The Political Economy of Gross Domestic Product Accounting and the Philippine Case

These serious flaws in the estimate of current and constant prices have brought up large statistical discrepancies from 2001 to 2006 during the present Arroyo administration in the NSCB calculations of the Philippine GDP by economic activity(agriculture, fishery and forestry, industry and services) and GDP by expenditures(personal consumption expenditures, government expenditures, domestic capital formation and export less imports). The total of these two sectors approach must of course be equal in national accounting. The discrepancies between the two sectors during the period mentioned averages a high +7% of GDP or P310 billion where total GDP averages P4.6 trillion at current price. It must be noted that the method of arriving at statistical discrepancies in determining GDP by the NSCB is simply based on taking the difference between GDP by economic activity and GDP by expenditures.(Graph next page)

The discrepancies which show more often a high estimate of GDP by economic activity reflect the inefficient and sloppy price surveys of the government especially on the production side of industries as discussed above. Even with the adoption of confidence interval to determine prices, which was only introduced by the NSCB in 1996, high inaccuracies will still persist if the methods of gathering data on prices of the inputs and outputs of firms remain as they are. We will now proceed to an analysis of the very theoretical framework of the capitalist national accounting method.

History and Weaknesses of the Method of Gross Domestic Product Accounting

In this section, we will examine the historical contexts from which the method of GDP emerged, after which we will analyze its conceptual weaknesses as a measure of development. GDP conceptual difficulties we will show stems from its ideological bias in favor of capitalism, specifically the capitalist market.

During the Great Depression of the 1930’s that wracked the capitalist economy, bankrupting thousands of erstwhile stable business corporations and laying off millions of workers, especially in the United States, capitalist governments were realizing that the assurance of their official economists that everything will become normal again with the economy soon recovering was becoming merely wishful thinking. The Great Depression which started in the Great Stock Market crash of Wall Street in 1929 persisted to the 1930’s. The claim of the classical neo-economists that there would eventually ensue full employment in an economy based on the law of supply and demand that the US economy was assumed to be, was becoming incredulous with even corporate executives in Wall Street, jumping off from windows because of the sudden collapse of their firms. The neo-classical economists have religiously advocated Say’s law ( Jean-Baptiste Say was a French economist of the 18th century) that with the lowering of prices due to poor demand, which was becoming the case during the Great Depression, there will be again an increase of demand as goods, all things being constant, will become more affordable to the population.. Of course, this flies in the face of reality when people are thrown out of their jobs, since they will not have any income to purchase commodities in the first place. Unlike the neo-classical economists, the classical economist Thomas Malthus was bothered by the spectre of unemployment, but he attributed its cause to the lustful working class, who reproduce like rats increasing population thus causing unemployment. To the neo-classical economists, however, all unemployment is merely transitional as they assumed a so-called natural rate of unemployment of about 4% when people are looking for new jobs.

Then along came John Maynard Keynes with his “General Theory of Employment, Interest and Money”(1936), which is an attempt to explain the persistence of unemployment in a capitalist economy. Keynes did not depart from the idealist assumption of the classical and neo-classical economists of perfect competition of the market under which condition Say’s law of supply and demand would only apply, but his approach was an innovation for capitalist economics. He adopted the French Physiocrat Quesnay’s model of a circular flow in the economy of income and expenditures, but introduced his concepts of leakages in this circular flow. In Keynes’ model, two categories, individuals and firms, are presented as the two sole actors in the circular flow in the economy of a nation. All property is assumed to be owned by individuals, who sell its services as well as their personal services to firms. The firms, on the other hand, use the productive services they have bought to produce commodities which they sell to individuals, who buy them with the income they have obtained by selling their productive services. Thus a circular flow of incomes and expenditures is transpiring. According to Keynes, investment should equal savings in a balanced economy in order to offset unemployment, but if individuals instead save some of their incomes making them unavailable for investment, disequilibrium occurs. Therefore, savings not available for investment is a leakage of the circular flow. This is also true with government taxes as well as imports because taxes reduce the incomes of individuals which may be used for investment by firms, and import is an external leakage with money going to a foreign country. What Keynes did not see, however, is that the profits of firms may not be used for productive investments which may require new workers but instead for speculative investments, which may lead to inflation, thus aggravating unemployment as weaker firms may reduce their workforce to save on costs of production.

It must be noted that Keynes attempted to construct an economic theory to salvage the sick capitalist economy of his time by bolstering demand for the goods that firms produce. He advocated deficit spending of the government through capital expenditures to create jobs and the reduction of taxes in order to increase the incomes of individuals. He did not reject Say’s law of supply and demand at all, but his emphasis on this law was on the demand side, with firms hiring new workers thereby giving the latter greater purchasing power to buy commodities, and not on the supply side as was true with Say and the neo-classicists. What Keynes vied for is the assistance of the state for private corporations to get back on their feet with the implementation of appropriate fiscal policies by the government.

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