Chapter 2 of ‘In Open Seas’.
Ignoring the fact that humans are social has been a failing of much economic policy thinking. It underpinned the neoliberal changes on the 1980s and 1990s which were based upon the assumption that an individual’s consumption or income was the focus of policy.
But a person’s income (or consumption) is not a complete measure of their wellbeing. It is easy to think of reasons why their equivalence with wellbeing is not exact. A reasonable response might be that, on average, the equation works and that income is the best single indicator we have. Even if this were true, there is a danger from forgetting all the caveats.
The problem is even deeper, for there are many other factors which influence wellbeing; pursuing income may undermine those other factors. Later chapters will address questions of the environment and sustainability, and the distribution of wellbeing among people. The aim of this chapter is to reduce the obsession with income as the focus of policy.
GDP as an Alleged Measure of Wellbeing
The usual measure of income for a nation is per capita Gross Domestic Product (GDP). (Strictly it should be ‘National Income’, which excludes income which goes overseas and capital depreciation, but allow the simplification adopted by the conventional wisdom.)
I first met GDP in my opening economic lectures in 1962. My teacher, Alan Danks, pointed out its limitations including that if neighbours did each other’s washing the measure would increase. (He could have added that a mother sending her child to a childcare centre and going to work there would have much the same effect.) Not long after, I read J.K. Galbraith’s Affluent Society, with its cautioning against the usefulness of GDP, and Paul Samuelson’s Foundations of Economic Analysis with an introduction which confesses that ‘the quaint modern custom of excluding the value of one’s wife’s services from national income cannot condone [Samuelson’s wife’s] exclusion from the title page’. Later, I would read Simon Kuznets, founder of modern national accounting from which GDP is derived – a colleague of Galbraith and a teacher of Samuelson – who wrote in 1934 that ‘the welfare of a nation can scarcely be inferred from a measurement of national income’.
So I have been greatly puzzled by those who, decades later, claimed that economists say per capita GDP measured wellbeing, ignoring the many eminent economists who said the opposite. The ignorance is compounded with proposed alternatives which suffer similar limitations to GDP. The challenge is not to fiddle around with its definition.
Economists need national accounts to assess the workings of the market economy, especially for tracking unemployment, inflation, the balance of payments and for fiscal and monetary policy. GDP, which is a part of the accounts, entered public commentary in other roles. Unfortunately, if nothing else of substance is around, we grab GDP, like a drowning man hangs onto a sinking boat.
Subjective Assessments
GDP-associated measures are derived from objective goods and services bought and sold in the market. In recent years people have been asked how they feel: ‘are you happy?’ or ‘are you satisfied with life?’ Converting the answers into useful measures is not without problems, but there is evidence that such subjective measures correlate with physiological measures and other people’s assessments of the individual. At the very least, they offer an alternative means of looking at wellbeing, thereby critiquing material income.
The longest ‘happiness series’ we have – I use ‘happiness’ interchangeably with ‘life satisfaction’, merely because it is shorter – derives from annual surveys in America beginning in the late 1940s. Since then, average US real material incomes have risen over three times but the average level of happiness has hardly changed and is at a similar level today to what it was 70 years earlier. You are much richer than your grandparents but no happier. Huh?
There are shifts within subgroups. Today’s American blacks are happier than their grandparents, which is some comfort, but still average as less happy than whites, which is not surprising. More paradoxically, while American women remain happier than men, they are less happy than their grandmothers, even although they have a greater share of labour earnings. (It is not sufficient to argue that today they are holding down two jobs, because they could abandon working in the market economy and that would make them most decidedly unhappier.)
We have much less data for other countries, but we can compare their happiness rates at a point in time. This shows that among affluent countries there is no correlation between the average happiness of a nation and GDP per capita. However, at lower levels of per capita GDP – well below New Zealand’s – there is a rough correlation, so that among low-income countries the higher the average income, the higher the average level of happiness (or life satisfaction) on average. That provides a case for poorer countries increasing their GDP, but it does not apply to affluent ones.
Happiness Levels Within a Population
There are patterns within a population which seem to be fairly general among affluent countries, although on the whole there do not seem to be a lot of differences among ethnic or language groups once other factors are allowed for.
Happiness averages are higher among young people than for those in their mid-adult years, but the elderly are also happier (so the relationship is curvilinear). An average ‘married’ person is likely to be happier than someone who is living alone. Be careful about causal directions; perhaps happy people marry or stay married. Serious analysis has to be careful about the interactions of the various influences. One news headline announced that widows were happier than married women. Before considering bumping hubby off, observe that widows are older on average than married women and that the age effect is stronger than the marital effect. Married women tend to be happier than widows of the same age.
The influences identified thus far can hardly be affected by public policy. Some of the correlates with happiness can. One clear finding is that unemployment is typically bad for happiness and life satisfaction. (There are no similar findings for inflation.) A similar result applies for the sick and disabled, whose lives are limited by their not being able to participate in their communities. My guess is that housing adequacy may matter for life satisfaction, but I have never seen solid research on the effect, probably because it is so difficult to measure.
The impact of income on happiness within a country is more complicated. The general finding is that those with higher incomes are slightly better off than those with lower incomes (if all other characteristics are the same). The effect is not strong. For instance, doubling income increases happiness to about the same degree as getting married. (This is not the same thing as saying that two can live as cheaply as one.)
However, at the bottom of the income distribution (say, the bottom 20 percent), the income effect is much stronger than the ‘slightly’ of the previous paragraph – the poor are much more unhappy. A utilitarian would conclude that the sum of happiness could be increased by transferring incomes from the top and the middle of the income distribution to those at the very bottom.
But there is a puzzle. Over time and between countries, higher average incomes appear to have no impact on happiness among the affluent, even though when we look within an affluent community, we find that there is this (very mild) correlation between happiness and income.
The conventional explanation – aside from denial that subjective measures have any meaning – is that one element of happiness is status. People feel they are happier with higher incomes because it gives them greater status than those with less. When everyone’s income goes up they get no additional life satisfaction because they maintain their income ranking. Thus, overall increases in income do not raise happiness.
This might explain why the wealthy are keen on tax cuts, despite having much more than enough to spend. Perhaps they think the higher resulting income will add to their status. But since all their peers’ incomes will go up too that they will only maintain their ranking. Not sure about this; many would say it was just pure greed.
Status seeking also explains ‘conspicuous consumption’, the showing off how wealthy someone is. (Galbraith has wonderful illustrations in The Age of Uncertainty.) Another demonstration of status can be charitable giving. While we should not sneer at the genuineness of the motive, it is noticeable that anonymous donations have been less frequent since Rogernomics.
Recent international studies have found that those countries where there is trust in the community (would you expect your wallet to be returned untouched?), in their health system and in the government generally, also describe themselves as happier. It may be too early to draw strong policy conclusions but one is struck that the neoliberal approach of the 1980s and 1990s with its focus on selfishness and lack of trust, may have done little to promote happiness in New Zealand – it did not do much for material income either.
A different approach, which broadly supports the above conclusions, is provided by a 2021 Pew Research survey which asked about what makes life meaningful. There are differences between the seventeen affluent countries in the survey, but the general finding was that respondents mentioned family and children most often, occupation and career second, and material wellbeing third. Very close behind were friends and community, and physical and mental health. New Zealand respondents mentioned friends more often than material wellbeing.
The Hierarchy of Needs
We can gather the previous sections together by drawing on psychologist Abraham Maslow’s hierarchy of (human) needs. The hierarchy is frequently presented as layers in a triangle, with a point which draws attention to the upward direction.
However, the casual observer may think that the needs at the top are smaller than those at the bottom. So here the hierarchy is presented as a stack. (Sometimes the asterisked levels are subsumed in self actualisation needs.) Stack or triangle, the physiological needs at the bottom are the foundation. They are the needs with which GDP is most concerned. Economics has much less to contribute to the remaining higher levels.
Maslow’s Hierarchy of Needs
Transcendence needs*
Self-actualisation needs
Aesthetic needs*
Cognitive needs*
Esteem needs
Love and belonging needs
Safety needs
Physiological needs
Certainly, economic stabilisation can contribute to safety and security needs, possessions to status-esteem needs, avoiding unemployment to all the upper needs. Income inequality may contribute to the esteem needs of those at the top. But generally, the role of conventional economics measures, such as income, become less relevant further up, just as the happiness research reports.
While economists tend to see a job as a trade-off for obtaining income, paid work also has latent functions which contribute to levels of the Maslow hierarchy of needs above the economic foundation for which income provides:
– it imposes a time structure on the working day;
– it involves contacts and regularly shared experiences with people outside the household;
– it links an individual to goals and purposes which transcend her or his own;
– it enforces activity;
– it provides social status (typically people who meet for the first time ask each other what do they do). (NINS:410-11)
The economy makes some contribution to wellbeing. But it is a limited one. In particular, the GDP measure, even if we could fix up all its problems, cannot be a comprehensive measure of wellbeing since it is dealing with only the bottom step in the hierarchy. A humbling thought for economists, but a proud one in that economics contributes to the foundation of the Maslow hierarchy of wellbeing. (A similar conclusion might apply to all public policy: it can make a contribution to some needs, but not to all of them.)
The Social Dimension
While Maslow was a psychologist, there is a social dimension to his hierarchy; the higher needs involve some social validation, the middle ones require social networks to fulfil them. That suggests an explanation as to why rising material living standards are not associated with rising life satisfaction.
Social networks are not well studied in the happiness survey context. An example might be that in order to obtain a high-paid job one might have to move to a location far from your family network, so economic income is up but social connections are down. Other issues are also relevant: how many friends have you? How often do you connect with them? Do you often feel lonely? It is hard to ask a suitable question in a short questionnaire.
However, there is one routine question which sheds some light: respondents are asked about their marital status. We all know of good, indifferent and bad marriages. Even so, the evidence from the surveys is that married people are on average happier than those who say they are not married. We may speculate on why, but for the purposes here it is evidence that social relationships affect wellbeing, particularly with reference to the love and belonging needs in the middle of the Maslow hierarchy. GDP says almost nothing about such social connections, other than when they generate a market transaction.
It is conceivable that modern economic development has been associated with deteriorating social conditions so that the impact of the extra material consumption has been offset by poorer social connections. One has to be cautious, because a comprehensive explanation requires that the two effects almost exactly offset one another. But at least this reminds us that wellbeing is more than the economists’ material consumption; that social and psychological conditions, outside the remit of economics, are important.
So the surveys conclude that age, employment status, gender, health, marital status and community trust are more important determinants of life satisfaction than income at even moderate levels of income. The exception is that the happiness of those at the bottom of the income ladder could be markedly improved if their relative income was higher. The surveys might be interpreted to suggest that housing, social connections and social ranking also have considerable influence on life satisfaction.
A weakness of the survey evidence is that generally it assesses wellbeing at a point in time. We do not have much data which tells us the patterns for an individual through their life cycle. However, we can make some inferences about some other significant issues.
Health and Longevity
Consider my grandfathers. My material standard of living is about double theirs but, if we can rely on back-projecting the happiness surveys, it is likely that their life satisfaction was similar to mine. Both died before I was born. My maternal one died in an accident at a railway crossing; my paternal one died after a debilitating illness. Both were in their fifties. I have lived a quarter of a century longer so we can be reasonably sure that I have had many more years of happiness than either of them.
This does not appear in GDP; indeed, my post-retirement longevity lowers per capita GDP since the elderly don’t produce much.
A bridge was built over the fatal crossing and the treatment of my other grandfather’s cancer would be more effective today. Both activities appear in GDP, but their qualitative impact on each life far exceeds the quantitative one on production. One is entitled to conclude, with various caveats, that my paternal grandfather was less happy because of his illness. So medicine and other measures have not just prolonged life, but given us a better quality of life while we are living.
I can better compare myself with Dad. Again, we were probably of about equal happiness despite my income being higher. What strikes me about the differences between us is life choices. Dad was the eldest of seven (with an ailing father) and left school in the Great Depression in order to support his family. Had he had my chances, he would have stayed on, gone to university and very likely become a very good GP. (He was bright enough and had the social and personal skills and an interest in medicine, evidenced by his second career as a psychopaedic nurse.)
For women, the inter-generational comparison is even starker. I am struck by the number of women in my mother’s generation who never had a chance, but by sheer ability contributed to the public domain (as well as being good mothers).
Economic development, which is not the same as GDP growth, has opened up choices our ancestors could not have dreamed of (especially for women). Amartya Sen’s ‘capabilities’ approach – encapsulated in the Fraser-Beeby principle set out below – proposes that social arrangements should be evaluated according to the extent that people are capable of achieving their well-being (rather than on their mere right or freedom to do so). Dad would have loved to be a doctor although he may never have dared dream of it.
From this perspective I have been more fortunate than Dad, not because my per capita real income is higher (true) or that I am happier (probably not true) but because I have been better able to exercise my capabilities.
The capability approach throws light on John Stuart Mill’s puzzle: whether it was ‘better to be a human dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied.’ He concluded against the pig: ‘if the fool, or the pig, are of a different opinion, it is because they only know their own side of the question. The other party to the comparison knows both sides.’ Sen offers an extension. If the pig has the capability to be a Socrates, he is worse off if it is not realised.
Opportunity has been a central concern in the development of New Zealand. Not in Narrow Seas asked why people came to New Zealand. (NINS20) It concluded that while there were objective differences (such as longevity and incomes) from other possible destinations, the differences were small (and not well-measured at the time). The critical element which had the newcomers coming to the other side of the world is that they saw New Zealand as a land of opportunity; they were not too wrong then.
The social objective of providing opportunity remains in our rhetoric. It is magisterially captured in the ambition expressed by Peter Fraser (drafted by Clarence Beeby and gender amended as later he said Fraser and he would have wished):
The government’s objective, broadly expressed, is that every person, whatever her or his level of academic ability, whether he or she be rich or poor, whether he or she live in country or town, has a right, as a citizen, to a free education of the kind for which he or she is best fitted and to the fullest extent of her or his power.
While there are complaisant anecdotes to ‘prove’ the objective is being attained, there are also many anecdotes – and some research – which demonstrate that able children from poor circumstances are less likely to make it. Sadly, whatever the professed aspirations, public policy often ignores the needs of those children, undermining any chance they have to achieve their potential.
Wellbeing is Not the Same as Income
While philosophers and social statisticians may conclude that there are profound deficiencies in such subjective assessments as surveyed happiness or life satisfaction, these alternative measures are useful if they have undermined the uncritical acceptance that income is a good measure.
Modern societies experience economic and social development (which has been rapid in comparison to human experience for the millennia earlier). The tendency is to assume that this development is generally progressive (environmental destruction aside). The rise in per capita real incomes seems to confirm this judgement.
Of course, there has been progress because we live longer and healthier lives, we have superior life opportunities to those of their ancestors and living is safer in some parts of the world (but only in some). However, GDP per capita (or any of its associated measures) is only tenuously connected to such outcomes. While economics has a sophisticated account of economic progress, there is not a comparable account of social progress.
The material foundation of the Maslow hierarchy of needs has consolidated but we cannot say the same about the social conditions which influence the upper parts of the Maslow hierarchy. There is even a case that some economic changes – such as the increased intensity of competition – have worsened social conditions, while other changes have damaged wellbeing – urbanisation is a possible candidate.
I am not sure about such things, but I do think we could have handled the social change better if we had not transferred the economic model of economic development to our thinking about social development, a concern which nags me as I write this book.