Economics of Contentment Part 02 – Written for the Sydney Opera House Ideas website, and also published in the text-book; Essentials of Economics 3, 2016, Pearson Publishing

In the second installment of ‘The Economics of Contentment,’ John Treadgold considers our attempts to measure well-being. From the oft-reported GDP to bespoke indicators in Bhutan through to our own Sydney Morning Herald. How successful are we at measuring something intangible and subjective like happiness?

Economists have found ways to measure many things (and they’ve refined the art of arguing about them) but so far the intangible emotion of happiness has eluded their statistical capabilities. Gross Domestic Product (GDP) has long been the blunt instrument with which economists have measured a country’s performance and its international comparability has made it the key measure of development/prosperity/growth.

But GDP is a lean measure of a market’s output and was never intended for such broad interpretation. As global power dynamics shift we are seeing a new set of indicators emerge that include a broader range of variables; and which reach ever further towards some sort of globalized understanding of prosperity.

GDP measures activity; it weighs the value of a country’s finished goods and services, but only those within the market. That means housework, education and environmental degradation are beyond its grasp. Love, free time and kids laughing do not increase GDP. Even its creator, Simon Kuznets, appreciated GDP’s short-comings: “The great contribution to our stock of utilities, made within the family system, and by numerous activities of mankind engaged in the ordinary process of life, is not included.”

On the other hand, traffic jams add to GDP – more cars driving less efficiently means more trips to the petrol station and new cars more often. But is this prosperity?

I agree wholeheartedly that increased economic activity will increase our standard of living, but this is a very shallow estimation of what it is that makes us humans tick; happiness is far more complex than our pay checks and our over-sized cars.

Bhutan has enshrined their own measure, Gross National Happiness, as being the most important aspiration for their government and people. “Gross National Happiness (GNH) is more important than Gross National Product (GNP),” says His Majesty, Jigme Khesar Namgyel Wangchuck of Bhutan. GNH weighs harmony and environmental sensitivity as heavily as it does exports and imports. The country is tiny and its population painfully poor, and yet it is happiness – not economic growth – that their government has prioritized.

The long-term success of these radical policies is much debated, but it’s a noble cause and sets a precedent that is hard to ignore. The United Nations Development Program (UNDP) have their own index called the Human Development Index (HDI) and the Himalayan state of Bhutan is ranked at 140; while Australia is at number two (as mentioned last week). The HDI attempts to incorporate health, equality and environmental protection into the standard mix of economic and productive calculations.

Norway, at number one on the HDI, has similarly fortuitous mineral endowments to Australia. These two countries, the nouveau riche of the West, have both benefited from the world’s dependence on fossil fuels, but they have also both (to varying degrees) ensured education, health care and environmental protection are prioritised. Although Australia has some catching up to do, the index suggests our CO2 emissions are 18 tonnes per person as compared to Norway’s 10 tonnes. In Bhutan they emit only one tonne per person – pollution has a perverse link to development.

HDI is a powerful index which is in-line with the UN’s Millennium Development Goals and which offers a scholarly comparison between different countries. But the same question applies here as with GDP: does it measure happiness? If happiness involves increased equality and access to technology, and decreases in C02 emissions and poverty, then it’s certainly far more relevant than GDP.

Having said that, economics is important and GDP does offer a valuable insight. The Organisation for Economic Cooperation and Development (OECD) understands this and they’ve used a range of variables, including GDP, to build their Better Life Index. The OECD represents 34 countries, mainly from the developed world, but also the less-developed such as China, India and Brazil. It fosters economic cooperation and offers research and policy advice to aid in development. Their Better Life Index pulls a raft of data from member countries, ranking countries against prescribed benchmarks and building a unique picture of the developmental preferences of different cultures to better understand what it is that makes people happy.

Oh yeah, and Australia topped the list this year.

In 2008 the French government showed their frustrations at the limitations of GDP when they established the Commission on the Measurement of Economic Performance and Social Progress. (Also referred to as the Stiglitz-Sen-Fitoussi Commission after its key authors). Its aim was to identify the limits of GDP as an indicator of economic performance and social progress. It reflected the growing appetite for information in the digital age and sought to nuance and refine our statistical understanding of social progress. The final product was the much-lauded 2009 report.

“What we measure affects what we do; and if our measurements are flawed, decisions may be distorted,” suggests the report.

It attempted to understand the gaps between official statistics and people’s perceptions of their situation. This is particularly relevant to Australia and to this column, since it suggests that increasing inequality – such as that resulting from a boom in one industry and a sudden increase in GDP – can cause people to feel worse off even when average GDP is increasing; i.e. the rich getting richer doesn’t always make everyone in the country feel better off. 

This report was a precursor to the Sydney Morning Herald’s Wellbeing Index. Fairfax Media employed Lateral Economics to weigh social, environmental, educational and health outcomes alongside GDP to assess how us Aussies are traveling.

But as with all attempts to weigh things, balance is the key and the mix of indicators and variables is what makes all the difference. Again, happiness is subjective.

The Well-being Index uses surveys to try and understand the mix of indicators that best represents the wants and aspirations of Australians. It has judged unemployment as being a key detractor of well-being, as is pollution and infant mortality; these factors are then varied depending on the respondent’s income.

It’s this detail which GDP has always lacked. Prosperity, well-being, happiness… whatever you want to call it, it’s an abstract concept, and measuring it is going to be hard. It’s intangible, it’s an emotion, it’s rare and subjective… but we can’t live without it, so it’s vital that our economic indicators reflect it. We’re not there yet, but there is a lot of hard work going on by some very dedicated economists, so please, don’t give up on them.