The Standard was at Joe Stiglitz’ talk in Wellington last week and was particularly interested an audience member’s question about growth. The question is whether economists focus too much on growth, to the detriment of human happiness. It’s an interesting and worthy question, but not one that hasn’t been considered by economists. There are two important issues around GDP: first, whether it’s a good measure of growth and, secondly, whether growth is particularly important.
The first is the most straightforward. Economists usually measure growth by looking at the increase in GDP per capita. The obvious reason for this it that GDP/capita is highly correlated with a high standard of living and is relatively easy to measure. Most people would be better off if they had more income so it seems reasonable to proxy unmeasurable things like happiness by the value in the economy. The huge problem with this, as The Standard points out, is that it doesn’t take into account the degradation of the environment that often results from increased production. Environmental services that have been destroyed and replaced by industry get counted as an increase in GDP. There are a couple of measures that have been developed to take this into account but, unfortunately, they have yet to gain wide acceptance.
The second issue is whether increases in economic value actually increases happiness. As was opinted out, France often claims to have a happier populace than the US, despite a large GDP/capita gap between the two coutries. Of course, it is impossible to measure this which is why economists can’t tell which country is better off. It may be that the French value leisure time more highly than Americans and choose to work, and earn, less than their US counterparts. If that is the case then it is impossible to tell who is better off without a detailed knowledge of their preferences. Here, we simply don’t have the measurement tools to be able to do any better. We must leave it up to the policy makers to gauge the ‘mood of the nation’ when they make their decisions and hope that they get it right.
However, neither of these problems is a reason to give up on measuring growth and striving for it. All other things being equal, growth in GDP/capita will be good for everyone. It’s not a perfect measure but, as long as we bear the limitations of our measure in mind, it can still be a very useful one.