables, the value of services provided within

the household economy, earnings from illegal employment or the informal economy, capital

gains, and relief and charity payments. For the first three of these, estimation was difficult and

including them risked introducing a good deal of noise. Leaving them out might provide a less

conceptually satisfying measure of levels but enable a more reliable calculation of growth rates.

Nonmarket services provided within the context of the household economy services were

one of these categories, although Kuznets noted that in the circumstances of the Great

Depression, their exclusion did not necessarily enable changes in national income to be a better

21

proxy for changes in welfare. The narrower measure he provided, which excluded services

provided within the household, fell sharply between 1929 and 1932, as the unmeasured

household sector grew to take up “some of the slack imposed by the shrinkage of the market

economy” (Kuznets, 1934, p. 4). So the measures Kuznets reported suggested a decline in

welfare more extreme than what probably occurred. Although the estimates in his report spanned

only a four-year period, Kuznets was also concerned that the practice of excluding the value of

household production could bias the welfare implications of long run increases in per capita

output, since the importance of such production tends to decline with the process of economic

development. For the same reasons, cross-national comparisons of regions at different stages of

development might be jeopardized, to the degree that output per capita measures were interpreted

as proxies for welfare.

Kuznets’ reasons for excluding capital gains were opaque. On the one hand he argued that

including them would represent double counting, since it would reflect “both changes in national

income and its capitalization.” He also says it would “distort” the calculation of national income

(1934, p. 5). The most compelling argument for excluding capital gains is that they do not

represent value added as a result of current period production. To include them as part of income

disrupts the posited equality between aggregate income and product.

In common with his treatment of the service flow from consumer durables, Kuznets also

excluded the value of owner occupied real estate. His view was that “… there is some doubt as

to the propriety of including this item, since the ownership of a home combined with its

possession does not constitute a participation by the proprietor in the economic activity of the

nation in the same recognized fashion as does his work for wages, profit or salary” (1934, p. 12)

Ultimately, the Department of Commerce thought otherwise, treating homeowners as in the

22

business of producing housing rental services, whether they chose to consume them or not.

Accepted practice today is to make an imputation for the service flow from owner occupied

housing, incrementing the aggregates for product, income, and expenditure. An argument for

doing this is that it would make little sense for the GDP growth rate to change simply because of

a change in the housing tenure rate, which could be the consequence of accepting Kuznets’

approach.

His largest deviation from current practice was to treat government spending on goods and

service as intermediate goods, arguing that it would be double counting to include in measures of

output and income both government spending and the private sector final output it facilitated.

Gilbert, Jaszi, Denison and Schwartz (1948, pp. 182-3) pointed out, however, that Kuznets was

using the concept of intermediate goods quite differently when applying it to government public

goods like national defense, justice systems, fire and police protection than was the case when it

was applied to the purchased materials and (nonwage) services deducted from an entity’s gross

sales to obtain value added. In the latter case payments to suppliers were associated with the

delivery of specific goods or services. To the degree that taxes support a judicial system, for

example it seems a stretch to call this a fee for service, a point that takes on particular salience in

the event we end up being prosecuted.

Kuznets, however, saw little difference, but on this he was opposed by many economists,

and the conventions adopted by the Department of Commerce reflected these objections. Goods

and services produced by government directly, as well as government purchases of goods and

services, were all considered part of final output, and after 1942 were included in measures of

gross national product and expenditure as well as income.

23

Kuznets’ position was consistent with his continuing concern that we not assume that

national output and income measures were necessarily good proxies for welfare. In particular, he

did not see trillions spent on the military as satisfying human needs as directly or in the same

way as spending on (and production) of food, clothing, or shelter. Similarly, and perhaps less

controversially, he observed that “occupational expenses” such as commuting, although counted

as part of consumption, really reflected an intermediate input into the production of goods and

income that did satisfy human needs. The commuting itself did not directly contribute to

welfare, but only indirectly through its facilitation of our ability to earn income.

Kuznets stressed several times that since value added was measured at market prices, the

aggregate depended not only on the vector of output, but also on relative prices, which could be

influenced by the distribution of income. For that reason as well, he said, per capita output

should not be interpreted as measures of welfare. All of these concerns are well and good and

certainly valid. But it was probably unreasonable to expect economists and others to refrain

from calculating per capita output over time or across different countries, and make inferences

from these numbers about material welfare.

Kuznets’ point about the possible influence of the distribution of income on relative

prices, and therefore on the value of production aggregates, received little emphasis in

subsequent decades. Perhaps economists believe the impact of variation in income distribution

on market prices to be relatively minor. On the other hand, it is often noted that, from the

standpoint of assessing how well a society meets human needs, it matters (on the income side)

how unequally that product is distributed among households. For example, adult height, a

reflection of consumption/nutrition through adolescence, is strongly correlated cross nationally

and over time with the log of per capita income (Steckel 1995). But for a given per capita

24

income, a higher Gini coefficient (a measure of inequality) is associated with lower average

height. Kuznets’ concern is related but not exactly the same, since it involves the impact of

inequality on the estimation of the aggregate itself, which appears in the numerator of an output

per capita measure.

Finally, Kuznets’ estimates were of nominal income. In the 1934 Senate report he made

no attempt to convert nominal estimates to measures of real output and income, attributing his

reticence to the absence of an appropriate deflator that would cover both goods and services

purchased by households. He called attention to the poor data for household expenditures on

services, but did not stress a need for a broader deflator that would also cover investment goods

(structures and equipment) and government goods which, as noted, he chose to treat as

intermediate. Still, even if a CPI or PCE deflator is the right price index with which to deflate

consumption spending, which bears the most direct connection to human welfare, and even if we

were to follow Kuznets in treating government purchases as intermediate goods, in measuring

changes in real output we would at least for some purposes still want to use a broader deflator

that covered the roughly one sixth of output that typically goes to producing investment goods

(structures and equipment). Robert F. Martin’s 1939 publication included estimates of real

output going back to 1799 using either the CPI or a broader price index as a deflator (1939, table

1, pp. 6-7). By 1937, as evident in National Income and Capital Formation, Kuznets was

including estimates of real output in 1929 prices.

Interestingly, the term gross national product appears to have originated with Clark

Warburton (1934), not Kuznets. The main difference with national income is that the gross

measure included that portion of output devoted to maintaining the physical capital stock and

thus compensating for depreciation. It is often argued that the preference for gross rather than

25

net measures allows a more reliable estimate of growth rates, because calculating economic

depreciation is difficult and often somewhat arbitrary -- as much art as science. By 1937

Kuznets had adopted Warburton’s approach and terminology.

Kuznets’ 1934 Senate report, although not the final word on procedures for calculating

national income and product, was a milestone in their development. It also has some value for

historical research, since it included a variety of observations about the differential impact on the

income side of the worst years of the Depression. He found, for example, that income to

property holders (in the form of interest and dividends) held up much better than labor income or

income to entrepreneurs (p. 14), and that, although both income to capital and income to labor

declined, labor’s share dropped (p. 41). Over and over again, he reported that, for those

industries where this could be distinguished, salary incomes between 1929 and 1932 declined

less in percentage terms than did the income of those receiving wage incomes. Entrepreneurial

income (what we call today income of proprietors) dropped sharply because it was heavily

dominated by farmers and those working in construction. The main cause of the decline in

proprietors’ income was the drop in grain prices (p. 49), although surely the collapse in

construction spending didn’t help. The effects on income were aggravated because neither group

tended to exit when incomes dropped (p. 33).

Some occupations or sectors did very well during the Depression in terms of real incomes.

If you kept your job in government at any level between 1929 and 1932, your real income went

up, as did those working in private higher education. Between 1929 and 1932 the number

employed in private higher education as well as their real per capita compensation went up quite

substantially in real terms (p. 148). More generally, if you were a salaried worker and kept your

job in the Depression, your standard of living improved. Overall, Kuznets’ report documented

26

the reality that those on the lower rungs of the income distribution suffered disproportionately:

“The Depression seems to have put its greatest burden upon those who, in view of their already

low position on the economic scale, could least afford to lose” (p. 19).

Other miscellaneous notes: Mining, manufacturing, and construction suffered the greatest

employment losses (p. 23). Finance had the highest average per capita compensation (p. 28).

Technical change in steam railroads was “a thing of the past” (pp. 86-7). Motor transport

(trucking) felt the effects of the depression much less severely than steam railroads. Interest

payments declined hardly at all, in contrast to dividends. Defaults on mortgages (and cessation of

interest payments) were much larger than defaults on corporate debt (p. 120)

Finally, Kuznets included an interesting discussion of cyclical effects on productivity

within manufacturing. In food and tobacco, output per worker continued to increase between

1929 and 1932. The same was true in chemicals and petroleum refining through 1931 (p. 72). In

most other industries, particularly industries where the quantity of output fell absolutely, labor

productivity also declined, perhaps reflecting the impact of initial labor hoarding.

Kuznets followed his Senate report and 1937 publication with work extending his

estimates first to 1919 (National Income and its Composition, published in 1941), and ultimately

to 1869 (National Product Since 1869, published in 1946). As scholars worked out the logic and

debated the conventions of national income and product accounting they also began to work to

extend their more systematized understanding of methods to construct income and output

aggregates in earlier periods. In the process they both critiqued and built upon earlier efforts.

Because the 1840 and subsequent US censuses enabled calculations of value added for the

material product portion of output (commodity output), the estimating technique for someone

interested in a comprehensive measure of output required making informed guesses based on

27

data from later periods about the ratio of services output to goods output, and using this to ‘mark

up’ the commodity totals.

This was the basic approach followed by Kuznets in constructing annual estimates back to

1869. His pre-1919 estimates were based on commodity (goods) data from Shaw (1947), which

Kuznets marked up by assumed margins for transportation and distribution. The size of those

margins, and more generally the question of whether service sector (non-commodity) output

varied roughly one for one with goods output, lay at the heart of Christina Romer’s subsequent

questioning of how much more moderate had been post World War II business cycles relative to

those that preceded them (Romer, 1989).

For 1919-1929, however, Kuznets was able to construct his estimates from the income

side, rather than the incomplete data on the product side, and his estimates for these years are

generally assumed to be of higher quality than the pre-1919 estimates. Romer also endorsed

income side estimates for 1909-1918 contained in an appendix to Kuznets (1961), although

Kuznets believed these numbers to be less accurate than those for 1919-29, and ultimately

judged his product side estimates for 1909-18 to be superior (see Weir, 1986, p. 355). John

Kendrick (1961) made adjustments to the treatment of government expenditure in Kuznets’ GNP

series to make them more comparable to the annual series from 1929 onward maintained by the

BEA. As noted, Kuznets’ practice had been to treat government expenditure as an intermediate

good, not part of final product. Kendrick’s have since become the standard series referenced by

students of the 1920s. Romer’s annual GNP series for 1919-1929 are Kuznets’ income side

estimates with Kendrick’s adjustments and some other minor adjustments.

Most of Romer’s revisionism applies to the pre-1909 data. Her big differences with

Kuznets involved how much pre-1909 GNP was likely to have varied with changes in

28

commodity output. Kuznets used freehand regression to estimate the elasticity of GNP with

respect to goods production using data for the years 1909-1938 (Kuznets, 1961, pp. 536-37).

Based on data from these years, he concluded that the elasticity approached one, and used this to

backcast a GNP series using goods data for the earlier years. Romer re-estimated the elasticity

using data from 1909 to 1985, but excluding the years of the Great Depression and the Second

World War (1929-46). She made a number of other more minor changes – using log differences

rather than ratios, allowing the elasticity to vary over time, and using what she described as

“normal” rather than peak years to establish trend from which deviations might be calculated.

Based on these regressions she found that the elasticity was not in fact very time sensitive:

“the time varying coefficient measuring the sensitivity of GNP to commodity output fell from

.583 in 1909 to .527 in 1985 (Romer, 1989, p. 20). The more important aspect of her results was

not the small difference in these two numbers but rather their moderate size. Kuznets had

concluded that GNP varied almost one for one with commodity output. Romer argued that the

elasticity was closer to .5 or .6. Thus her estimates of pre-1909 GNP are much less volatile than

Kuznets’, which is what underpins her conclusion that the pre-World War I business cycle was

not markedly more severe than the post-World War II cycle.

Romer justified excluding 1929-1946 from her regression on the grounds that we could

expect the elasticity of GNP with respect to commodity output to have been unusually large

during these years because the fluctuations in both series were so substantial. She maintained

that it would be inappropriate to extrapolate backwards from this “abnormal” period to more

“normal” years between 1869 and 1908, and she attributed Kuznets’ high elasticity estimate in

part to his inclusion of the years 1929-1938 in his estimating regression. Weir (1986, p. 355)

questioned Romer’s exclusion of 1929-46, arguing that there was little evidence of a structural

29

break during the depression years. Nevertheless, Romer’s argument about the relative severity of

the pre-World War I business cycle, and her means of reaching that conclusion, have

subsequently been widely accepted.

It should be kept in mind that Kuznets was adamant that although he thought his annual

estimates back to 1869 were useful for calculating trend growth rates, he did not think they were

sufficiently accurate to form the basis for the exploration of cyclical variation (Kuznets, 1961;

Rhode et al, 2005). Robert Gallman, Kuznets’ student, who extended estimates to 1834, took the

same position. Kuznets, along with Gallman, also did pioneering work estimating the growth of

the US physical capital stock. Gallman, extended both series back to 1834, continuing Kuznets’

tradition of careful attention to detail, crosschecking of calculations, and documentation of

sources and data transformations. With respect to the capital stock, Gallman emphasized the

dominance of structures in both the capital stock and net investment flows, a theme emphasized

in Field (1985). Gallman also considered investment in land clearing as equivalent to the

creation of a reproducible tangible asset, thus a capital good, and emphasized how empirically

important it was in the nineteenth century.

For the 1909 period and earlier, Kuznets and Gallman did not have access to better data

than did Tucker, Seaman, Spahr, or Wilfred King. Nor, for the most part, could they use

electronic spreadsheets or other data processing conveniences, which might have made their job

easier. What they did have was a more solid understanding of the logic of national income and

product accounting, an essential starting point for those wishing to do research in this area.

Extending the aggregates much before the 1840s, however, continued to strike these

scholars as daunting. The first serious effort to venture further back in time is reflected in

estimates published by Robert F. Martin in 1939. Martin provided decadal numbers starting in

30

1799 and then annual data from 1900 through 1938. He concluded that real per capita income

had fallen during the first three decades of the nineteenth century, beginning to rise again only in

the 1840s (Martin, 1929, table 3, pp. 14-15). Because of the absence of reliable production data

for commodity output prior to the 1840 census, the years before this are commonly referred to as

a statistical dark age.

Using an approach suggested by Kuznets (1952), who had been critical of Martin’s

estimates, Paul David attempted to shed light through what he described as controlled

conjectures. He took aim at what he perceived as a consensus, based on Rostow’s work and

apparently supported by Martin’s estimates, that there had been a marked acceleration in the rate

of growth in output per head sometimes between 1800 and 1840. This would have been

consistent with Rostow’s claim that a takeoff typically accompanied entry into sustained

economic growth. David pushed for a more gradualist perspective on the entire 1790 – 1860

period, emphasizing instead a post-Civil War acceleration associated with, among other things, a

rise in the national saving rate.

He began by observing that growth in output per head would equal the sum of growth of

labor force participation and growth in output per worker, and the advance in the former was

relatively modest (about .3 percent per-year). On the other hand, there were across the

antebellum period major shifts in the sectoral shares of agriculture and the non-agricultural

sectors. Following Kuznets, his conjectures were driven by data from later in the nineteenth

century suggesting that value added per worker in non-agricultural sectors was twice (or more)

what it was in agriculture. David assumed that growth within each sector (and thus the average

for the economy) could be proxied by the rate of advance within agriculture. Using these

moving parts he assembled an engine to “retrodict” growth in output per hour, and in

31

combination with the data on modest increases in participation rates, output per head. His

conclusion: growth in output per head between 1790 and 1860 at about 1.3 percent per year.

Having begun by endorsing Kuznets’ criticisms of Martin’s estimates, and aiming to soften

Rostow’s takeoff, David’s numbers nevertheless still showed acceleration between the first two

decades of the century and decades three and four (.28 percent per year between 1800 and 1820

vs. 2.0 percent between 1820 and 1840), although this was earlier than Martin or Rostow had

suggested.

When incorporated into a similar Kuznetsian framework, Thomas Weiss’s revisions to

Lebergott’s labor force data suggested somewhat higher levels of output per capita at the start of

the nineteenth century, slower growth between 1820 and 1840, and consequently somewhat

lower overall growth rates over the first six decades of the century (Weiss, 1992 table 1.2, p.

27). One should be careful in concluding that such revisions necessarily reflected poorer

economic performance. If U.S. residents in the first decades of the century enjoyed higher levels

of output per capita than was previously suggested, this is not necessarily a less rosy picture,

simply because the growth rate was lower.

In an unpublished working paper written decades after his original contribution, David

articulated some second thoughts (David, 2005), expressing reservations about his earlier

uncritical acceptance of Kuznets’ reading of relative productivity levels in the agricultural and

nonagricultural sectors. David now argued that the growing share of labor outside of agriculture

contributed to rising output per head not because output per hour was higher outside of

agriculture, but because people worked so many more hours per year once they left agriculture.

He still pressed for a more gradualist reading of trends in output per hear in the first six decades

of the nineteenth century than had been suggested by Martin or Rostow, but was now using a

32

much modified retrodictive engine to arrive at these results. If David’s revisionism about

relative productivity levels are to be taken seriously, they pose issues for much other work.

The seventeenth and eighteenth centuries, which include the colonial and revolutionary

periods in US economic history, have in recent decades attracted a remarkably wide range of

inquiries aimed at estimating levels and growth rates of output and/or the standard of living

across this long period. Both economists and historians have contributed. The energy and range

of interest in these explorations may partly reflect the relative paucity of data, and thus the

premium placed on creative inferences from that which is available. In the absence of

comprehensive data on commodity output, the starting point for most nineteenth century

estimates, scholars have used different means to extrapolate output per capita levels and rates of

growth. Alice Hanson Jones, for example, whose research had built up estimates of wealth using

probate records, assumed a wealth to income ratio to estimate income (1980). Others have tried

to infer income or product from data on imports (for example, Egnal, 1988, but see Mancall and

Weiss, 1999). Steckel (1995, 2006) drew inferences about consumption levels from height data.

Rosenbloom and Weiss (2014) provide a useful overview of research on the colonial

period and the different data sources and methods of drawing inference from them, along with a

comprehensive set of references. Their main agenda, however, is to estimate product per capita

and its growth in the Mid-Atlantic Colonies (Pennsylvania, New Jersey, New York, and

Delaware), using the framework that David and Kuznets exploited: inferences about the

respective growth rates of output per person in agriculture and non-agriculture, combined with

estimates of shifts between the sectors and changes in labor force participation rates. Their

research is echoed in the Lindert-Williamson conclusion that a significant retrogression in

economic growth took place during the revolutionary and Articles of Confederation periods

33

(1775-1790) (see below). It is also notable for acknowledging the important role the service

flow from the housing capital stock (whether owned or rented) makes to aggregate output, and

thus the contribution of the accumulation of residential housing to increased actual and potential

output. This treatment is a valuable counter to those who dismiss residential capital as non-

productive. Such capital is indeed unusual in comparison to that employed in agriculture,

manufacturing, or transportation because it contributes to aggregate product largely without the

cooperation of labor. But historically, as is true today, it makes a significant contribution to

output and consumption. They conclude that growth in the Atlantic colonies between 1720 and

1800 was modest. Using a similar approach, Mancall, Rosenbloom, and Weiss (2003) estimated

output growth in the lower South, with a similar conclusion, and Mancall and Weiss (1999)

develop the no growth argument for the entire colonial period

Growth, however, is not all that matters. Levels do as well, which brings us to Lindert and

Williamson (2016). Their book attempts a grand synthesis, providing an overview of and new

perspectives on output growth as well as inequality trends from the seventeenth through the

twentieth centuries. I focus here on their contribution to our knowledge about historical trends in

output, particularly in the period up to 1800. Kuznets and others, including David and Weiss,

had built most of their estimates for the period prior to 1919 from the production side. Lindert

and Williamson reverted back to the political arithmetic tradition associated with Petty and

Gregory King (as well as Blodget). They built income side estimates by dividing the population

into groups, searching for information on their respective labor and property earnings, and

constructing “social tables”, as had Petty and Gregory King. Aggregating estimates of free labor

earnings, property incomes, and (up to 1860) slaves’ retained earnings (the costs of their

subsistence), Lindert and Williamson constructed five social tables for the years 1774, 1800,

34

1850, 1860, 1870. Their work is a vivid illustration of the challenges involved in building

estimates of the aggregate from the income as opposed to production (value added) side.

Their most radical conclusion is that “the US had reached world leadership long before the

founding fathers constructed their new republic” (2016, p. 2). It did not grow very fast during

the colonial period, but the level of per capita output throughout the epoch was high (this is

consistent with data on heights). They find that America’s per capita income exceeded Britain’s

in the colonial period, fell behind during the years of the Revolutionary War and the Articles of

Confederation (1775-1790), when per capita income may have declined by 30 percent. With the

resumption of growth after the adoption of the Constitution, the country had recovered the lead

over Great Britain by 1860, although it lost it during the regression associated with the Civil War

and then again during the Great Depression of the 1930s.

Their overall conclusion is this: Maddison was quite wrong to argue that it was not until

the start of the 20th century that US income per capita overtook Britain’s (2016, p. 9). Lindert

and Williamson point out that transatlantic migration was overwhelmingly from Britain to the

United States rather than vice versa, US population growth was very rapid, with women enjoying

the highest fertility in the world and children experiencing the highest survival rates in the world.

IV. Conclusion

As the modern apparatus for estimating national output, income and expenditure was

developed and rationalized, Cliometricians, new economic historians, and government

statisticians have refined our understanding of the historical record of US economic growth. By

exploring the genesis of modern national accounting systems, their main principles and

conventions, and their application to historical data, this chapter has emphasized opportunities to

improve our understanding of the past, not always or necessarily by using previously unavailable

35

data, but also by innovating in using known data sources and developing new ways to draw

inferences from them.

36

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