Tag: happiness

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Should countries target GDP growth?

A key economic objective of governments around the world is economic growth, where economic growth is taken to mean growth in Gross Domestic Product (GDP). This can be refined as growth in GDP per head or growth in Net National Income (NNY or NNI) – this takes account of depreciation and net flows of income to and from abroad. But is GDP (or NNY) an appropriate measure? There continues to be much debate about this and there is a lot of support for adopting an alternative measure – the Genuine Progress Indicator (GPI) as a target for economic policy.

GDP measures the market value of production and is the value added at each stage of production. If the value of a nation’s production is what you want to measure or target, then GDP is quite a good indicator. Its main drawbacks are that it uses market prices, which may be distorted, and that much of production in the informal sector is not included.

But if GDP growth is taken to be a proxy for development or growth in wellbeing of the residents of a country, then it has serious shortcomings. This is not to say that GDP gives no indication of progress. Generally, countries with higher GDP per head have a better standard of living, but it is not necessarily the case that, if Country A has higher production in the formal sector than Country B, its residents will be happier, more fulfilled and have fewer economic or other problems.

GDP, by focusing on production, ignores many environmental and social costs of that production. Valuable but not tradable resources, such as clean air, rivers and oceans, may be sacrificed for the sake of extra production and this is recorded as a gain in GDP.

Similarly, unless GDP is specifically weighted by income groups, which virtually never happens, it does not take into account income distribution. Much of the growth in production in both rich and poor countries in recent decades has gone to the richest people. Take the case of the USA. In 1944 the share of income going to the top 1% share was 11.3%, while the bottom 90% were receiving 67.5%. Such levels remained roughly constant for the next three decades. But then things began to change.

Starting in the mid- to late 1970s, the uppermost tier’s income share began rising dramatically, while that of the bottom 90% started to fall. The top 1% took heavy hits from the dot-com crash and the Great Recession but recovered fairly quickly: [preliminary estimates for 2012 by Emmanuel Saez] have that group receiving nearly 22.5% of all pre-tax income, while the bottom 90%’s share is below 50% for the first time ever (49.6%, to be precise).

So what does GPI measure and why may it be a better target for policy-makers than GDP or NNY? The answer is that it includes a number of important items that affect the well-being of a country, such as resource depletion, social activity and income distribution, that are not measured in GDP. So what would cause GPI to rise? According to The Guardian article below, examples would include:

Getting more energy from renewables; increased energy efficiency; reducing the income gap; putting more reliable, durable products on the market (have you heard of planned obsolescence?); volunteering more for your community; preserving wetlands, forests, and farmland; shorter commutes and transport routes. In fact, there are 26 ways the GPI can go up, all measured in dollars that boil down to a single number.

GPI is being increasingly adopted as a measure of progress. In the USA, it is officially used in Vermont and Maryland and is being considered in other states, such as Hawaii, Washington and Oregon.

And there are other alternatives. For example, since 1990, the United Nations Development Programme (UNDP) has published an annual Human Development Index (HDI) As Box 27.1 in Economics, 8th edition states:

HDI is the average of three indices based on three sets of variables: (i) life expectancy at birth, (ii) education (a weighted average of (a) the mean years that a 25-year-old person or older has spent in school and (b) the number of years of schooling that a 5-year-old child is expected to have over their lifetime) and (iii) real GNY per capita, measured in US dollars at purchasing-power parity exchange rates.

The following articles look at the suitability of GDP and GPI and whether, by targeting growth in GDP, governments are guilty of downplaying the importance of other economic and social objectives.

Beyond GDP: US states have adopted genuine progress indicators The Guardian, Marta Ceroni (23/9/14)
Forget the GDP. Some States Have Found a Better Way to Measure Our Progress. New Republic, Lew Daly and Sean McElwee (3/2/14)
Gross domestic problem Aljazeera, Sean McElwee (6/6/14)
Creating the Circular Economy, Part II Environmental Leader, David Dornfeld (17/9/14)
Development: Time to leave GDP behind Nature, Robert Costanza, Ida Kubiszewski, Enrico Giovannini, Hunter Lovins, Jacqueline McGlade, Kate E. Pickett, Kristín Vala Ragnarsdóttir, Debra Roberts, Roberto De Vogli and Richard Wilkinson (15/1/14)
The Problems With Using GPI Rather Than GDP Forbes, Tim Worstall (5/6/14)

Questions

  1. What does GDP measure?
  2. Does GDP of a country equate to the turnover of a firm?
  3. If growth in NNY is superior to growth in GDP as a measure of economic growth, why are GDP figures more generally used than NNY figures when assessing a country’s economic performance?
  4. How suitable is using GDP as a measure of a nation’s production?
  5. What does GPI measure?
  6. Is GPI superior to GDP as a measure of a nation’s level of development? Explain why or why not.
  7. Give some examples of where a growth in GDP might correspond to a decline in economic well-being.
  8. For what reasons could GPI measures be described as subjective?
  9. Would it be a good idea for a country to target growth in GPI/GDP? Explain your answer.
  10. In addition to real GNY per capita, the Human Development Index includes measures of education and life expectancy. For what other social objectives might education and life expectancy be useful proxies?
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Time to leave GDP behind?

GDP is still the most frequently used indicator of a country’s development. When governments target economic growth as a key goal, it is growth in GDP to which they are referring. And they often make the assumption that growth in GDP is a proxy for growth in well-being. But is it time to leave GDP behind as the main indicator of national economic success? This is the question posed in the first of the linked articles below, from the prestigious science journal Nature.

As the article states:

Robert F. Kennedy once said that a country’s gross domestic product (GDP) measures “everything except that which makes life worthwhile”. The metric was developed in the 1930s and 1940s amid the upheaval of the Great Depression and global war. Even before the United Nations began requiring countries to collect data to report national GDP, Simon Kuznets, the metric’s chief architect, had warned against equating its growth with well-being.

GDP measures mainly market transactions. It ignores social costs, environmental impacts and income inequality. If a business used GDP-style accounting, it would aim to maximize gross revenue — even at the expense of profitability, efficiency, sustainability or flexibility. That is hardly smart or sustainable (think Enron). Yet since the end of the Second World War, promoting GDP growth has remained the primary national policy goal in almost every country

So what could replace GDP, or be considered alongside GDP? Should we try to measure happiness? After all, behavioural scientists are getting much better at understanding and measuring the psychology of human well-being (see the blog posts Money can’t buy me love and Happiness economics).

Or should we focus primarily on long-term issues of the sustainability of development? Or should we focus more on the distribution of income or well-being in a world that is becoming increasingly unequal?

Or should measures of well-being involve weighted composite indices involving things such as life-expectancy, education, housing, democratic engagement, leisure time, social mobility, etc. And, if so, how should the weightings of the different indicators be determined? The United Nations Development Programme (UNDP) produces annual Human Development Reports, where countries are ranked according to a Human Development Index. As the UNDP site states:

The breakthrough for the HDI was the creation of a single statistic which was to serve as a frame of reference for both social and economic development. The HDI sets a minimum and a maximum for each dimension, called goalposts, and then shows where each country stands in relation to these goalposts, expressed as a value between 0 and 1.

HDI is a composite of three sets of indicators: education, life expectancy and income (see). The UNDP since 2010 has also produced an Inequality-adjusted HDI (IHDI).

The IHDI will be equal to the HDI value when there is no inequality, but falls below the HDI value as inequality rises. The difference between the HDI and the IHDI represents the ‘loss’ in potential human development due to inequality and can be expressed as a percentage.

You can now build your own HDI for each country on the UNDP site by selecting from the following indicators: health, education, income, inequality, poverty and gender.

The Nature article considers a number of measures of progress and considers their relative merits. The other articles also look at measuring national progress and well-being and at the relationship between income per head and happiness. It is clear that focusing on GDP alone provides too simplistic an approach to measuring development.

Development: Time to leave GDP behind Nature, Robert Costanza, Ida Kubiszewski, Enrico Giovannini, Hunter Lovins, Jacqueline McGlade, Kate E. Pickett, Kristín Vala Ragnarsdóttir, Debra Roberts, Roberto De Vogli and Richard Wilkinson (15/1/14)
The happiness agenda makes for miserable policy The Conversation, Daniel Sage (9/1/14)
Economic view: No matter what the politicians say, GDP is a distorted guide to economic performance and a bad way to measure prosperity Independent, Guy Hands (28/1/14)
Buy buy love The Economist (22/6/13)
Experts confirm that money does buy happiness – but only up to £22,100 Independent, Jamie Merrill (28/11/13)
Can Money Buy Happiness? Scientific American, Sonja Lyubomirsky (10/8/10)
Money can buy happiness The Economist (2/5/13)
Money can buy happiness Hacker News, pyduan (13/1/14)
Can ‘happiness economics’ provide a new framework for development? The Guardian, Christian Kroll (3/9/13)
The 10 Things Economics Can Tell Us About Happiness The Atlantic, Derek Thompson (31/5/12)
Financial crisis hits happiness levels BBC News (3/11/13)
Happiness study finds that UK is passing point of peak life satisfaction The Guardian, Larry Elliott (27/11/13)
How GDP became the figure everyone wanted to watch BBC News, Peter Day (16/4/14)
Economic development can only buy happiness up to a ‘sweet spot’ of $36,000 GDP per person Science Daily (27/11/13)

Questions

  1. What does GDP measure?
  2. How suitable a measure of economic progress is growth in GDP?
  3. How can GDP be adjusted to make it a more suitable measure of economic progress?
  4. What are the advantages of using composite indicators of well-being?
  5. What difficulties are there in measuring well-being using composite indicators?
  6. Assuming there were no measurement problems, what indicators would you include in devising the optimum composite indicator of well-being?
  7. Can money buy happiness?
  8. Why do life satisfaction levels peak at around $36,000 (adjusted for Purchasing Power Parity (PPP))?
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Money can’t buy me love

Australia is a rich country. It is one of the few to have avoided a recession. This has been the result partly of successful macroeconomic policies, but largely of the huge mining boom, with Australia exporting minerals to China and other fast growing Asian economies.

But has this growth brought happiness? Are Australians having to work harder and harder to pay for their high standard of living? Indeed, do higher incomes generally result in greater happiness? The following articles explore this issue, both in an Australian context and more broadly. They look at some recent evidence.

For example, in one study, Canadian, Chinese, Indian, and Japanese university students were asked what they held to be most important for assessing the worth of their lives. The crucial finding was that although higher incomes may be a contributing factor to increased happiness and well-being, especially for poorer people, other factors are more important. These include developing fulfilling personal relationships, whether with partners, family members or friends; gaining knowledge and wisdom; having enjoyable hobbies; having financial security (as opposed to higher incomes); having a worthwhile career; living a moral life; helping other people.

The question then arises whether our economic systems and incentives are geared towards achieving these outcomes. Or are we encouraged to consume more and more and to seek higher and higher incomes to feed our addiction to consumption?

Is there an information problem here? Do many individuals perceive that money will buy them happiness, whereas, in reality, money can’t buy them love?

Articles

Australia: Where the good life comes at a price BBC News Magazine, Madeleine Morris (24/2/13)
Australia has the know-how to boost wellbeing Sydney Morning Herald, Matt Wade (8/9/12)
Money can’t buy you the good life Independent, Roger Dobson (24/2/13)
The 10 Things Economics Can Tell Us About Happiness The Atlantic, Derek Thompson (31/5/12)
Yes, Money Does Buy Happiness: 6 Lessons from the Newest Research on Income and Well-Being The Atlantic, Derek Thompson (10/1/13)
The fact is, the richer you are, the happier you are The Telegraph, Allister Heath (5/2/13)
Money buys happiness? I wouldn’t bank on it The Telegraph, Christopher Howse (6/2/13)
Who Says Wealth Doesn’t Buy Happiness? The Wealthy Do CNBC, Robert Frank (4/2/13)
More Proof That Money Can’t Buy Happiness Business Insider, Aimee Groth (28/1/13)
Money Changes Everything The New York Times, Adam Davidson (5/2/13)
Why are the Chinese so sad? Maclean’s (Canada), Mitch Moxley (4/2/13)

Reports

First World Happiness Report Launched at the United Nations The Earth Institute, Columbia University (2/4/12)
World Happiness Report The Earth Institute, Columbia University, John Helliwell, Richard Layard and Jeffrey Sachs (eds.) (2/4/12)
Well-being evidence for policy: A review New Economics Foundation, Laura Stoll, Juliet Michaelson and Charles Seaford (3/4/12)

Questions

  1. Distinguish between necessary and sufficient conditions. Is higher income a necessary or sufficient condition (or both or neither) for an increase in happiness? Does a person’s circumstances affect the answer to this question?
  2. Explain what is meant by ‘rational behaviour’ at the margin in the traditional economic sense?
  3. If a person always behaved rationally, would they be happier than if they did not? Explain.
  4. Explain how information asymmetry between the two or more parties involved in a transaction may make people worse off, rather than better off, even though they were behaving rationally.
  5. Explain what is meant by diminishing returns to income.Do richer countries get happier as they get richer?
  6. How would you set about measuring happiness?
  7. What do you understand by the term ‘hedonic elevation and decline’? Does this provide an accurate description of you own purchasing behaviour? If so, explain whether or not you would like to change this behaviour.
  8. When people make economic decisions, these are normally made with bounded rationality. How may this affect the desirability of the outcomes of the decisions?
  9. In explaining bankers’ behaviour, Christopher Howse (author of the second Telegraph article above) states: ‘It’s the power game that keeps them happy, not the money itself. When I say “keeps them happy” I mean “feeds their addiction”. It is a negative kind of satisfaction. A morning spent without the distraction of making big bucks is a morning left exposed to the empty horror of being a little rational animal on the bare surface of the Earth lost in space.’ Do you agree? Explain why or why not.
  10. When people are addicted to something, would doing more of it be classed as irrational? Explain.
  11. Why are the Chinese so sad?
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Happiness economics

Economics studies scarcity and the allocation of resources. Central to societies’ economic objectives is the reduction in scarcity and central to that is economic growth. Certainly, economic growth is a major objective of all governments. They know that they will be judged by their record on economic growth.

But what do we mean by economic growth? The normal measure is growth in GDP. But does GDP measure how much a society benefits? Many people argue that GDP is a poor proxy for social benefit and that a new method of establishing the level of human well-being and happiness is necessary.

And it’s not just at macro level. As we saw in a previous news article, A new felicific calculus? happiness and unhappiness are central to economists’ analysis of consumer behaviour. If we define ‘utility’ as perceived happiness, standard consumer theory assumes that rational people will seek to maximise the excess of happiness over the costs of achieving it: i.e. will seek to maximise consumer surplus.

There have been three recent developments in the measurement of happiness. ‘Understanding Society’ is a £48.9m government-funded UK study following 40,000 households and is run by the Institute of Social and Economic Research (ISER) at the University of Essex. It has just published its first findings (see link below).

The second development is the work by the ONS on developing new measures of national well-being and includes a questionnaire asking about the things that matter to people and which should be included in a measure or measures of national well-being.

The third development will be an addition of five new questions to the Integrated Household Survey:

• Overall, how satisfied are you with your life nowadays?
• Overall, how happy did you feel yesterday?
• Overall, how anxious did you feel yesterday?
• Overall, to what extent do you feel the things you do in your life are worthwhile?

But after all this, will we be any closer to getting a correct measure of human well-being? Will the results of such investigations help governments devise policy? Will the government be closer to measuring the costs and benefits of any policy decisions?

Articles

ONS site

Understanding Society site

Questions

  1. For what reasons might GDP be a poor measure of human well-being?
  2. How suitable is a survey of individuals for establishing the nation’s happiness?
  3. How suitable are each of the four specific questions above for measuring a person’s well-being?
  4. Why, do you think, has average life satisfaction not increased over the past 30 years despite a substantial increase in GDP per head?
  5. Give some examples of ways in which national well-being could increase for any given level of GDP. Explain why they would increase well-being.
  6. Should other countries follow Bhutan’s example and use a ‘groass national happiness index’ to drive economic and social policy?
  7. If human well-being could be accurately measured, should that be the sole driver of economic and social policy?
  8. Do people’s spending patterns give a good indication of the things that give them happiness?
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A new felicific calculus?

Happiness and unhappiness are central to economists’ analysis of consumer behaviour. If we define ‘utility’ as perceived happiness, standard consumer theory assumes that rational people will seek to maximise the excess of happiness over the costs of achieving it: i.e. will seek to maximise consumer surplus. In fact, this analysis can be traced back to the work of the utilitarians, Jeremy Bentham and John Stuart Mill. Bentham reffered to it as hedonic or felicific calculus (see also and also).

Now, of course, whether people actually behave in this way is an empirical question: one that behavioural and experimental economists have been investigating over a number of years. Nevertheless, it remains central to neoclassical analysis of ‘rational behaviour’.

But if happiness is central to a large part of economic analysis, how is happiness to be measured? At a micro level, this has proved problematic as it is virtually impossible to have inter-personal comparisons of utility. As a result, consumer theory uses indifference analysis, characteristics analysis, revealed preference and other approaches to analyse consumer demand.

But what about at the macro level? How is a nation’s happiness or well-being to be measured? There is general acceptance that GDP is a relatively poor proxy for national well-being and is more a measure of production. There have been various indices developed over the years (see, for example, Box 14.7 on ISEW in Economics, 7th edition) as alternatives to GDP. None has been adopted by governments, however, with the exception of a Gross National Happiness index in Bhutan.

Recently, however, there has been renewed interest in developing an index of well-being. In France, President Sarkozy commissioned two Nobel economists, Joseph Stiglitz and Amartya Sen, to examine the issues in developing such a measure. In the light of the Stiglitz/Sen report, David Cameron has asked the Office of National Statistics to measure the UK’s general well-being. The articles below look at the difficulties that could arise in producing an index of well-being, of meauring the elements and in using it for policy.

Articles
UK Prime Minister Cameron Moves on UK Happiness Index Triple Pundit, Kristina Robinson (17/11/10)
David Cameron’s happiness index finds support despite impending decade of austerity Daily Record, Magnus Gardham (16/11/10)
How can we measure happiness? Telegraph, Philip Johnston (16/11/10)
David Cameron aims to make happiness the new GDP Guardian, Allegra Stratton (14/11/10)
An unhappiness index is more David Cameron’s style Guardian, Polly Toynbee (16/11/10)
Happiness is a warm baguette? The Economist (13/1/08)
‘Stiglitz-Sen Moving in the Right Direction, but Slowly’ IPS, Hazel Henderson (18/9/09)
The Rise and Fall of the G.D.P. New York Times Magazine (13/5/10)
Happiness doesn’t increase with growing wealth of nations, finds study Guardian, Alok Jha (13/12/10)
Should governments pursue happiness rather than economic growth? The Economist (25/11/10)
M&S’s Sir Stuart Rose among UK’s expert happiness panel BBC News (27/1/11)

The Stiglitz/Sen/Fitoussi report
Report by the Commission on the Measurement of Economic Performance and Social Progress, Joseph Stiglitz, Amartya Sen, Jean-Paul Fitoussi (September 2009)

Questions

  1. What are the shortcomings of using GDP as a measure of a nation’s well-being?
  2. Summarise the main findings of the Stiglitz/Sen/Fetoussi report.
  3. What items would be included in a happiness or well-being index that (a) are not included in GDP; (b) not included in Stiglitz and Sen’s proposed net national product measure? How would such an index be compiled?
  4. Would it be satisfactory to compile such an index purely on the basis of survey evidence? Why might such evidence prove unreliable?
  5. What are the political advantages and disadvantages of using such an index?
  6. Is utilitarianism the best basis for judging the progress of society?