The visible hand in economics

Growth and happiness

Posted on: March 22, 2008

The Standard was at Joe Stiglitz’ talk in Wellington last week and was particularly interested an audience member’s question about growth. The question is whether economists focus too much on growth, to the detriment of human happiness. It’s an interesting and worthy question, but not one that hasn’t been considered by economists. There are two important issues around GDP: first, whether it’s a good measure of growth and, secondly, whether growth is particularly important.

The first is the most straightforward. Economists usually measure growth by looking at the increase in GDP per capita. The obvious reason for this it that GDP/capita is highly correlated with a high standard of living and is relatively easy to measure. Most people would be better off if they had more income so it seems reasonable to proxy unmeasurable things like happiness by the value in the economy. The huge problem with this, as The Standard points out, is that it doesn’t take into account the degradation of the environment that often results from increased production. Environmental services that have been destroyed and replaced by industry get counted as an increase in GDP. There are a couple of measures that have been developed to take this into account but, unfortunately, they have yet to gain wide acceptance.

The second issue is whether increases in economic value actually increases happiness. As was opinted out, France often claims to have a happier populace than the US, despite a large GDP/capita gap between the two coutries. Of course, it is impossible to measure this which is why economists can’t tell which country is better off. It may be that the French value leisure time more highly than Americans and choose to work, and earn, less than their US counterparts. If that is the case then it is impossible to tell who is better off without a detailed knowledge of their preferences. Here, we simply don’t have the measurement tools to be able to do any better. We must leave it up to the policy makers to gauge the ‘mood of the nation’ when they make their decisions and hope that they get it right.

However, neither of these problems is a reason to give up on measuring growth and striving for it. All other things being equal, growth in GDP/capita will be good for everyone. It’s not a perfect measure but, as long as we bear the limitations of our measure in mind, it can still be a very useful one.

6 Responses to "Growth and happiness"

Oh – the irritating thing about that question was the suggestion that a global economic slow down might not be a good thing because it would reduce climate change. The audience applauded and I just wondered how long their applause might last in the unemployment queues. Surely, a global recession has to be worst way of protecting the environment.

Anyhow, rant aside, you wrote: “All other things being equal, growth in GDP/capita will be good for everyone.” But everything else is not equal. For what it’s worth (and sorry for linking to myself) I had a go at looking at the pros and cons of economic growth as a measure wellbeing here:

Yeah, the applause didn’t always happen when I would have been willing to applaud.

“But everything else is not equal.”

Definitely. I just didn’t want to get into that rather hairy topic in this post so I went for the most uncontroversial statement I could think of about growth 😛

Thanks for the link, too. Self-promotion seems to be the norm on the internet so I think you’re being awfully polite by apologising for linking to something thoughtful 🙂

Thanks – I inappropriate moments of applause aside I certainly enjoyed the talk.

Good to see that someone flies the flag for us economists!

We get a lot of shtick from people who think that the raison d’etre of economists is to provide the answers. What’s happening to the currency? Are interest rates going up? If we we cut taxes, will we be better off? etc. etc. We can point to things that the models in our mind lead to. But we are not soothsayers. After all, we are social scientists – not lab scientists. We try to improve our understanding of human behaviour. If economics had perfected this, we wouldn’t even be needed.

All too often people will use the inexactness of economics as a reason to ignore it. It is just as intellectually dishonest to say that GDP misses out on other measures of social develpment and therefore anyone who wants GDP growth is a minion of the VRWC.

Hi Dismal,

While I agree with everything you have said I just had to pick up on this line:

“But we are not soothsayers”

I think this is interesting. While we often try to avoid being a discipline that is solely focused on answers it seems that the common conception of economists, even inside the discipline, is of a subject that aims to predict outcomes.

After all, Friedman’s empirical positivist point of view stated that the main way to evaluate economics is based on the success of it to predict the future, not the realism of our assumptions (a point of view I find difficult to relate to standard positivism 😛 ). If Friedman was happy to say these kind of things, I can understand why the general public views us as a set of soothsayers – infact that is what my flatmate called economists last night when I was talking to him.

I agree that a large section of economics, infact potentially all of economic science is focused on human behaviour rather than predictive accuracy. However, there are economists out there whose goal is predictive accuracy and reading the tea leaves of the world economy – maybe we need to come up with a different name for this discipline 😛

French happy? Since when?

Whats next, Germans funny?

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