October 2014 newsletter – Shouldn’t economists get involved in the making of the national accounts?

Writing from America Salah el Serafy argues that economists should pay more attention to national income estimation especially where natural resource deterioration is overlooked

This note is prompted by a recent publication related to national accounting issued under the names of the United Nations Secretary-General and the heads of five eminent international organizations (see references). I take advantage of the emergence of this document with its curious sponsorship to urge my fellow economists to play a more active role in the compilation and evaluation of the national account numbers which they consume with abandon discarding their ‘caveat emptor’ precaution. The overpowering sponsorship of this work to which I bring attention looks decidedly odd considering the relative smallness of the objective. For the objective is merely a standardized format that had been missing from a set of peripheral accounts for the environment introduced two decades ago by the 1993 System of National Accounts (SNA93).

The notion that the SNA should reflect natural resource losses to the extent possible had been researched for many years though how to integrate these losses meaningfully in the national accounts has eluded consensus. Over the years hope has gradually faded for such integration, and the recent work appears to close the door firmly against it. All that can be expected now is the collection of ‘relevant’ information on so-called ‘links between the economy and the environment’ to be deployed in subsidiary Satellite Accounts — as if natural resources were not an integral part in the structure of most economies. The fact that natural resource losses are ipso facto economic losses appears to escape the national accountants who one can surmise are the true begetters of this document, hiding behind a façade of an imposing edifice. Their message in brief is that no adjustment for environmental losses can be expected within the mainframe of the national accounts. This in effect is a death sentence on ‘green accounting’.

Economists tend to take the national accounting estimates at face value, often feeding them into sophisticated models without questioning their accuracy or veracity. Reasons behind their presumed apathy are not difficult to disentangle. National accounting is generally absent from teaching curricula. It neither excites teachers’ interest nor attracts students who are often enticed by what look like more glamorous lines of learning. This present-day neglect contrasts with the past when economists considered the national aggregates and what they stand for as fundamental to economic inquiry. Need I mention Adam Smith’s work on the nature and causes of the wealth of nations (meaning income of nations)? National income has been central to the work of economists, describing and analyzing its sources, size, composition, distribution, changes and much else.

In the course of the past century the names of Bowley, Colin Clark, Pigou and Keynes forged the national income concept and guided its measurement in England, together with Simon Kuznets and others in America. Of outstanding significance in this regard is Hicks’s dogged pursuit of the subject beginning with his book The Social Framework (second edition, 1952) where he blended theoretical analysis with attempts to overcome estimation problems. He wanted to initiate the study of economics from the macro end to supplant (or perhaps complement) the then-dominant micro approach of supply and demand. In a posthumously published article in the Economic Journal (EJ, 1990) on the ‘Unification of Macro-economics’ Hicks credited the availability of the national accounts with nothing less than the development of modern macroeconomics. However, as the economists’ interest in studying social accounting faded the accountants and statisticians have taken over, often disregarding the concerns of economics, and disclaiming any hint that the national accounts should be estimating income. One remarkable feature of the recent publication is its omission of any reference to the account-greening efforts of Dasgupta, Hartwick, Mäler, Nordhaus, Solow and Vincent (see El Serafy 2013).

Some rudimentary statements about GDP are perhaps here called for to justify what follows. Ask economists what GDP essentially imparts and the common answer, I believe, will be ‘the level of national income’. This is important as the accountants, judging from previous attempts at integrating the environment and the economy, have denied any relevance of GDP to income. Without using the familiar acronym Pigou called GDP the ‘National Dividend’, revealingly defining it as the total of consumption and investment (Pigou, 1948, p. 6). That GDP/GNP should denote income is a view that has been shared by major economists, but whether or not national income may be construed also as signifying happiness is another matter. On its own it cannot express welfare since it contains no reference to the number of people who share it, and even when converted to a per caput basis, it still remains devoid of how it is distributed, let alone the capacity of individuals to derive happiness from their share in income. Disappointed in GDP estimates which ignore ecological losses, many environmentalists have advocated the abolition of GDP though adjusting its estimates would be preferable and more practicable. This is because GDP has become so interwoven in the fabric of modern society that its estimates, however supposedly flawed, are cherished by business, academia, the media and the general public. Moreover, if its ‘flaws’ are consistently maintained it will reveal growth rates (the pet interest of many economists) that are grosso modo accurate. However imperfect these estimates may be they meet quite adequately the needs of short and medium term macroeconomic management particularly for monetary and fiscal purposes. And yet while this is true for perhaps a large number of countries, it fails the macroeconomic needs of the primary producing economies where the conventional estimates of GDP are not just inaccurate but are often misleading. Running down their natural heritage through commercial exploitation is falsely portrayed as ‘value added’ whereas only the income content of the sale proceeds should appear in GDP. Exploiting finite natural resources without replenishment is akin to mining and Marshall had taken pains to explain that the surplus realized in mining, often miscalled rent, should be split into proper ‘rent’ which is income and ‘royalty’ which is capital.

Any presumption that removing ‘royalty’ (the capital element) from GDP entries relating to natural resources might be taken care of at the level of estimating NDP cannot be accepted for more than one reason. First, NDP is not often reckoned at all, and if reckoned there is no unanimity over the amount to be used for the capital consumption involved. Second, natural resource deterioration due to commercial exploitation is not ‘depreciation’ in the accepted sense; it does not conform to standard wear-and-tear allowances applied at year-end to asset categories, and may in fact amount to as much as 100 per cent of the asset. In the latter case proceeds of the asset sale will all be a User Cost and must be exiled altogether from GDP. Third, if stock erosion is viewed correctly as Marshall advised as emanating from ‘Nature’s store’, accounting conventions dictate that using-up stocks must be dealt with at the gross income estimation stage. Clearly natural resources are not ‘fixed capital’ but inventories, and the User Cost implicit in using them up should be recognized for correct accounting. Such economic reasoning appears to escape the concerns of the estimators who have taken charge of the accounts resisting the economic logic behind the ‘greening’ quest.

Apart from the mistreatment of natural resources a few additional faults have been recognized in the GDP estimates, but most of these have been taken in their stride by analysts. Criticism has touched among others on overlooking unpaid voluntary and household activities and in many cases also inadequate covering of subsistence production. More significantly perhaps is the omission of transactions that evade imposts such as value-added taxation. Whilst such economic activities are left out it would be foolhardy to deny that what is being caught within the catchment of GDP is appreciable enough to make its estimates worthwhile, and this argues for a ‘better’-estimated GDP involving serious economist participation, if for no other reason than that no single metric available can yield as comprehensive a cornucopia of information as that which GDP/GNP provides.

Finally I do not wish to appear against gathering the kind of relevant information the UN Secretary-General and his colleagues are encouraging. The availability of detailed and organized information on the environment collected in satellite accounts or elsewhere will be greatly beneficial. This information may also prove invaluable for a systematic analysis of environmental issues in the various compartments delineated. Additionally the availability of data may well attract the attention of economists and trigger their interest in taking national accounting more seriously. But promoting the satellite accounts as a substitute for reforming entries in the accounting mainframe should be strongly resisted. The national accountants seem to prefer a ‘catalactic’ view of GDPs as a medium for enumerating market transactions. This if accepted will jeopardize the proper estimation of national income. Their fear of an environmental invasion is understandable, but exaggerated, and the SNA after all must live up to its claim of being a universal system. A universal system should cater to the economic conditions of rich and poor, and not be blind to the requirements of some of the world’s poorest economies whose GDP is rooted in primary production.


System of Environmental-Economic Accounting 2012 — Central Framework, United Nations, European Commission, Food and Agriculture Organisation of the United Nations, International Monetary Fund, Organisation for Economic Co-operation and Development and World Bank, 346 pages, United Nations, New York, 2014.

El Serafy, Salah, Macroeconomics and the Environment, Edward Elgar, Cheltenham, UK and Northampton, MA, USA, 2013.

Hicks, J R, The Social Framework, An Introduction to Economics, 2nd ed., Oxford University Press, 1952.

Hicks, J R, ‘The unification of macro-economics’, Economic Journal, 100, pp. 528-38, 1990.

Marshall, A, Principles of Economics, 8th ed., Macmillan, 1920.

Pigou, A C, Income — An Introduction to Economics, Macmillan, London, 1948.