1 May 2017

Developing a smile

Corneill writes:*

Once upon a time, in a land far, far away, Nobel Prize-winning economist Simon Kuznets created a report for Congress in the United States of America. The goal of this report was to quantify the existing productivity within the country, which would ultimately help with lifting the United States out of the Great Depression. Ironically enough, the work he produced has become the norm for these forms of calculations, and Kuznets’s creation of the gross domestic product (GDP) is currently one of the most popular methods for judging the ‘success’ of a country.

It is neither a secret nor a surprise that GDP is a poor indicator of both economic growth and development – even when adjusted for per capita values, purchasing power parity, and inflation. Nonetheless, there has not (yet) been a consensus in the academic field as to what exactly should replace GDP as a measure. Whilst the Human Development Index (HDI) is widely used, as it combines life expectancy, education and income into one comparable number, it is still not all encompassing. There have, however, been some countries which have considered other alternative measures, and are in fact beginning to use happiness or subjective wellbeing for the purpose of guiding economic policymaking. Theoretically, this is supposed to be a better measure than GDP, as happiness promises to capture the quality of life of an individual more accurately and hence, policies that are more effective and equitable should be able to be implemented.

One of the frontrunners in this field is the country of Bhutan. Since as early as 1971(!), GDP has not been the predominant measure of progress. Its replacement, the measure of gross national happiness (GNH), aims to collate the spiritual, physical, social and environmental health of its citizens and natural environment into a formal measure of prosperity. This approach has led to growing interest from other nation states today, as collapsing financial systems, rising inequality and wide-scale environmental problems seem to be becoming more prevalent.

However, there are a number of problems [pdf] with the concept of happiness that policymakers should be aware of before adopting it as a policy tool. As a term, happiness is often vague and multidimensional, which makes it difficult to define clearly and precisely. Moreover, even if it is defined, it is in essence a qualitative notion which is difficult to measure consistently and confidently. These two issues notwithstanding, designing and executing policies created on this notion of happiness raises ethical and political issues which cannot be fixed by refining the ‘science’ of the measurement.

Bottom Line: Even though there may be problems with happiness as a measure, it could be a step in the right direction. Perhaps this can be best summed up by Thakur Singh Powdyel, Bhutan's minister of education. "People always ask how can you possibly have a nation of happy people? But this is missing the point. GNH is an aspiration, a set of guiding principles through which we are navigating our path towards a sustainable and equitable society. We believe the world needs to do the same before it is too late."

* Please comment on these posts by students in my growth & development economics course. It really helps if you highlight unclear analysis, alternative perspectives, better data, etc.


Doctor Harv said...

I don't find it persuasive that the problem of using GDP as a measure of a country's success is best solved with introducing new measures. For one, the issue seems to be (and has been since Kuznets published it) that people misinterpret national income as national wellbeing. But their errors are in the interpretative end, not the computation of the statistic itself. If you want to learn about national incomes, GDP is an excellent measure. What happened to poor Kuznets later in life was that he spent much of his time berating idiotic policy makers who didn't understand the concept.

HDI is maybe a reasonable snapshot of other dimensions, but I'd be wary of looking at it as a 'replacement' for GDP. As you point out, it measures levels of life expectancy and education in addition to GNI. But it's still open to the same policymaker misinterpretation as GDP. Want to boost your HDI score? The same tornado that destroys homes but stimulates rebuilding spending and hence higher GNP will also boost HDI, especially in lower income countries that are not penalized by the logarithmic computation as much. But there are other ways to manipulate the HDI account too: don't bother investing in educational quality as a policymaker because years of schooling are all that's required. And, while Nordic countries seem to have such high HDIs, entry level jobs which are performed by Bachelor's holders in many other countries require Master's from their employees. This skews upward years of schooling while misallocating human capital.

Other examples abound, but I don't feel your criticism that the HDI is not multidimensional enough is the key issue. It's, again, interpretation. Any index you construct will leave out factors that contribute to happiness (and that's not even touching the aggregation problems); policymakers need to understand what a given metric tells them, and what it leaves out.

I was further confused by your comparison of GDP to HDI in the sense that GDP is a flow, while HDI is measuring the stock of education and lifespans, and the flow of log-income. Stocks and flows should be evaluated very differently by policymakers, and hiding some of each in an index seems to only confuse the issue further.

PS: You may be interested in reading Martha Nussbaum's and Amartya Sen's work on the Human Capabilities approach.

JP said...

Thanks for the article on Gross National Happiness. That metric seems more relevant and important than GNP. The article mentions that it would be difficult to measure reliably. As such it seems like it would be pretty easy for an administration, agency, or institution to intentionally produce erroneous readings for political or even economic purposes. Could some other entity check the data and demonstrate that it was erroneous? It would be great to have a widely accepted way to measure satisfaction and happiness. Having one might help guide our social systems to improve substantially. Our pretending that material wealth is a useful indicator seems dysfunctional.

Lauren said...

Hi Corneill,

Interesting topic and definitely worth a critical discussion, good job!

I have some comments though. You suggest that we should refine the way we think about some aggregate measures, like GDP. Although I agree to a large extent, we do have to keep in mind a couple of things. Firstly, politicians and policy makers could find ways to still misrepresent these more refined measures. Additionally, having a new measure does not necessarily imply that politicians won’t still use the old measures, like GDP, simply because it's convenient or might serve their interest better. Therefore, if you keep this topic for your research paper, it might be good to consider the incentives of people to use a certain measure over the other, and how you could possibly change these incentives. But besides that, good discussion and curious to see what you find!

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