More pie in the sky - economic progress no slice of life
Tuesday, Jun 25, 2013, 04:55 AM | Source: The Conversation
By Warwick Smith
More pie in the sky - economic progress no slice of lifeWarwick Smith, University of Melbourne
In the verbal volley between Gillard and Abbott, Swan and Hockey, there is a conversation that we are not hearing. It bubbles below the consciousness of mainstream Australia, a conversation that is old news for many of us who delve beyond the broadsheets and broadcasts and, for some, a lifetime mission to see in the mainstream.
I believe this conversation can be summed up by the question: what is progress and how should we measure it? Catchphrases such as mateship and "family values" aside, we don't talk much about our core values or our aspirations in any sense that is not economic.
While economic growth, interest rates and inflation are all good things to measure, they tell us very little about who we are, what we want and how well we're achieving goals that really make a difference to our lives. Most importantly, how do they help us know if our government is focused on providing us with an environment in which we can achieve those goals?
For many people in the developed world, consumption has become integrated into our sense of identity and into our measure of progress. Who we are and who we associate with is in part defined by what we buy. Our goals are often material: a new car, a renovated kitchen or a 3D TV will make us happier. In this Sisphyean culture, we roll our boulders to the top of the hill and then look about for the next boulder and the next highest hill, glancing at our neighbour's boulders and their hills as our measure of self-worth. How did we get here? And is it what we want?
A little insight into modern economic theory can help explain our predicament. In undergraduate courses, the core of modern economics is usually fleetingly mentioned in the first lecture with a one-liner like:
The crux of this assumption is that the more things we buy or sell that include an economic surplus, the better off we are. A surplus is simply how much more we would have paid for something than it costs (consumer surplus) or how much less we would have sold something for than somebody paid for it (producer surplus).
That's it. That is how economists maximise human welfare. Leisure has a price too, which fits into the model, and with that included, working out how to make the world a better place becomes remarkably simple…deceptively simple.
Unfortunately, the relationship between income and direct measures of wellbeing is logarithmic, at best. This means that increasing somebody's income from $200,000 to $400,000 per annum will provide the same increase in wellbeing as an increase from $2000 to $4000. These diminishing returns on GDP growth for wealthy countries cast the whole enterprise into doubt.
The problems only get worse when economists try to create a tally of society's welfare by adding one person's economic welfare to another's.
Not all people like the same things to the same extent. This means every person gains a different amount of utility from the same product at the same price. You can't add up all of the consumer surpluses from a fall in the price of chocolate because the benefit to an individual depends on how much they like chocolate. How do economists get around the fact that it's simply not possible to measure every person's tastes for every possible product? They cheat.
In order to aggregate social welfare, economists assume that there is only one consumer with one set of tastes who gains the same benefit from each extra unit of consumption (even if it's the 40th apple for the day). Every single product is also assumed to maintain its share of an individual's budget no matter what their income. Economic models then calculate the economic welfare of this individual and multiply the result by the number of people in the population.
If you follow the logic of these models it leads inexorably to the desirability of an ever-expanding economy. In terms of overall economic welfare it doesn't matter who has the extra money. Give a loaf of bread to a homeless person or to Gina Rinehart and the overall social welfare increases by the same amount. This result flows, not from any data or evidence, but from these obviously flawed assumptions that are built into the model to make the mathematics work.
There is a saying about mathematical models: garbage in, garbage out. If we remove the garbage assumptions made about products improving welfare no matter how many are consumed and products taking up the same proportion of our income no matter how much we earn, then we get a very different picture. And it's one that places a great deal of importance on economic equality. It really does matter if the bread goes to somebody who would otherwise be unable to afford it and the first apple somebody has in a day is much more valuable than the 40th.
Economists have hoodwinked us into thinking measures of economic progress are measures of real progress. This begs the obvious question, how do we measure non-economic progress?
Former French President Nicolas Sarkozy commissioned a report in an attempt to answer this very question. The report, published in 2009, is a great summary of the topic but makes few tangible recommendations. As it says, the report represents the beginning of a conversation.
This is a conversation we are not having in the Australian mainstream and it is almost entirely absent from federal politics. Labor and the Coalition are still focused on economic growth as the yardstick of success – tempered by fears of inflation and debt.
We need to start measuring and valuing things that actually make a difference to people's lives and use these measures to gauge our progress as a nation. Once we do, we can measure policies and policy-makers against a yardstick that means something tangible to us. We may also find new meaning in our lives as we work for something more valuable than the latest gadget or the biggest house.
Until we have this conversation and establish national environmental and social-progress indicators to supplement raw economic indicators, we will be forever pushing boulders up hills and wondering why our lives feel a bit meaningless.