The Economics Of Well-BeingHave we found a better measure of

success than GDP?

by Justin FoxHarvard Business Review

GDP

GDP = private consumption + gross investment + government spending + (exports − imports)

• The metrics that has prevailed since world war II is the monetary value country’s output expressed first as GNP later GDP

• At present GDP is facing trouble as the economists and national leaders are talking about measuring country’s status based on the concept “ happiness”

• A study was being taken in 2009 with regard to alternative to GDP (replacing GDP looks little airy as plays a vital role in policy making of the country )

• In October 2011 the organization for economic co-operation and development (OECDD), a club of the world’s wealthy nation followed with a ‘How’s life?’ report on well being

• There are also decades old challenges to GDP such as Human development Index (HDI)

From happiness calculus to GDP

• Jeremy Bentham out lined the Philosophy of ‘utility’ (“the greatest good for the greatest number”)

• Principle of utility measure the merits of an action based on how much happiness it produced

• It was started during enlightenment, period i.e. 18th century

• Bentham developed a happiness calculus for any action by balancing 12 pains and 14 pleasure (the pain of senses, pain of awareness; pleasure of amity, pleasure of wealth etc.)

• But calculating pleasure and pain was too difficult and messy

• His followers modified the concept by “ what they were willing to spend money on”

• In 1930s Paul Samuelson attempted to explain welfare economics in purely mathematical terms

• About the same time economists Simon Kuznets in the U.S and Richard Stone in U.K were developing the system of national accounting from which GNP and GDP are derived

• There main aim was to make it easier for policy makers to mange a national economy through financial crises and wars (not concerned about utility )

• In 1940 GNP was adopted by the international monetary fund (IMF) and World Bank as the key indicator of economic growth ( original purpose was to measure short term fluctuations )

• Over the years GNP became the measure of “well-being”

• Robert F. Kennedy said on the presidential campaign in 1968 “It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl.…Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play.”

• He emphasized the major criticism of GDP - GDP is, even on its Owen terms, a faulty

measure ( Measurement error ) - It takes no account of sustainability or

durability - Progress and development can be better

measured with other metrics

Measurement Error

• GDP does not reflect all productionE.g. unpaid household workers are left out of the

calculation • Government welfare E.g. health care provision • Underground economy• Developing nations with lots of FDI saw GDP grow

much faster but didn’t necessarily reap the benefits as the investment profit went to multinational corporation

Sustainability

• Kennedy – “GDP can’t distinguish between economic activates that increase a nation’s wealth and one that eat its natural rich” results in sickness and pollution

• Clinton administration pushed the Bureau of Economic Analysis to develop a green GDP.

• But the politics are extremely tricky. A West Virginia congressman put a halt to the effort, fearing it would hurt his state’s coal mining industry.

Other metrics

• Mahub Ul Haq a top adviser at world bank in 1970s, served as Pakistan's finance minister in 1980s and joined UN development programme in 1989

• He found that countries like Pakistan and other poor nations to make rapid progress as measured solely by GDP was difficult

• He found that is was not meaningful enough to capture complex reality in one number like GDP

• So Human Development Index was published in1990

• HDI, published in 1990• U.S was leading in terms of per capita GDP became

10th place in 1990 which was behind Japan, Canada, Australia and several small European countries

• It was also identified that a few nations like Sri Lanka, Vietnam and China were standout with respect to living standards

• HDI calculated considering Health, education and income

Top Countries by HumanDevelopment

1. Norway2. Australia3. Netherlands4. United States5. New Zealand6. Canada7. Ireland8. Liechtenstein9. Germany10. Swedenhttp://hdr.undp.org/en/countries/

Conclusion

• The idea that economic and other data can be better presented with a dashboard of indicators (metrics of health, education, income)than as a single number or ranked list is very much in the air among experts and policy makers.

• These dashboard are justified as Jeremy Bentham focused on maximize happiness