## Thursday, May 26, 2016

### Two moments in the broad sweep

First impressions are sometimes troublesome. A short history of GDP at Reddit caught my eye. I followed the link to Measuring an Economy: Where did GDP Come from? at Thirty is Infinity.

When I got to the site, there, at the top of the page, below the blog name Thirty is Infinity is the line A stat blog for the rest of us. My first impression was that they are dumbing things down really far "for the rest of us" -- from infinity, down to thirty. I like simplifying things, you know, but infinite is infinite.

When I read the article I was torn. They start in the 17th century with William Petty and Charles Davenant and the first attempts at income measurement. Next they move to the 1930s and Dr. Simon Kuznetsk. I've heard of Petty and Kuznets, but not of Davenant or Kuznetsk. That "k" on the end of Kuznets there only strengthens my first impression.

And something else bothers me about the article. Back when I first took an interest in economics, they talked about GNP. Not GDP. That was in the 1970s. In 1991 the government switched from the old GNP to the GDP. But in the Short History of GDP article they say

To see the earliest working of GDP, we need to go back to 17th century England

and, later

After Charles Davenent’s work on gross domestic product, this measurement would not be worked on or even be relevant for over 200 years.

I understand they're trying to simplify the story. But if you simplify too much, you're no longer telling the truth. Charles Davenant didn't work on GDP. He didn't even work on GNP. He tried to estimate the national income or some such thing. There probably wasn't even a name for it back then.

So I was a little hesitant to rely on the article. But I went to their "about" page. They have something on the site-name "Thirty is Infinity".

When working with normally distributed data but in small samples, you use what’s called the student t distribution. When your sample is over thirty, you can just use the normal distribution, which implies an infinite number of samples. So, thirty is infinity.

Suddenly, I like them. They're poking statistics people in the eye. So I guess I don't have to hold it against them, the simplification that says people were working on "GDP" in the 17th century. I can let it go, this time.

Good, because there is something I need from the article.

I need this:

Petty’s work was further developed by Charles Davenent, a Tory member of parliament and mercantilist economist. Continuing the trend of economic thought development from times of war, Davenent developed new methods for the sake of national income accounting. In the end, the government was able to use statistics (incredibly rudimentary statistics) to calculate output of the nation for the purpose of taxation calculation and budget planning in war efforts.

National income accounting was developed to facilitate taxation. Hm, that's probably why statistics are called "statistics". In early times, the meaning was restricted to information about states.

But anyway, in the 17th century the state was starting to think about taxing income. The idea developed further in the 18th century thanks to Adam Smith. Smith said the wealth of a nation was measured by what its people produced -- or by the income generated thereby:

... the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry ...

Smith's view provided an economic theory which supports taxation of income. Stop, stop, stop, I'm not arguing in favor of taxes. I'm describing two points in the cycle of civilization. Two moments in history.

I'm still describing the first of the two, in fact. So, how was Smith's view different from what came before? Good question! Before Smith was mercantilism. From FYO's Gallery, Adam Smith and Self Interest:

Mercantilists believed ... that the wealth of a nation was in the gold and silver (bullion) it possessed, and that trade surpluses were a primary means to accumulating bullion. Smith argued that the wealth of a nation was the real goods it produced, not the money it possessed.

It is not clear to me whether the mercantilist focus was on gold and silver within the borders of the nation, or in the King's treasury specifically. EconLib indicates the latter:

During the mercantilist era it was often suggested, if not actually believed, that the principal benefit of foreign trade was the importation of gold and silver... Adam Smith refuted the idea that the wealth of a nation is measured by the size of the treasury in his famous treatise The Wealth of Nations ...

If that is correct, then before Smith, economics pretty much came down to restocking the King's coffers. If not, economics pretty much came down to restocking everybody's coffers -- or the coffers within the nation's borders, at least.

Either way, the mercantilists were focused on accumulating wealth, wealth in the form of gold and silver. Wealth as opposed to income. Adam Smith, by contrast, focused on income -- on income and the production that generates income.

A huge conceptual difference between the two. In the world of the dark ages, there was little spending. Agreements kept some people bound to the soil and others bound to their lords. But there was little spending. In a time of little spending, there was wealth but not income. There was much wealth, and little income.

In such a time, there would be little benefit in the taxation of income and much in the taxation of wealth. But in the time of William Petty and Charles Davenant and Adam Smith, the economy was waking up. Money was changing hands more often, and there were more hands willing and able to participate in monetary exchange. Income was growing. In such a time the revenue from the taxation of income would also grow. Thus the involvement of Petty and Davenant, and thus the thinking of Adam Smith.

This is the first of two points: By the 17th century income had grown to the point that taxing income produced enough revenue to make it worthwhile. Before the 17th century, it was more productive to get revenue by taxing wealth.

In our time it would again be productive to tax wealth. But this story is not about our time on the cycle of civilization. It is about Smith and Davenant and William Petty, and about a time before them.

Oh, by the way, by the 17th century income had grown to the point that taxing income produced enough revenue to make it worthwhile. How do you suppose that circumstance came about? Here's my guess: In the 13th century, Edward Longshanks -- remember him from the movie Braveheart? -- Longshanks started using money to pay the help.
[edit 12 Feb 2018: Looks like it was King Henry II, a hundred years before Longshanks, who started using money to pay the help. Or maybe Henry I, a tickle in my brain says. But it was some time during that period, that's the point.]

By the 13th century, then, the use of money had grown to the point that people were willing to accept it as payment, but not to the point that enough money was changing hands that taxing income was worth the trouble.

Let us now go a little further back in time to reach our second point. Let us go back to 1086, some years after the Norman Conquest. William the Conqueror, also known as William the Bastard, had the Domesday book assembled.

In Domesday: A Search for the Roots of England, Michael Wood quoted from the Anglo-Saxon Chronicle on the idea for the Domesday book and on William's motivation for assembling it:

Then he sent his men all over England, into every shire, and had them find out how many hundred hides there were in the shire, or what land or cattle the king himself had in the country, or what dues he ought to have each year from the shire.

William wanted to know what dues he ought to have each year -- what revenue he could expect to receive. The bastard!

The point, the second point actually, is that in the 11th century the King's business was to determine the wealth of the nation in order to predict his revenue from a tax on that wealth.

It would be six centuries before anybody thought about taxing income.

#### 1 comment:

Oilfield Trash said...

Art

This is a good observation.

"In our time it would again be productive to tax wealth."

Although I would argue that with medium incomes reducing it is not just productive but necessary.

The actual distribution of wealth and income in society will determine ‘how individual utilities are compared’ in the economy, and there is no guarantee that this will correspond to the social welfare function.

This is the Achilles heel of Capitalism and neoclassical economists who see free markets as the only way economies can function.

‘Let us now hypothesize that there is a process, a benevolent central authority perhaps, that, for any given prices p and aggregate wealth function w, redistributes wealth in order to maximize social welfare’

Mas-Colell, A. (1977) ‘On the equilibrium price set of an exchange economy,’ Journal of Mathematical Economics, 4: 117–26.

IMO opinion political destabilization is driven from tipping point dynamics of social welfare. Does not matter what type of government you have. If a large percentage of income and or wealth is concentrated in the hands of few...Well in the interest this is not a political blog I will leave it there.