The Nobel Series: Father of national income accounting

The Nobel Prize in Economic Sciences for the year 1984 was awarded to Sir Richard Stone for his work on national accounts. At the time of getting the award, Sir Stone was at Cambridge University, United Kingdom. As the Nobel website says, the award was given for:

Having made fundamental contributions to the development of systems of national accounts and hence, greatly improving the basis for empirical economic analysis.

Stone studied law at Cambridge for two years from 1931, before he shifted to economics. His early teachers were Colin Clark and Richard Kahn. He graduated from Cambridge in 1935 and then worked for Lloyds in London. In his written account for The Nobel Prize 1984, he explained his switching from law to economics in these terms:

At that time the world was in the depth of the Great Depression and my motive for wanting to change subject was the belief, bred of youthful ignorance and optimism, that if only economics were better understood, the world would be a better place

During the War years, Stone ran into James Meade, another statistician and a trade economist, and worked with him as a statistician. Together, they developed the first version of the system of national accounts, which led to the UK's first National Accounts in 1941. After this, Stone became an assistant to Keynes at the Central Statistical Office. He joined Cambridge in the Department of Applied Economics after the War in 1945 as a faculty and focussed his research on statistical methods and national accounts. In 1955, he began the Cambridge Growth Project which developed a model of the British economy. In 1970, Stone became the Chairman of the Economics and Politics Faculty at Cambridge. Stone is generally called the father of national income accounting for his contributions.

In this article, we will review the major works of Richard Stone and their applications in public policy.

Main works of Richard Stone

Much like other economists of his time, Stone grew up during the Great Depression, and in his early years, he witnessed the War. As we saw above, Stone was not only influenced by Keynes' works but was also his statistical assistant. Since accounting and balance sheets involve a lot of work on statistics and methodology, Stone did a lot of innovative work in econometrics too. However, Stone is best known for his work on national accounts. As the Nobel website tells us:

Stone's ideas on the design of the national accounts initially (1940) concentrated on obtaining full integration of the accounts of a nation for the different sub-sectors which together represented the nation's entire application of its resources. Each item of revenue or expenditure on one side of an account should reappear as expenditure or revenue, respectively, in another account. By means of such an integrated system of accounts – thus covering household income and outlays, the disbursements of the business sector (such as of wages) and revenues for national savings and investments, the expenditures and revenues of the public sector, and, finally, payment balances towards the outside world – a picture was obtained of the interplay and interdependence of the entire economic system. This double-entry bookkeeping provided, and this was significant, a means of cross-checking the statistics for the large number of transactions. Figures from different sources had to agree. Stone had to pursue very extensive statistical research in order to satisfy the requirements of the national accounts for empirical contents.

It may be recalled that Keynes's work was not limited to the macroeconomic theory of aggregate demand and aggregate supply. While at the Treasury, he was also involved in the methodology to balance the supply side and the demand side for the War-financing. In this work, Keynes was assisted by James Meade (Nobel winner in 1977) and Richard Stone. Stone's work on national accounts arose out of his work at the Treasury.

Hence, Stone's major works can be enumerated as follows:

 Double-entry accounting: This was Stone's unique and innovative contribution. This requires that every income item on one side of the balance sheet has to meet with an expenditure item on the other side. This brought about uniformity in national accounts all across the world and greatly helped in policymaking and comparative analysis in social sciences

 Econometric modelling: Stone developed a macroeconometric model of the British economy as we saw above. In 1962, he co-authored the book 'A Computable Model of Economic Growth' with Alan Swan, which became the foundation of the Cambridge Growth Project.

 Consumer behaviour: He used data on consumer expenditures, incomes, and prices to model consumer demand and utility functions.

Stone's double-entry accounting was not a mechanical accounting exercise but rather based on sound economic theory — more specifically, the Keynesian theoretical framework underpinned Stone's work.

Applications of Stone's works

The earliest application of Stone's work was in the preparation of the first official estimates of British national income and expenditure in 1941. Later, in the 1950s, he offered the first concrete statistical means by which to measure investment, government spending, and consumption, which became a type of national bookkeeping system. His methods were adopted by international agencies such as the UN, IMF and the World Bank in due course, as we will see below. He was co-author (with JE Meade) of 'National Income and Expenditure' (1944; 10th edition, with Giovanna Stone, 1977) and author of several other works including 'Input-Output and National Accounts' (1961), 'Mathematics in the Social Sciences and Other Essays' (1966), and 'Mathematical Models of the Economy and Other Essays' (1970). He was also the general editor and part author of the series 'A Programme for Growth' (1962–74).

Stone's work was applied at the UN, as noted above. This was preceded by the report of a committee headed by Stone, which prepared standardized forms for national accounts which could be recommended for international use. This also helped in comparative economic analysis.

In the 1960s and thereafter, Stone applied his earlier works in other social, economic and demographic policies. He incorporated these aspects into the system of national accounts. Early research in this direction was undertaken at King's College Research Centre and appeared in 'Towards a System of Social and Demographic Statistics' published by the United Nations in 1975.

In the 'Cambridge Growth Project', Stone suggested extension to more complex fields of economic activity such as education and training, labour issues and demographics. In his words:

We believe that the main motive forces of economic growth are to be found in human abilities and attitudes: organising capacity, acceptance of education and training, response to innovation, labour mobility, and so on. However, we could hardly have begun with these indefinite and on the whole badly documented areas of interest; and in any case, it would have been useless to do so until we could embody them in a coherent picture of the socio-economic system. So naturally enough, we decided to build out from the familiar and to use our working experience as the starting point for our work' [097, p. 84].

Stone also used the input-output model in the double-entry national accounts proposed by him. He also used this integrated framework for the analysis of various social and economic policies such as education, environment etc. In 'A Model of the Educational System', Stone included education and manpower in the growth model developed at Cambridge.

Again, Stone proposed his accounting framework in demographics. In his paper, 'Input-Output and Demographic Accounting: A Tool for Educational Planning', the usual input-output matrices present stages of individuals' lives in rows and columns. The categories, rather than industries and products, are age-groups and occupations. Extending his work on demographics in the paper 'An Example of Demographic Accounting: The School Ages', Stone (with co-authors Giovanna Stone and Jane Gunton) points out:

Demographic, educational and manpower statistics are usually treated as three separate subsystems in the statistical universe. Here, an effort is made to connect them, and to do it in such a way so as to enable us to trace through time the gradual transformation of human stocks and flows.

Stone applied his framework along with input-output techniques to the issue of environmental problems and policy. The first paper on the subject, 'The Evaluation of Pollution: Balancing Gains and Losses' discussed the issue of environmental sustainability. Stone suggested ways to sustain the costs of reducing pollution within the productive process and emphasized that the negative externalities arising out of pollution can be incorporated into national and social accounts.

Conclusion

Stone's contributions in double-entry accounting have enabled a systematic organization of national accounts across the world. The fact that his works were adopted by the UN, World Bank and IMF speaks highly of the quality of his works. Thanks to the more systematic accounts, that the economic policy at a national and international

level could be formulated with more facts and more objectivity. Moreover, a comparative analysis was also made easier and more scientific because of the common basis of the statistics.

In addition, Richard Stone contributed to economics in a large number of fields such as econometrics, consumer behaviour and input-output analysis. He pushed forward the limits of applied research. Many of his works were also possible because of the development of computers. Presenting the advantages of computer modelling in economics, Stone provided a simple description of a 'toy model' of the economic system, which was the basis of his Cambridge model.

The writer is an IAS officer, working as Principal Resident Commissioner, Government of West Bengal.

Views expressed are personal