By Walter Molano

Besides being a pro-longed period of human suffering, the Great Depression marked an era of extraordinary innovations in economic theory.

The privations produced by the collapse of output and demand led to the ideas proposed by John Maynard Keynes in his Treatise on Money.

It produced the policy mistakes that flowered into the arguments for Milton Friedman's monetary theory, and it sparked Friedrich August von Hayek's writings on the proper role of government and markets.

However, one of the most interesting developments of the 1930s was produced by a Harvard University professor who was born in Belarus. Simon Kuznets focused his research on a small niche of economic theory that studied national income. The work was developing in the United Kingdom by several economists, particularly Colin Clark.

Up to that time, governments had no standardised means of measuring national output.

The industrial revolution led to a proliferation of data, such as production and shipping numbers. However, there was no methodology to systemically aggregate the figures into a national statistic.

new indicators

Eventually, economists produced two indicators, one that was based on ownership (GNP) and the other on output (GDP).

Kuznets helped the US Department of Commerce conduct the first national income surveys in 1934 and 1941, which led to the first estimates of GDP and GNP. He then standardised his techniques to estimate US output to 1869.

In 1952, the United Nations published a guide for nations to set up similar systems, thus standardising the format.

It was not until the 1960s and 1970s that most nations began publishing their first GDP numbers. Therefore, GDP is a relatively new statistic.

Moreover, GDP is not an indicator of economic well-being or prosperity. This is something that was clearly argued by Kuznets, who warned that the new statistic was only a measure of national income. The problem is that most economists and policymakers ignored his warning.

Soon after the Great Depression, the world was plunged into a brutal war that destroyed much of its production capacity and infrastructure.

For the next half-century, the globe focused its efforts on rebuilding what was destroyed. As a result, the global economy experienced a prolonged period of growth.

moderate economic output

Yet, with the reintegration and modernisation of China, India and the former Soviet Union, the process finally came to a close. As a result, we are now entering into a period of moderate economic output.

This is a trend that is being registered throughout the planet. The pattern is not only evident in the developed parts of the world, such as Europe, but also in the developing parts of the planet, such as China, Brazil and Turkey. Some policymakers, economists and business leaders are fretting.

They worry about the social, economic and political implications of slower GDP growth. Yet, there are no signs of trouble on the horizon. On the contrary, there seems to be signs that people are quite content with their level of prosperity.

This is a pulse that is being measured by pollsters around the globe. North American political pundits ask how an incumbent president with such a weak domestic economy does so well in his re-election campaign.

Sino analysts wonder why the Chinese population is not taking to the streets as the pace of economic output stabilises at a much lower rate.

Many Europeans wonder why civil unrest is not more pervasive in the stagnant peripheral countries, such as Greece, Italy, Spain and Portugal.

measure aggregate well-being

The answer was provided by Kuznets more than 70 years ago. GDP is a measure of national income. It is not a measure of aggregate welfare. As the level of global economic growth plateaus after half a century of rebuilding what was destroyed by two world wars, a massive depression and a failed experiment with an alternative form of economic organisation, economists need to focus on indicators that measure aggregate well-being.

The pace of economic growth in the US may be slowing, but home prices are on the rise. This makes voters happy.

The unemployment rate in Italy may be rising, but Italian household wealth has never been as high as with the euro. Therefore, why should they abandon the common currency?

The level of economic growth in China may be slowing, but why should citizens complain when their disposable income is multiple times higher than it was a decade ago?

Low levels of economic growth can mask the well-being of a nation in the same way that high levels of GDP output can overstate aggregate welfare.

This is a lesson that the Japanese bestowed us more than two decades ago. Now, it is time we generalised it to a wider spectrum of countries.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC. wmolano@bcpsecurities.com