Thursday, October 26, 2006

Happiness != Welfare

Robert Frank of Cornell says happiness is not the same thing as welfare. More importantly, while increasing GDP may not increase happniness much (his focus is on rich countries), it certainly contributes to a greater welfare; therefore, GDP growth is good. QED.

Many critics of economic growth ... argue that if money buys happiness, it is relative, not absolute, income that matters. As incomes grow, people quickly adapt to their new circumstances, showing no enduring gains in measured happiness. Growth makes the poor happier in low-income countries, critics concede, but not in developed countries, where those at the bottom continue to experience relative deprivation.

All true. But these statements do not imply that economic growth no longer matters in wealthy countries. The reason, in a nutshell, is that happiness and welfare, though related, are very different things. Growth enables us to expand medical research and other activities that clearly enhance human welfare but have little effect on measured happiness levels.

All this is quite appealing, but one of Mark Thoma's readers raises a valid point (do read the other comments there as well):

Well, I still think that growth as such is the wrong target. The author says that some growth promotes welfare, while some harms it, yet concludes that we should be aiming for growth, albeit intelligently managed growth, because that would have some positive correlation with welfare.

Then why not rather aim at welfare?


  1. Anonymous said...

    The system of taxes, subsidies and income transfers is what is used to "guide" growth so as to make it compatible with welfare. I think something like this is implicit in the phrase "intelligently managed growth."

  2. Abi said...

    Anon: Granted. But, wouldn't you agree that there are umpteen things that contribute to greater welfare without increasing the GDP. An exclusive focus on GDP growth (even one that's "intelligently managed") obscures the underlying goal of enhancing welfare.

    In other words, why be coy by getting to welfare through GDP growth? Expand your policy options (even ones that 'sacrifice' some GDP growth) that go straight to the real thing: welfare.

  3. Anonymous said...

    At this point, I'd say be specific: Name one thing that is being obscured by the focus on GDP growth and then we can take this further. Otherwise, the whole discussion is going to get mired in vague generalities.

    GDP as a measure of welfare is imperfect and all economists are aware of this fact. However, imperfect as it is, it does serve a purpose provided it is used carefully. I think this is the point of Frank's article.

    If you are that sceptical of GDP (per capita) as a measure of welfare, then you must answer this: What do you propose to replace this imperfect measure by? Does this alternate measure "perfectly" measure welfare?

  4. Abi said...

    Anon: Fair enough.

    It turns out that I don't have to look far (or hard). The answer to your suggestion that we discuss specific examples lies in Mark Thoma's post. Specifically, in the comments by people like Emmanuel and Jeffrey Miller.

    As for a suitable measure for 'welfare', I certainly have no idea of what it could be. But, just as welfare seems to be a superset of happiness (Frank's thesis), it is also a superset of GDP and GDP growth. Being satisfied with GDP as a proxy for welfare is not the best way to look for the right measure for welfare.

  5. Anonymous said...

    I have to say I am not convinced, but then I am an economist, so perhaps that's only to be expected. GDP is a measure of the amount of goods and services produced in the economy and an increase only indicates that there are more things to go around. It is an imperfect measure of "welfare" in that the increase may involve things that we do not want. Also, the increase may go into the hands of a very few people - GDP says nothing about the distribution of those additional goods and services. This is why Frank advocated an "intelligent" use of this measure. More broadly, his point was that this imperfect measure is still relevant even in developed countries.

    What Emmanuel and Miller say simply go towards showing that GDP is an imperfect measure; this of course, is conceded by all economists. So far as I can make out, they do not address Frank's point which is that this measure still has some relevance, if used carefully.

    GDP's virtue, I suppose, is that as a measure, it is easy to compute relative to other measures. Also, since it is simply a measure of the amount of economic activity, it involves no tricky issues aboout what exactly "welfare" means and how it is to be measured. (If you and I disagree about "welfare," how are we even going to do the even more tricky business of aggregating everyone's welfare to come up with a measure of "societal welfare"?)

    Unless you can come up with an alternate more or less agreed-upon measure of welfare which is also relatively easy to compute and thus useful for framing policy, I am afraid we are stuck with this measure. Incidentally, part of the field of Social Choice (to which Amartya Sen has contributed) has struggled with such problems. I think IISc receives the journal "Social Choice and Welfare" - take a peek into it when you have the time.

    In closing, I will simply note that some of the issues raised by Miller & Emmanuel can be tackled through the tax system and through income transfers. This does not negate the usefulness of GDP (growth) as a measure.

  6. Abi said...

    Anon said: "In closing, I will simply note that some of the issues raised by Miller & Emmanuel can be tackled through the tax system and through income transfers. This does not negate the usefulness of GDP (growth) as a measure.

    I have just one word: Sweden!

  7. Anonymous said...

    Sorry, I missed you: Are you saying that Sweden has dispensed with GDP as a useful measure altogether? Can you point me to a reference? Thanks!

  8. Abi said...

    OOps, no! This wasn't meant as a rebuttal to the quote. It is just to highlight (with a concrete example!) what you said in your previous comment: "... can be tackled through the tax system and through income transfers ...". When I read that, it just reminded me of Sweden (and other Scandinavian countries, of course).

  9. Anonymous said...

    Yes, of course, Sweden has a strong welfare state. Your previous comment and my reading of it (prior to your clarification) though prompted me to trawl the web for some sort of official statement from the Government of Sweden about their economy. I came across this:

    The pdf document can be downloaded from the link on the right of the page. I haven't gone through the whole thing but note their use of GDP growth rate right on the first page. I guess that is all I was trying to say - the use of GDP growth rate as a measure of welfare is not incompatible with a welfare state or for that matter, the simultaneous use of other measures of "welfare."