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Sushmitha Chander
Econ 442
April 16, 2008
National Income Accounting: Kuznets - Stone
Keynes’s pamphlet How to Pay for the War published in 1940 came out when
World War II broke out. In that small tract, he identified the inflation gap created by
resource constraints during the war effort, and promoted the device of compulsory saving
and rationing to prevent price inflation, proposals that were adopted in 1941. How to Pay
for the War is notable for it provided the seeds of a theory of inflation to complement the
depression economics of the General Theory. One of the advantages of Keynes's General
Theory was the provision of a closed, interdependent general equilibrium theory based on
a few simple, essential relationships, such as that between consumption and income,
investment and interest rates, etc. It was fortuitous that national income accounts, which
began to be collected in the 1920s by institutions and economists such as Simon Kuznets
in the US and Colin Clark, Richard Stone and James Meade in the UK, contained within
them these very categories. John Maynard Keynes joined the British Treasury in 1915
and was involved in the design and implementation of the policies used to finance World
War I. In Keynes’s view, an important goal of war finance was to avoid the high inflation
that had occurred during World War I. He predicted that inflation would increase as
wartime output and incomes rose, while resources were diverted away from the
production of consumer goods and services. To prevent inflation, he argued that the only
viable options were to institute price controls, to borrow, or to tax away consumer’s
spending power. Keynes recommended raising taxes to finance the war and that these
taxes should be borne by the wealthy. Since, this would not be sufficient to raise revenue
for the war, Keynes proposed a “system of sharply rising levies on all incomes in excess
of a small minimum, with the highest incomes paying 85% marginal rates” (Cooley and
Ohanian) and compulsory savings for the working classes. This is deferred pay, which
would be rebated with interest after the war beginning in the first postwar recession.
Keynes’s approach to wartime finance was first based on constructing a consistent set of
national income accounts capable of providing the structure needed to understand the
public finance problem presented by the war. James Meade and Richard Stone further
developed this theory.
Simon Kuznets was the founder of national income measurement. He was invited
to join National Bureau of Economics Research (NBER) where he did research on
national income and product accounts. He was responsible for the publication of the
nation’s first national income estimates for 1929 -1932. In his book “National Income
and its Composition, 1919 to 1938” published in 1941, he explains the concept of
national income which is now the basics for the modern national income accounting.
Gross Domestic Product was created by Simon Kuznets during World War II to quantify
final aggregate demand according to the new economics of Keynes. As such, GDP
ignores all intermediate spending in the economy, based on the tenuous argument that
earlier stages of production constitute double counting. Kuznets's life work was the
collection and organization of the national income accounts of the United States, an
accomplishment paralleling that of Richard Stone and James Meade in Great Britain.
Kuznets work was similar to the two other developments at the time: the emergence of
econometrics and the Keynesian Revolution, both of which found in Kuznets's data an
important resource for their advancement. The system of national accounts built by
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Sushmitha Chander
Econ 442
April 16, 2008
Kuznets was the empirical scaffolding for Keynes’s theory of national income
determination.
A major contributor to the development of national income accounting was Sir
John Richard Nicholas Stone. He also won a Nobel Prize for economics for developing
an accounting model that could be used to track economic activities on a national and
international level. The first official estimates of British National Income and
expenditures were made according to Stone’s method in 1941. Stone had also published a
complete set of accounts for the United Sates in 1942, and together with Meade had
produced textbook, National Income and Expenditure, which was illustrated with
estimates from Britain and America. He offered the first statistical model to calculate
investment, government spending and consumption. Stone organized national accounting
on the basis of an extensive transaction matrix which was then used to construct different
types of models by imposing various kinds of restrictions on it and combining it with a
response matrix. In other words, national accounts structures were used for the model
construction such as Keynesian macro models which emphasize factor markets,
international trade models and input-output models, special cases of transaction models.
World War I and World War II brought about the statistical revolution, which
introduced national income estimates both in United States and in Britain as an example
of a technological improvement stimulated by war. The C + I +G = Y rubric from
Keynes’s General Theory had an overwhelming influence in the post-war policy making,
which was then expanded on by both Kuznets and Stone.
References
1. Thomas F. Cooley and Lee E. Ohanian, Postwar British Economic Growth and the
Legacy of Keynes, The Journal of Political Economy, Vol. 105, No. 3 (Jun., 1997), pp.
439-472
2. http://cepa.newschool.edu/het/
3. Yoram Ben-Porath, Simon Kuznets in Person and in Writing, Economic Development
and Cultural Change, Vol. 36, No. 3 (Apr., 1988), pp. 435-447
4. Leif Johansen, Richard Stone’s Contribution to Economics, The Scandinavian Journal
of Economics, Vol. 87, No. 1 (Mar., 1985), pp. 4-32
5. Don Patinkin, Keynes and Econometrics: On the Interaction between the
Macroeconomic Revolutions of the Interwar Period, Econometrica, Vol. 44, No. 6 (Nov.,
1976), pp. 1091-1123
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