This is the first of two essays addressing questions raised by readers about my recent post, “Real-World Trade-Deficit Math-Magic.” That piece revolved around three interlocking equations, loaded with explanatory power about the relationships between a nation’s public, private, and international sectors. These equations emerged from the National Income and Product Accounts (NIPA)—the first system ever developed to measure the size of a national economy and of its component sectors. Today, we review the NIPAs’ origins, their role in winning World War II, and their down-to-earth nature. We’ll visit the economist who oversaw their creation; plus a 13th-century merchant who used similar methods on his business; and a 15th-century priest who invented modern business accounting (as well as collaborating with Leonardo da Vinci and pioneering aspects of card tricks, juggling, and fire-eating). In a few days, the second essay will use two small towns and two crops to make the three equations more comprehensible and intuitive and to illustrate some fallacies in today’s debates over America’s economy and its place in the world.

THERE WERE TWO MANHATTAN PROJECTS?

While physicist Robert Oppenheimer and his colleagues raced to develop the atomic bomb, economist Simon Kuznets and his colleagues raced to develop the National Income and Product Accounts (NIPA)—analytical tools to bring the full weight of the American economy down upon the heads of Tojo, Hitler, and Mussolini. Development of the A-bomb began at the Army’s Manhattan Engineering District at 270 Broadway (hence, the name, “Manhattan Project”). Development of the NIPA began four miles north, at the National Bureau of Economic Research at 1819 Broadway. Both were applied engineering projects, not arcane exercises in rarefied theory. Both involved coordinated efforts across multiple institutions.

In the end, Oppenheimer gave us history’s first atomic weapon, and Kuznets gave us history’s first means of calculating the size and composition of a national economy. As for their relative importance, allow me to offer a provocative debate topic:

Arguing the affirmative: Trinity Site, Hiroshima, and Nagasaki accelerated the end of WWII, but Japan was already on its last legs, and Germany and Italy had been crushed. But earlier in the war, there were many points at which the Allies could have lost, and at each juncture, the NIPA gave our war planners a powerful physical advantage over their Axis counterparts.

In a few days, a second essay will dig into the NIPAs’ mathematics of trade, finance, production, and government. We’ll do so by creating a world of two towns and two crops which will help us understand what our three equations say about a real world with hundreds of countries, millions of products, billions of people, and trillions of transactions. With the current battles over tariffs, trade, private production, and the federal budget, an understanding of these three little equations can make you smarter than the vast majority of policymakers at the White House or on Capitol Hill.

WHAT ARE THE THREE EQUATIONS, AND WHO CARES?

Since the second essay will revolve around crops, above the equations are shown in needlepoint, framed and hanging on the Victorian wallpaper of an old farmhouse. From top to bottom, they represent:

• The Expenditure Approach to Gross Domestic Product (GDP). Every dollar of national income goes toward either consumption or saving or taxes.

• The Income Approach to GDP. Every dollar of national income comes from either consumption or investment or government or exports (with imports subtracted to avoid double-counting).

• The Balance of Payments Identity. Net inflows of foreign capital yield an equal balance of payments deficit, whereas net outflows of capital yield balance of payments surpluses.

These three equations are collectively known as the National Income Accounting Identities and they were natural extensions of the NIPA. They comprise an alarm system to tell policymakers and voters when their goals and policies and analyses are veering into the illogical and impossible.

When President Trump promises to spur net inflows of capital from foreign investors and promises to reduce the nation’s deficit of trade in goods and services, the third equation says he is promising to accomplish two things cannot happen simultaneously. (This assumes I am correctly interpreting his twin promises.) This incompatibility of his twin promises isn’t theory or speculation or opinion or pointy-headed academic sophistry. Kuznets and his colleagues applied simple arithmetic and longstanding accounting principles to well-organized, real-world data and revealed surprising truths. No president can command these mathematical relationships to go away any more than King Canute could command the tides to recede before his throne. The equation doesn’t care if a president is a skilled negotiator.

For me, that third identity, (X-M)=(S-I)+(T-G), is the closest thing economics has to E=mc²—a simple formula, packed with worlds of insight, and utterly nonintuitive.

WHAT’S THE ORIGIN STORY OF THESE THREE EQUATIONS?

The NIPA emerged from America’s titanic struggle with the Great Depression and existential war against Nazi Germany, Fascist Italy, and Militarist Japan.

Before the NIPA, if someone asked, “How big is the U.S. economy?” the most scientific answer would have been, “I dunno. Pretty durned big, I guess.” With the NIPA, one could say, “Gross Domestic Product (GDP) was $228 billion in 1945.” You could add that nearly 50% of that was government spending, around 45% was personal consumption expenditures, 7%-9% was agriculture, 45%-50% was industrial, 40%-50% was services (as opposed to goods). Digging deeper, you could learn that America that year spent $6.5b on electricity, $3.56b on steel, $1.2b on fruit, and $15b on airplanes. The NIPA gave America’s war planners comprehensive knowledge of which resources they did and did not have. In contrast, Japan, Germany, and Italy had fragmented, low-quality, ideologically driven statistics—leaving their leaders fumbling in the dark. (The one exception was that Nazi Germany effectively used state-of-the-art computer technology to count and track down Jews.)

Someone said that pre-NIPA economic management was like trying to drive a car with no speedometer, fuel gauge, or odometer. The NIPA systematized America’s wartime rationing, bond drives, manpower recruitment, scrap metal drives, fuel allocation, crop production, industrial planning, and far more. The Axis Powers winged it on old-school intuition and guesswork—falling further behind with each passing day. Without the NIPA, the effort to develop the atomic bomb itself might well have slowed or failed, as Oppenheimer could well have faced resource inefficiencies—too much steel, not enough uranium, the wrong kinds of craftsmen, delays in deliveries, unreliable electricity.

Today, the idea of GDP is second nature in any discussion of the economy—a term familiar to humble folk in the street. Before Kuznets, there was no such concept—in academe or anywhere else. GDP, by and large, was his invention. It was this metric and its sub-components that allowed America’s war planners ask, with great precision, “How much s*** can we afford to throw at the Nazis and still have food to put on the table back home?”

SO THESE IDEAS BEGAN WITH THE DEPRESSION AND WWII?

Naaah—the NIPA merely extended accounting principles, developed in the Middle Ages, from the firm to entire economies and then developed practical survey techniques for gathering data. The central feature of accountancy and of the NIPA is double-entry bookkeeping, where every expenditure in one account must also appear as a receipt in another account. This serves to minimize errors and logical fallacies. The earliest extant example of double-entry bookkeeping is found in the 13th century ledgers of Amatino Manucci, a Florentine merchant living in Nîmes (Provence). The principles of double-entry accountancy were systematized in the 1400s by mathematician and Franciscan friar Luca Pacioli, who said, “A person should not go to sleep at night until debits equal credits.” Pacioli’s implorement was what Kuznets and friends brought to macroeconomics. (BTW, Pacioli also collaborated with Leonardo da Vinci on the Golden Ratio, made the first known reference to card tricks, revealed to the world that Leonardo was left-handed, offered practical advice on juggling and fire-eating, and was a key figure in the origin of mathematical puzzles.)

Before the NIPA, economic analysis at the national level was little more than spotty, inconsistent statistics, undergirded by flawed intuition and guesswork. Double-entry methodology brought two great gifts to macroeconomic knowledge. First, in an economy of trillions of transactions, the NIPA suggested coherent taxonomies of activity—consumption versus investment, public versus private, foreign versus domestic, agriculture versus industry, etc. Second, the NIPA made the collection of micro-level data manageable and meaningful.

OPPENHEIMER GOT A BIOPIC, SO HOW ABOUT KUZNETS?

I believe the film industry only allows one biopic about an economist every forty or fifty years, and the John Nash biopic, A Beautiful Mind, was released in 2001. (Albert Hirschmann is a dashing French Resistance fighter in the TV series Transatlantic, but he’s only one of a number of characters.) As a feature film, Kuznets would have several disadvantages when compared to Oppenheimer.

• Paper spreadsheets are not as visually compelling as mushroom clouds.

• Kuznets seems to have led a more sedate private life than Oppenheimer. And Kuznets’s private life was far more private than Oppenheimer’s endless domestic dramas.

• Kuznets spent the war in and around Washington, Philadelphia, and New York, which offer less dramatic visuals than Oppenheimer’s stark New Mexico grandeur.

• One can find a great number of interesting quotes by Kuznets, but probably none as mystical and cinematically compelling as Oppenheimer’s “Now I am become Death, the destroyer of worlds.”

Communism would play a role in any screenplay about either Oppenheimer or Kuznets, but in vastly different ways. Though not a Communist himself, Oppenheimer was an adherent of leftist causes and had numerous connections with American Communists. These ties brought much suspicion down upon him and partially derailed his career. Kuznets was born in Ukraine in 1901 and experienced the turmoil of Communism firsthand—departing for America amid the turmoil that followed the Russian Revolution. He mostly stayed away from politics, but his experience in post-revolutionary Russia made him deeply suspicious of central planning and central planners.

Kuznets was outwardly modest about his work and creations. He warned against interpreting GDP as a measure of national well-being:

• “The welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GDP.”

• “Distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long term. Goals for more growth should specify more growth of what and for what.”

And he could be modest about his own writings:

• “[My research] paper is perhaps 5 per cent empirical information and 95 per cent speculation, some of it possibly tainted by wishful thinking.”

One of my favorite Kuznets quotes is a sort of upbeat version of George Santayana’s, “Those who cannot remember the past are condemned to repeat it.” Kuznets’s take was:

• “The most meaningful way to forge a prosperous future is to understand and measure the past.”

And that statement summarizes the life’s work of Simon Kuznets. He borrowed the ancient double-entry bookkeeping techniques of Amatino Manucci and Luca Pacioli and, figuratively speaking, didn’t go to bed at night until the entire nation’s debits and credits were equal.

In the next essay, we’ll build two little towns to illustrate the NIPAs’ insights.

THE ACHIEVEMENTS OF SIMON KUZNETS IN 91 SECONDS

BASTIAT’S WINDOW publisher Robert F. Graboyes is an economist, journalist, and musician whose five degrees include a PhD in economics from Columbia University. An award-winning professor, he received the Reason Foundation’s 2014 Bastiat Prize for Journalism. His musical compositions are on YouTube.