Book Review: The Power of a Single Number
Reviewed by Ian Robertson, CFA
“Gross domestic product (GDP) is the most powerful statistical figure in human history. No other indicator has ever had such an impact. At first glance, GDP is simply the measure of a country’s economic output, the value of all goods and services produced in a specific period, expressed as a number. However, GDP is far more than a mere statistic. Together with growth, which describes its rate of change, GDP serves as the key indicator of development and progress.”
Following this succinct and enticing opening paragraph of The Power of a Single Number: A Political History of GDP, Philipp Lepenies, visiting professor of comparative politics at Berlin’s Freie Universität, sets out to answer three questions:
- How and why did we arrive at this numerical measure of progress?
- What is the impact of its use?
- Where might we go from here?
The third question will be of the most interest to financial analysts and portfolio managers, especially those who invest with very long time horizons or who integrate environmental, social, and governance (ESG) factors into their analyses. It is a question best answered, however, after examining Lepenies’s excellent work answering the first and second questions. As with many other areas of the CFA® Program curriculum, analysts can best reach their own conclusions by first understanding the framework and foundations of the continued evolution of GDP in governments’ economic and political calculus.
The book’s early chapters trace the historic contributions of three major figures — William Petty, Colin Clark, and Simon Kuznets — to the idea and the methodological rigor of GDP. Petty (1620–1687) worked toward a “precise knowledge of [England’s] social and economic conditions,” including the “first systematic calculation of national income.” He theorized that his “Political Arithmetic” could be used to estimate the potential tax base of the population and to maximize its contribution to England’s military power. Two centuries later, Clark proposed the three methods that are still used to calculate national income: “from the production side, the income side, and the expenditure side.” He used a precursor of today’s purchasing power parity to compare the results among countries and to demonstrate changes in employment within countries as they shifted from agricultural to manufacturing to service economies. Kuznets worked contemporaneously with Clark but in the United States. He posited that population growth could play an important role in GDP growth, and despite his considerable refinement of the calculation of GDP, he cautioned against misinterpreting the results because the inputs were what could be measured rather than what should be measured.
Within a few short years during the Great Depression, national income became a political touchstone, and it has since been adopted by politicians around the world, even though their underlying economic orthodoxy and social policies differ. What does it mean to a company’s long-term growth prospects when US politicians focus more on GDP growth than on social welfare or when Scandinavian politicians strike a considerably different balance? The differences may mask hidden challenges for companies, including access to skilled labor, political stability, and social unrest — factors that must be considered by long-term investors.
It is the GDP inputs that should be measured but are not that are of growing importance to financial analysts and portfolio managers. Those inputs include the cost of such externalities as pollutants and carbon; the depletion of natural resources, including water; and the contribution of uncounted domestic work. These are the macro environmental and social factors that analysts who use “ESG integration” are increasingly including in their valuation models — analysts for whom The Power of a Single Number will be helpful in two ways.
First, analysts who value individual stocks must work within an inchoate system of reporting in which environmental and social information is nonstandardized, regardless of whether it comes directly from the company, from a third-party provider, or from a government or regulatory body. To that end, the long political history of GDP provides valuable context as efforts to standardize reporting unfold, such as those led in the United States by the Sustainability Accounting Standards Board (SASB) and internationally by the Global Reporting Initiative (GRI).
Second, long-term asset owners, such as large pension plans, will find the book’s historical perspective useful as they consider the possibility of a more expansive definition of GDP. For example, inclusion of environmental and social metrics in GDP could alter growth rate assumptions for some countries, with concomitant implications for pension plans’ asset allocations and discount rates.
In the book’s concluding chapter, Lepenies writes of “current international efforts to establish a separate statistical measurement of society’s welfare, parallel to or even in place of GDP.” He notes that such work is underway in several countries, including the United States, Canada, Italy, Germany, and France, and is being carried out internationally by the OECD, the World Bank, the UN, and the EU. That work is in addition to the reporting standardization efforts of the SASB and GRI, as noted earlier. It would have been helpful had this material been included in the book. That, however, is a minor quibble that highlights the narrative strength of the chapters on GDP’s historical framework and the relative brevity of the conclusion.
Originally published in French in 2013 and recently translated, The Power of a Single Number delivers a welcome history and context for an evolving area of economic measurement that can potentially provide a competitive edge for forward-thinking analysts, portfolio managers, and corporate strategists.
Ian Robertson, CFA, is a portfolio manager, director, and vice president at Odlum Brown Limited, Vancouver, British Columbia.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.