Why can’t economists measure wellbeing as material wealth?
Listener 11 January 2003.
Keywords: History of Ideas, Methodology & Philosophy;
While there is considerable national agreement that economic policy should aim to accelerate the growth of sustainable GDP, Gross Domestic Product only measures material output. Its designers never not intended it to assess human welfare. As economists have known for more than fifty years, GDP is not a good measure of wellbeing. While people in cold climates have bigger fuel bills, they are not necessarily better off than where it is warm. People in insecure environments spend more on the police and military, but better to be in a secure community. Where does friendship fit into GDP? Attempts to extend the concept (to include such things as non-market activities and the environment) do not solve the basic problem that material output is not the same thing as happiness.
Alternatively, the World Values Study asked ‘are you happy’ and ‘are you satisfied with life’. (You may worry that the word ‘satisfied’ in English is not equivalent to ‘satisfait’ (French), ‘sodisfatto’ (Italian), or ‘zufrieden’ (German). However the Swiss response is substantially higher than their counterparts speaking the same languages in France, Germany and Italy, which suggests the study is measuring cultural, and not language, differences.)
In 1998 (not a year of outstanding economic performance, by the way) 95 percent of New Zealanders said they were ‘happy’, which put us second equal in the world with Switzerland and Sweden, just behind Iceland. Some 84 percent said they were satisfied with their life. That is 14th in the world – in the middle of the OECD. (Apparently there are a lot of New Zealanders who are happy, but striving for better.)
That New Zealand ranks higher on these measures than we do on per capita GDP is no surprise given the deficiencies of aggregate material product as a measure of wellbeing. There is not a very good correlation among the rich OECD countries: The responses of New Zealand and the US are much the same even though US per capita GDP is 40 percent higher than New Zealand’s. There is a relationship for those countries whose per capita GDP is less than 70 percent of New Zealand’s. In poor countries economic growth increases happiness and life satisfaction. As a country gets richer, growth does not.
Among the factors which depress the responses are being in a Communist nation, although (sadly) happiness and satisfaction deteriorated when they threw off their Communist shackles. While there does not seem to be any connection among high income countries between wellbeing and measures of civil liberties and political rights, poorer countries with democratic institutions seem to be happier. (One study reports that countries with historically Protestant elites do better than those that were Catholic. I am unsure of what this means.) Regrettably there is no investigation of the extent to which high employment and low unemployment affect happiness and life satisfaction. An eyeball over the data suggests there may be a statistically significant correlation, although the effect of superior labour market conditions may not be strong.
What this means for economic policy is that raising material output may not necessarily increase personal wellbeing. It may. More quality jobs and less unemployment does. Spending on education and health care can. Increasing individual choice seems to. (I mean ‘real’ choice. Giving a person a choice between marmite and vegemite may not make much difference.) The freedom and choice dimension is complicated. Marriage reduces options (with the exception of Bernard Shaw’s ‘combining the maximum of temptation with the maximum of opportunity’), yet married people are happier than non-married ones. This may be a particular case of the importance of relationships and communities to individual wellbeing. Almost certainly spiritual and ethical values are important, while countries with narrower income distributions seem to be happier than those where there is greater inequality.
If some forms of economic growth can enhance the factors listed in the previous paragraph, other forms can degrade them. This suggests the nation’s objective of accelerating sustainable economic growth is an intermediate target, which should not be pursued if the higher material output debases wellbeing.
This makes economic advice difficult , since economists are trained to focus on improving economic measures of material out. Not that the members of the profession are more socially maladjusted than normal, but in some ways their discipline is. Even so, we should not discount the economics disciplinary framework, for the alternatives proposed by people who claim to be free of economists’ prejudices, are usually based on worse economics.
You are probably reading this column while on holiday, perhaps after a lazy day, hopefully with friends and family. As like as not, today you have made no contribution at all towards the GDP of the nation – merely consuming without producing. Dont worry, be happy.