The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.

Note: This material might be considered “heavy” by some – but understanding the fundamentals of the numbers that are reported about our economy and what our institutions are accomplishing is important.

* * * * *

This essay is Part III of VI. Links to Parts I and II are right here. Click to go to the part you want.     Part I      Part II

* * * * *

Everyone quotes the sentence. Almost nobody follows the man who wrote it into what he did next.

The standard telling is that Simon Kuznets built the national accounts and then warned that they could not measure a nation’s welfare. Both halves are true. What it leaves out is the eight years after, when he took the same instrument into a war, used it to settle the largest resource question this country has ever asked itself, and showed on the page how it was to be done.

He did not write a procedure. He wrote a demonstration, and the difference between the two is the subject of this essay.

What Kuznets applied was a conditional: use the aggregate for the question the aggregate can answer, and the moment the question turns to who bears the cost, go and get the distribution. A conditional requires somebody to notice that the condition has arrived, and nobody can be held answerable for noticing. A number carries no condition. That is what makes it portable — it can be put in a budget, a treaty, a bonus formula, and it will mean the same thing in each without anyone’s judgment being required.

So the number travels and the rule does not. It happens in three stages, and this essay follows them in order: a thing is measured, the measurement becomes a target, the target becomes a reward.

I. The measurement

In June 1932, Robert La Follette Jr. of Wisconsin submitted Senate Resolution 220. Its verb was requested. It asked the Secretary of Commerce for estimates of the national income for 1929, 1930, and 1931. The country was three years into the Depression and the federal government could not say how large the economy was, or by how much it had shrunk. It had freight-car loadings and steel tonnage. It had the ticker and the breadlines and the reports of its own inspectors, and no way to add them.

The work went to the Division of Economic Research at the Bureau of Foreign and Domestic Commerce, which did not have the people for it. Staff were pulled to other projects, and the Bureau turned to a consultant it already had on hand — Simon Kuznets, thirty-one, Russian-born, on the staff of the National Bureau of Economic Research, of no public reputation. He took charge in January 1933. The founding document of American macroeconomic measurement got written because a staffing shortfall handed it to an outside man.

Four people are named as having done it with him: Lillian Epstein and Elizabeth Jenks from the National Bureau, Robert F. Martin and Robert R. Nathan from Commerce. Nathan, a former student of his, took the employment and professional-income estimates. Remember Nathan; he is back within the decade.

Five people, twelve months, no calculating machine worth the name. What they produced was two hundred sixty-one pages and more than two hundred tables covering sixteen industry groups, complete by the end of 1933. The report reached the Senate on January 4, 1934, over a letter of transmittal signed by an Acting Secretary of Commerce who wrote none of it. The acknowledgment inside says who did: Kuznets was in full charge, responsible for the final estimates, the organization, and the text. Income produced had fallen from about eighty-three billion dollars in 1929 to about thirty-nine billion in 1932, and now the government knew it, and knew where the money had gone and where it had stopped. Printed and sold for twenty cents.

The sixteen charts everyone reproduces were not in it. They were drawn at Commerce after the report had gone to the Senate, and it took a second motion from La Follette, on February 28, 1934, to order them bound in.

Section 4 of Chapter I begins near the bottom of page 5, under a heading Kuznets wrote himself: Uses and Abuses of National Income Measurements. The sentence is on page 7.

The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.

The therefore is load-bearing. Two sentences earlier he has said that economic welfare cannot be adequately measured unless the personal distribution of income is known, and that no income measurement undertakes to estimate the reverse side of income — the intensity and unpleasantness of the effort going into the earning of it. The famous line is the conclusion of an argument. For ninety years it has been quoted as an aphorism, which is a different kind of object.

He had already listed what the instrument could not see: unpaid household work, the services of durable goods already owned, odd jobs, relief and charity. The household item he thought large enough to affect materially any estimate of national income, and it went missing hardest in the years when the market was contracting and the work inside the family was expanding. The worse things got, the more the number missed.

And the one with no fix: the reverse side of income. Two men earn the same wage. One of them is tired in a way the other cannot imagine. The accounts show one figure, twice.

None of which made the instrument a mistake. Roosevelt used the figures in April 1938, asking Congress for more recovery spending, and by January 1939 national income framed his budget message. The arguments about the New Deal, for and against, were conducted afterward in a vocabulary this report created. A country that cannot measure itself governs blind, and the men who wanted the number were right to want it.

Go back to the printed page. Along the bottom of page 5, where section 4 begins, runs the printer’s signature mark — 37265—34——2 — the stamp telling a pressman which folded sheet he holds. The most quoted sentence in the history of economic measurement sits two leaves inside a signature, in a book bound for the convenience of the man doing the folding.

II. The rule in operation

Uses of National Income in Peace and War — Occasional Paper 6, National Bureau of Economic Research, March 1942, forty-five pages — is the warning at work.

In the section headed Bearing Upon the Present Emergency he runs the feasibility arithmetic in the aggregate. Net capital formation had never exceeded fifteen percent of national income in any past decade; the war plans contemplated diverting forty or fifty. He posits a national income for the war years, subtracts an irreducible minimum of nonwar capital formation, and arrives at what can be turned to war production. All aggregate. All decisive.

Then the question changes and he changes with it. The moment it stops being how much and becomes who goes without, he drops below the aggregate. He goes to the 1935–36 family income distribution, where 41.6 percent of American families lived on a thousand dollars or less and could not spend much less. He weights by consuming units rather than heads. He sets aside the families sending men into the armed forces, whose food and clothing and housing cannot be cut, and arrives at the real burden falling on the people able to carry it. Then he names what he has not settled: that he has not asked what share of income keeps a population healthy and efficient as a body of producers, and that on that criterion the figure would have to come down further still.

That is the conditional, executed. And here is the thing to be clear about, because it is where this essay lives: the paper contains a man doing it correctly, page after page, under deadline, in a war, and that is all it contains. It demonstrates the switch. It does not say how anyone else is to know when the switch is due. Kuznets could tell because he had built the thing and knew everything in it and everything not in it. He never converted that into anything a stranger could follow.

Eight months later the aggregate was in a room without him. On October 6, 1942, the War Production Board’s Planning Committee — Nathan in the chair — met Lieutenant General Brehon Somervell, commander of Army Service Forces, and put the productive resources of the nation against the share that could go to the war without wrecking the rest. Somervell had already dissented in writing: an inchoate mass of words, he called the study, and recommended it be carefully hidden from the eyes of thoughtful men. Nathan wrote back that he saw no reason for adopting an ostrich-like attitude, and told a lieutenant general he was disappointed in his reply. In the room Somervell said that sixty billion dollars for 1943 was like handing them fifty cents. Leon Henderson, the price administrator, lost his temper and called the general names. A week later Henderson came back with figures, and the question went to the Joint Chiefs.

Nathan is the link and he is the only one I can document: the man who estimated professional incomes for the 1934 report chaired the committee that carried the feasibility fight in 1942. I cannot show a paper trail from Occasional Paper 6 into that committee’s work. The two are contemporaneous and they are the same method in the same year, and that is as far as the record takes me.

The settlement was smaller than the scene suggests. Feasibility was a compound test, and the Army’s own building program was among the worst bottlenecks in it. The same tools had cut the other way a year earlier, when aggregate calculation was used to argue that 1941 goals were too low. The arithmetic was indifferent. It argued for more in 1941 and for less in 1942.

III. The target

The first repurposing was not done by people who had inherited the number carelessly. It was done by people who knew exactly what they were changing, and Kuznets was on the record, losing.

Through the forties Commerce built the accounts we now use, under Milton Gilbert and George Jaszi, and built them for war planning. That meant treating government purchases as final product. Kuznets had wanted much peacetime military spending kept out of national income altogether, as an intermediate cost — the price of the scarecrow, already inside the price of the wheat. He argued it in print, reviewing the Commerce accounts; Gilbert and Jaszi and their colleagues answered him in print; the exchange is there to be read. He lost. The version that governs is theirs.

That is the instrument repurposed by professionals in daylight, over the builder’s stated objection. It is not a story of forgetting. It is a purpose changed by people entitled to change it, with the original purpose left in the literature where it did no further work.

The Employment Act of 1946 is the counter-case, and it deserves to be read before anyone assumes the worst. Congress named maximum employment, production, and purchasing power, and stopped there. Growth in 1946 was a consequence people wanted. It had not yet become a figure they were answerable for.

That came fifteen years later, from Paris. In November 1961 the ministerial council of the newly constituted Organisation for Economic Co-operation and Development adopted a collective growth target: fifty percent real growth in the member economies’ combined output over the decade. A number, a deadline, and a room full of governments answerable for it. It came with the apparatus a target requires: comparable accounts, annual country examinations, published performance against the figure. You cannot set a collective growth rate for twenty economies until somebody has made twenty economies commensurable, and by 1961 somebody had.

Growth had been a description of what had happened. It was now something a country could fail to achieve.

The instrument was built to describe. It was promoted to decide.

Kuznets objected again the following year, in The New Republic, and showed his work. Take 1961: gross national product of $519 billion, of which national defense was $49 billion. Assume seven years of four percent annual growth — faster than the three percent the country had just managed — and assume defense output triples. By 1968 GNP is $683 billion, defense is $147 billion, and what is left for everything else stands about fourteen percent above the 1961 level, which after seven years of population growth means consumption and capital formation have barely moved. The growth is genuine, he wrote, in the accounting sense. And nobody would want it. He asked that objectives be made explicit: a demand for more growth has to say more growth of what, and for what. A hostile reader can look at 1962 and see a man relitigating the defeat of the forties, and there is something in that. The objection survives it. He grants that the growth is real and asks what it is for.

That is the question this series is about.

IV. The incentive

The third stage attaches money to the number. The corporation did it in thirty years.

Milton Friedman’s 1970 essay is the usual starting point and it does not say what it is remembered as saying. He argued that a corporate executive’s responsibility runs to the owners and that the responsibility is to make money — while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. The clause is in the text and it is almost never in the quotation. Friedman said profits. Share price is nowhere in the piece.

Jensen and Meckling named the agency problem in 1976, and the problem was real: managers accountable to nobody in particular, building empires with other people’s capital. In 1990 Jensen and Murphy made it measurable, finding that the wealth of a typical chief executive moved by $3.25 for every thousand dollars of change in shareholder wealth, most of it from stock he already owned. Their conclusion was that the link was too weak. Their prescription was to make executives owners.

Three years later Congress agreed with them by accident. Section 162(m) of the Internal Revenue Code arrived as section 13211 of the Omnibus Budget Reconciliation Act of 1993, signed August 10, effective for taxable years beginning on or after January 1, 1994. It was written to restrain executive pay. It capped the corporate deduction at one million dollars per covered executive — unless the pay was performance-based, in which case it was fully deductible, and Congress built the machinery to certify it: outside directors to set the goals, a separate shareholder vote on the terms, a certification afterward that the goals had been met. Stock options qualified.

Look at what traveled. The purpose of the statute was to hold pay down; it is in the record and it went nowhere. The machinery was a line at a million dollars and a certification procedure, and it went everywhere — into option grants, plan documents, proxy statements, and compensation committee minutes at every large public company in the country. Same statute, same Congress, same year. The unconditional part moved and the conditional part stayed on the page.

Friedman’s ethical custom is the same shape, and so is Jensen’s own insistence, in 2001, that long-run firm value cannot be reached while ignoring employees, customers, or suppliers. Both were written down. Neither had anywhere to go. A caveat has no institutional carrier. A figure has a dozen.

V. What I cannot settle

I do not know whether the instrument caused the change or recorded it. American capital may have been going to concentrate on the share price for reasons owing nothing to any accounting system — the collapse of the postwar settlement, foreign competition, the takeover market, the arrival of the institutional investor — and the number may be the language the change spoke while the causes lay elsewhere. The corporate historians lean that way, and they supply mechanisms that need no Kuznets at all. I lean the other way on the 1993 statute alone, where the causation runs in a direction you can read in the Statutes at Large.

Nor is the aggregate blind to how people live. Jones and Klenow build a consumption-equivalent welfare measure out of consumption, leisure, mortality, and inequality, and across a broad sample it tracks GDP per capita at about 0.98. Where the number is high, people live longer and work fewer hours. Anyone arguing that the aggregate tells us nothing about human welfare is arguing against the evidence, and this essay does not make that argument. The claim here is narrower and survives the correlation intact: a good measure used without its condition is still a measure used without its condition.

VI. The warning, edited

On December 7, 1999, the Commerce Department reviewed a hundred years of its own work and named the national income and product accounts its achievement of the century. Which they may well have been. Nobody at the podium mentioned the warning the same department had printed and sold for twenty cents.

The warning did not survive intact either, and that is the part I find hardest to be smug about. The sentence has been quietly edited by the people who admire it most. Two statements written twenty-eight years apart, spliced into one quotation. Gross national product turned into gross domestic product inside the quotation marks. A written report turned into a warning delivered to Congress, then into testimony given before Congress, which never happened. Each step was taken in good faith by someone citing the person in front of him.

I include myself. I had him warning Congress in an earlier draft — a verb that turns a printed section heading into a man standing up and speaking — and I did not catch it until I went and read page 7.

VII. The rule you have never written down

The instrument is still running and you are inside it.

The claims adjuster knows which files can be settled from the desk and which one requires getting in the car and driving to the address, and could not tell you, if pressed, what in the file made the difference. You have the same thing in your own trade. You apply it correctly every time. You know when the standard figure is telling you something and when it has quietly stopped, and on that signal you go and get the other thing. Nobody has asked you to write it down. There is no procedure. On the day you leave, the discipline leaves with you and the figure stays.

That is not a story about one economist’s negligence. Kuznets held both halves at once and could operate both, and the demonstration he published is as good as demonstrations get. The sentence traveled without the discipline because the sentence could travel and the discipline could not.

Which is why this pattern keeps being invented rather than transmitted. It descends from no single source and needs no contagion to explain it. American school administrators found it a generation before Kuznets, running cost accounting and efficiency surveys on classrooms, having never heard of national income. Any enterprise of any size, given a number that summarizes it, will eventually be run off the number. It is a discovery available to anyone, and it has been made over and over by people who did not know it had been made before.

Return to the pressman. Page 7 sits two leaves inside a folded sheet, in a signature stamped 37265—34——2, in a book sold for twenty cents by the government that commissioned it. Everything in the warning survived. It was printed, bound, catalogued, and it is still on the shelf. Nothing about it stopped working. It simply had no way to get where the number went.

The instrument goes next to the place where the thing being counted is a child.

In October 1969, in a school district on the Texas–Arkansas line, a company began collecting eighty dollars every time one of them gained a grade level in reading.

*   *   *   *   *

Charles Cranston Jett is an author, civic educator, and Professional Certified Coach based in Chicago. A graduate of the U.S. Naval Academy (Class of 1964) and Harvard Business School, he served during the Cold War aboard the nuclear submarine USS Ray (SSN 653), where he developed the Geographic Plot, a contact-tracking method for submarine operations. He is the author of six books, including Super Nuke!, hosts four podcasts, and writes across his Critical Skills Blog platform on history, leadership, and the health of the American republic. In his writing he employs AI tools in a limited, supporting role for research, occasional image creation, and editing, while the prose and judgment remain entirely his own. He and his wife, Dr. Nancy Church, live at and co-host the Chicago Salons at the Water Tower Residences in Chicago.