There is a common misconception (sometimes even deliberate
misdirection) that GDP is distinct from well-being. You hear phrases like "we
need to abandon GDP and move to well-being instead".
This is erroneous. GDP is an indicator of well-being. One with a lot of
attractive properties. The income and price data that are used to build GDP are
similar indicators. In this post I want to explain how income, prices, and GDP
work as indicators of well-being in an accessible manner (i.e. very little math).
I should preface this by saying that I am keen to move gradually over the next
century away from income and towards some more holistic way of thinking
about well-being and progress. However, there are major dangers associated with
rushing towards happiness and subjective well-being specifically, notably
paternalism, technocratic conceit, perverse distributional consequences from
adaptation, major
measurement error, etc. I write about these in my academic works and will
provide explainers as those longer papers become publicly available. Some
discussion is available here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3223959
There are four big reasons why GDP is a good indicator of
well-being: it is objective, inter-personally cardinal, unidimensional, and liberal. I
will take them one-by-one.
Objective
Measuring and debating something is a lot easier if it is
observable independently of personal judgement. Income is objective, happiness
is not. Now I must immediately note that measuring income is not
straightforward, especially when you’re dealing with poor and/or vulnerable
people. People don’t remember their incomes accurately, don’t account for
transfer payments, forget gifts, overstate their tax bill etc. Things are
similarly complicated at the other end of the scale when you’re trying to
aggregate economic activity across the entire economy into GDP. Measuring
happiness and well-being is an
order of magnitude more difficult, but it should not be assumed that measuring
income is straightforward. The important thing, in any case, is that income,
prices, and GDP are all observable. An analyst can engage with them without
asking anyone for a subjective judgement. This is very important in the context
of public policy because it means you have a fact that is perceived similarly
by all stakeholders. I think this is a weak argument for the most part, because
subjective well-being scores, once collected, are observed the same way by all
parties. Sure, they can be manipulated—you could do the survey on a sunny day
in spring if you wanted higher scores—but so can income measures.
Cardinality
Cardinality is about how things are in proportion to one
another. For example, $2 is twice as large as $1 and 4 times as large as $0.50.
In contrast, ordinal relationships are simply about rank, like biggest to
smallest or some such, with no regard for proportion. For example, 2 > 1
> 0.5. Cardinal vs ordinal is extremely important in the context of
interpersonal welfare comparisons. Think about the justice of a distribution
for a moment. In one society you have people Say you’ve got 5 people with
incomes of 100, 50, 50, 20, 20, 20, 20, 10, 10, and 10. You want to make this
society more equal. It matters that the person with 100 income is not only rank
#1 but also has 10 times as much income as the people ranked #8–#10. You can do
such cardinal comparisons with income. I don’t want to go into the details in
this post, but subjective well-being metrics do not produce cardinal measures
of well-being. I don’t even think they produce ordinal measures of well-being,
which is a huge problem, but assuming that they did, we would still have reason
to maintain some interest in income.
Unidimensional
When you’re trying to compare one person’s welfare with
other another, it helps if your indicator of welfare has only a single
dimension (i.e. unidimensional). The human development index, millennium development
goals, sustainable development goals, and other attempts to move beyond GDP in
the objective indicators space have all struggled with dimensionality. Imagine
you have two people, both 40 years old. One has perfect health, an income of $25
000 p.a., and lives in an ugly, crime-ridden neighborhood. The other lives in a
beautiful, safe neighborhood on an income of $140 000 p.a., but has a bad knee
and shoulder that prevents them from doing just about any form of exercise
other than walking, and even that is a little uncomfortable. Which one of these
people is better off?
The answer is that it depends on what you value. Maybe you
don’t care so much that you’re immobile because your passion is crafting model
trains and for that income is critical. Or maybe you care loads about living in
nature and you would be willing to take an enormous pay cut for that. How can
we compare people in a way that takes account of these differences in
preferences?
Prices to the rescue! People communicate their preferences
into markets through their consumer demand. They are willing to pay more for things
they have a stronger preference for. Producers look to make profits by
providing things people want at least cost. This is the supply side. The
interaction of demand and supply gives rise to market prices, which reflect the
cost and benefit of a good relative to all other goods. Prices are measured in
money which is unidimensional and inter-personally cardinal i.e. a dollar is
worth the same to two average Americans even though they will spend it on
different things. In this way, income and prices provide us with a means of conducting
unidimensional, inter-personally cardinal welfare comparisons. This is critical
for thinking about justice, but also for doing relatively simple cost-benefit
calculations for things like building a new light rail network versus expanding
the existing bus network.
Liberal
People spend money (and health, education, and rights) on
whatever they have the strongest preference for. It is a very slippery slope to
dystopia when governments start to assume that they know better than individual
citizens what the preferences of those citizens are. This is one of the
foundational principles of liberalism, crisply articulated in the harm
principle—governments only have a right to interfere with a sovereign
individual if that individual is doing harm to someone else. It is a relatively
uncontroversial thing for governments to expand the options available to
people: help them achieve greater wealth, education, health, and political
enfranchisement. People will choose from among the growing number of possibilities
available to them which live they would most like to lead.
This or an even more limited role for government is implicit
in most political theory since the enlightenment. You have to go all the way
back to Plato to find someone advocating that government, in all its wisdom,
choose the kind of life someone should live on the grounds that this life will
make them happiest. And yet it is precisely this transformation in the role of
government that is implicit in a lot of contemporary advocacy for policy to
target happiness and subjective well-being (SWB). For example, a recent paper
argued for greater progressivity of taxation on the grounds that it makes poor
people happier and rich people not so unhappy. Leaving aside the abysmal
treatment of causation in the paper, this attitude rides roughshod over the
last 400 or so years of political theory. In particular, it rides over social
contract issues around the legitimacy of taxation enforced by state power. The
potential to violate liberal norms in the quest to maximise happiness should be
clear as day here. I am not at all a libertarian and still find the naivety of
such policy advocacy staggering.
It is worth
mentioning is this context that advocates of subjective well-being policy
frequently claim that life satisfaction scales are a “democratic” metric. For
example, Clark et al (2019, p. 4) write that: “Third, and most important, [life
satisfaction] is democratic—it allows individuals to assess their lives on the
basis of whatever they consider
important to themselves”. Similarly, Frijters et al (2019) write that life
satisfaction scales “takes individuals seriously as political agents and sets
them at the top of the judgement tree”.
This claim strikes me as specious for two reasons. First, because respondents are never asked why they hold a level of life
satisfaction. Instead, their responses are placed on the left-hand side of a
regression and then variables chosen by analysts are used to determine what
causes respondents’ levels of satisfaction. Indeed, SWB scholars emphasise that
respondents cannot be asked what determines their satisfaction because this
would contaminate their responses with present, social desirability, and other
biases. It seems that in practice, life
satisfaction scales decidedly do not take individuals seriously as political
agents. Second, because there is at present no process by which respondents
assent to how their responses are translated into policy proposals. Democracy
is fundamentally about making decisions by vote. Arguing, for example, that
such and such a program should be prioritised in government budgeting because
some technocrat has observed that it is associated with higher SWB than some
other policy involves no voting. One could argue that scales are liberal because they respect the
individual’s own judgement about their life. However, advocates must then
explain why they are superior in this regard to the status quo in which
governments merely act to maximise citizen’s capabilities and then leave them
to decide how to leverage those resources. The advantage of the prevailing paradigm, namely preference-satisfaction measured using income and prices, is precisely its liberalism.
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