The Tricky Economics of Creating a Better Quality of Life
Listener 26 January, 2002.
Keywords History of Ideas, Methodology & Philosophy
The life expectancy of someone living in Western Europe or North America was about 45 years in 1900. Today it is closer to 80 years. The increased longevity reduces the material standard of living (measured by GDP* or consumption per capita), since people are now retiring for far longer. Is the increased life expectancy a good thing? If we were to execute everyone over 65 years of age, we would raise the GDP per capita figure by about the same as the increase since 1981. Why dont we?
Although we often treat material output as though it is an ultimate objective, in practice we have a more fundamental notion of the economic objectives of society, which might be summarised as the ‘quality of life’. I meet the paradox in some of my work. Eliminating alcohol misuse would increase both life expectancy and per capita incomes (because grog kills the young). However, if no one had started smoking tobacco, per capita GDP would fall, because people would live longer in retirement. (Would the ideal cigarette might be one which extinguishes past smoker’s lives on their 65th birthday?) In both cases the non-abuser would lead a better quality life while alive (no hangovers, no hacking coughs), as would their friends, relatives, and associates. But how to include all this in the economic assessment?
Rather than thinking about what we can be and what we can do, economics is founded on the utilitarian notion of what we can consume. The result is most economists find these paradoxes too complicated to think about. The outstanding exception is (Nobel prize winner) Amartya Sen, who starts with the notion of ‘functionings’ which summarise the life a person might lead. Some functionings are elementary: being well nourished and disease free. Some are more complex: having self respect, preserving human dignity, taking part in the life of the community. Sen then introduces the key notion of ‘capability’ which refers to the alternative functionings (‘life choices’) a person might have, indicating the freedom of choice a person has over their life. Material consumption is only a part of that totality.
The logic of Sen’s approach led to the World Bank’s ‘Human Development Index’ (HDI), which is intended to replace GDP per capita as an indicator of the state of progress of a nation. It combines per capita material output with measures of educational achievement and longevity. Thus a rise in life expectation increases the HDI even if GDP per capita goes down. Literacy is there, because the capability markedly affects our ability to flourish and enjoy life. The index has to be simple, because most countries do not have complicated statistical bases. Had it been practical, Sen would have wanted a measure of the differences between men and women, which can be grotesque (as it has been in Afghanistan).
New Zealand is 19th in the world on current HDI standings, three above our GDP per capita ranking. (If we bumped off the over 65s the ranking would go down.) However the index is not be very good at discriminating between rich countries, since the World Bank’s interests are poor countries. Sometimes the difference in rankings can be dramatic. The biggest divergence is for South Africa, whose HDI ranking is a whopping 44 places below its GDP per capita ranking, a terrible indictment on apartheid’s record on health and education. That will take generations to repair.
The HDI appeared in to New Zealand officials’ reports about the ‘inclusive society’ published last year. While they referred to Sen’s ideas, there was little attempt to master his challenge, their references being to his popular book rather scholarly papers. In part it is because it is very hard for an economist trained in one paradigm to see outside it. However, there is a deeper problem. Like the New Right, Sen talks of ‘freedom’ and ‘choice’. But unlike the New Right, Sen does not assume that if everybody has ‘freedom’ (in the New Right sense) in a ‘free’ market they will all be better off. This is partly because Sen is an expert on inequality, and he knows ‘free market’ outcomes will have some people worse off (as happened in New Zealand). But the capability approach also diverges markedly from the New Right when it concludes that government spending (on education, on health care, on other things such as the environment, culture and recreation facilities) can enable individuals to do and be so much more.
Today’s officials are reluctant to go down this path (especially in election year, when the fisc will be under awful pressure). Yet the notion that the government can spend public funds to create a better quality of life is deep among New Zealanders’ beliefs, if not in today’s public policy. Sen’s extraordinary insights shows there is a sense they are right and that narrow economics is wrong. They offer the opportunity to create an inclusive society built around a high quality of life.
* A reminder: Gross Domestic Product (GDP) is all of a country’s market production of material goods and services, valued at market prices and, usually, measured in a year.
Subjects Quality of Life