The Economics of Happiness
In 1934, one of the original developers of the Gross National Product economic indicator (GDP) cautioned that “the welfare of a nation can scarcely be inferred from a measurement of national income.” Deeply flawed though it is, GDP became our primary way to measure the wealth, and health, of nations. But this week, for the first time in seventy years, we may be moving towards using a more accurate barometer.
The leader of a major developed country, President Nicolas Sarkozy of France, has announced that he intends to begin a ‘great revolution’ in the way we measure social progress. The announcement came after a year and a half of research by a commission set up by the President to reconsider the way progress is measured. The commission was chaired by former chief economist at the World Bank, Joseph Stiglitz, and its star-studded cast included development guru Amartya Sen, Nobel-prize winning psychologist Daniel Kahneman, and economist-turned-climate-change-hero Lord Nicholas Stern.
The commission’s final report, which has been fully endorsed by President Sarkozy, recognizes that “new political narratives are necessary to identify where our societies should go” and boldly advocates for “a shift of emphasis from a ‘production-oriented’ measurement system to one focused on the well-being of current and future generations.” Their conclusions echo what many normal people feel—in the UK, where I live, a 2006 poll found that 81 percent of people believed that the government's primary objective should be the "greatest happiness" of its citizens, rather than the "'greatest wealth."
The main problem with using GDP as a primary economic indicator is that, ultimately, it is simply the sum of all transactions in a country. It values guns and prisons in the same way it values music and medicine: by how much money changes hands. When the Exxon Valdez spilt its oil on the shores of Alaska in 1989 it increased U.S. GDP by $2 billion, thanks to the costs of the clean-up operation. But when a free concert is put on in a town square, or a parent participates on a school board, or a volunteer helps a charity, the change to the balance sheet is a big zero.
Here in the UK, people are starting to talk about the end of the recession because the GDP is expected to increase a fraction. But meanwhile, unemployment has risen to its highest levels this century, and is expected to continue rising. According to indicators that reflect the effect of the economy on people’s lives, the recession has just begun.
GDP also treats money the same no matter whom it goes to, though economists know full well the concept of diminishing returns. A dollar represents a day’s labor for half the population of sub-Saharan Africa. But for the CEOs of the world’s biggest banks, it wouldn’t even be worth their time to bend over to pick it up off the floor.
GDP is unable to capture any environmental impacts: neither the depletion of finite resources, nor the pollution of a river, nor the long-term effects of climate change. According to GDP, a fish swimming in the sea has no value until it is dead and in a packing factory.
And, perhaps, even more fundamentally, GDP gives no way of assessing people’s well-being. How is it possible that a small Central American country—Costa Rica—has higher average life expectancy and higher levels of happiness than the U.S. despite having a per capita GDP one quarter the size? Material conditions are important to people, but they do not determine everything—far more important are people’s friends, their community, their health, their aspirations, how they use their time and whether they feel valued.
In recognition of these failures, the commission recommended that France find replacement measures of material living standards—such as household income, income distribution, and access to education and health—that shift emphasis from GDP to well-being and sustainability.
Should he enact all of the commission’s twelve recommendations, Sarkozy will have gone a long way towards dealing with many of the criticisms of GDP. However, having better data in our national statistics offices is only the first step. Our political leaders and their economic advisers need to recognize that these new measures must be a first step to a broader redefinition of progress.
A strong stable economy is important, but only as one of several tools for achieving what matters: high, equitable well-being that doesn’t destroy the planet. This must surely be the goal for any society, and we need to measure progress towards this. As the British economist Andrew Oswald says: “Economic things only matter insofar as they make people happier.”
If you realize that you’ve built your house on quicksand, it’s not enough to strengthen the floor. You need to move. Our economies, built on the myth of GDP, are crumbling in the face of economic and environmental crises. We need a stronger foundation on which to build a better life.
Interested? In The New Economy, read about the activists, visionaries, and upstarts who are trying something new: an economy that works within the carrying capacity of Mother Earth.
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