Does economic growth make you happy?
October 2, 2012
Adair Turner is the jewel in the crown of British public servants. He is one of a tiny minority in public life today capable of thinking and acting at the highest level. Economics after the Crisis, based on three lectures he delivered at the London School of Economics in 2010, is a thinking person’s delight, not least for the clear and lucid way in which Turner sets out his arguments. His book challenges the three main planks of what he calls the “instrumental conventional wisdom”. The first is that the object of policy should be to maximize Gross Domestic Product per head; the second, that the primary means of doing this is to create freer markets; the third, that increased inequality is acceptable as long as it delivers superior growth. The attack is devastating, leaving little of the policy edifice of the past thirty years standing.
The case against making increased GDP per capita the overriding policy objective is that it doesn’t deliver the increased happiness or welfare if promises. In 1974, the economist Richard Easterlin published a famous paper, “Does Economic Growth Improve the Human Lot?”. The answer, he concluded, after correlating per capita incomes and self-reported happiness levels across a number of countries is probably “no”. In a refinement dating from 1995, Easterlin found no relationship between income and happiness above an average per capita income level of between $15,000 and $20,000. Other findings confirm Easterlin. Data from the UK show that from 1973 to 2009, there was a continuous rise in GDP per head, but no increase in reported life-satisfaction. What is more, some of the “happiest” countries are also the poorest. However, inequality within countries does matter for happiness: the rich in the UK are on the whole happier than the poor.
Why, above a quite low income threshold, does a person’s happiness not increase with more income? The intuitive explanation must be that rising incomes produce dissatisfactions which offset the pleasure which the increase affords. Turner discusses some of the ills of wealth. The richer societies are, the more “status” goods people want, but because status is relative there is never, so to speak, enough of it to go round. The same is true of “positional” goods. “If the supply of pleasant homes is restricted then you have to seek to win in the relative income competition.” But there are only a few winners. Growth in wealth also worsens the environment, thus degrading the benefits it seems to make more generally available.
These negative effects of economic growth on contentment levels are well known. More radical is Turner’s attack on our way of measuring wealth. GDP measures the volume of marketed output, not its quality. But it is the improvement in quality which is chiefly important for satisfaction. Taking his cue from the economist Roger Bootle, Turner argues that a large fraction of GDP, especially in finance, law and “branding”, measures “distributive” rather than “creative” transactions; that is, it measures transfers between groups and individuals rather than net additions to income. “The clever lawyer who wins a case for his client achieves a redistribution from the opposing client but doesn’t create greater social value.”
Inequality within societies does matter for happiness, however. Studies show that, in any society, the rich are happier than the poor, and that at the same average income levels, more equal societies record greater levels of happiness. This throws the onus of increasing welfare or satisfaction on distribution. But modern capitalist society, especially in its Anglo-American version, produces growing inequality: over the past thirty years the very rich have pulled away from the moderately rich, the average from the median, and the median from the bottom. Why have the rich gained and the poor lost ground?
Turner’s explanation is twofold. On the one hand, the world of stars and celebrities created a momentum towards excessive rewards untrammelled by former considerations of what was reasonable and fair. On the other hand, technology and globalization have forced down the wages of the least skilled. For all these reasons, Turner believes that “there is no good reason for believing that additional growth in average income, as measured by by national accounts, necessarily and limitlessly delivers happiness” (my italics) and that “rich countries are now in a zone where further increases in average happiness are of uncertain and in some respects of diminishing importance”.
Turner’s second target is the belief that freer markets are the best way to produce faster growth. Evidently, if faster growth is no longer so important, “freeing up” markets is less important too. But Turner argues that the proposition that freer markets bring faster growth is not true in any case. The empirical case is shaky, the theoretical case deeply flawed. Before the First World War the United States achieved rapid growth behind high tariffs. China has been stunningly successful with an eclectic economic system. There is no evidence that the growth of rich countries accelerated following extensive market deregulation in the 1980s.
The theoretical case goes back to Adam Smith: the wider the market, the faster the growth of wealth. The argument, applied to the financial markets, is that the more “liquid” they are, and the more extensive financial innovation is, the more efficient the economy will be. This was the conventional wisdom Turner experienced first-hand as a banker and as chairman of the UK Financial Services Authority. Professors of finance like Eugene Fama gave it authority by claiming that all risks would be correctly priced, so that current prices would always reflect fundamental values. Regulation should be confined to specific “market imperfections”. This wisdom, Turner asserts, was part of the “institutional DNA” of Britain’s Financial Services Authority in the years before the crisis…