The Review of Austrian Economics, 17:4, 387–405, 2004.
2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
National Income Accounting and Public Policy
RANDALL G. HOLCOMBE email@example.com
Department of Economics, Florida State University, Tallahassee, Florida 32306
Abstract. Modern national income accounting was designed in the early 20th century for the purpose of providing
improved indicators about the performance of the economy so that government policy makers could better control
the economy. The way that performance is measured affects the types of policies used to try to accomplish
policy goals. Two attributes of national income accounting are analyzed for their effects on economic policy.
First, government production is included in the national income accounts at cost, rather than at market value as
private sector output is measured. This biases policy toward a larger public sector. Second, output is measured as
a homogeneous dollar amount. This biases policy toward focusing on increasing quantities of inputs and outputs
in the production process, rather than on innovation and entrepreneurship, which are the true engines of economic
progress. Economic policy could be improved by focusing less on national income as an indicator of policy, and
more on the underlying processes that foster economic progress.
KeyWords: national income accounting, macroeconomic policy, public ﬁnance
JEL classiﬁcation: E6.
The unprecedented worldwide economic progress in the nineteenth century was led by the
United States, which began the century as an agrarian economy and ended it as the world’s
industrial leader. Nineteenth century economic progress was not without its setbacks, how-
ever. Big economic issues toward the end of the nineteenth century included the growing
concentration of economic power among a few individuals, monetary standards and bank
credit, and banking panics and the increasingly severe economic downturns that periodi-
cally plagued the economy. By the early twentieth century, national economic policy had
addressed these issues in several ways. Antitrust laws, beginning with the Sherman Act
in 1890, were enacted and being enforced; various segments of the economy, from trans-
portation to food and drugs, were being increasingly regulated; and the Federal Reserve
Act, passed in 1913, created monetary institutions that began a substantial transformation
of the nation’s monetary system. Still, economists and government policy makers thought
that more could be done to effectively manage the economy. Economists were actively
engaged in business cycle research with the hope of designing policies that could dampen
the increasingly violent economic ﬂuctuations, and principles of scientiﬁc management,
which had spilled over from the private sector into government early in the twentieth cen-
tury, suggested some promise that the macroeconomy could also be managed if effective
policies could be designed. However, there was widespread agreement that more effective
management of the economy would require better methods for measuring and assessing
economic performance. Thus, a system of national income accounting was designed in the
1920s to better measure the performance of the economy, but with the signiﬁcant secondary