Finance & economics | Free exchange

Joy to the world

What Ebenezer Scrooge and Tiny Tim can tell us about economics

WHAT is the point of economics? It often seems that the objective is to make the world richer. When global GDP is growing quickly, dismal scientists rejoice; their only misgiving is that growth might slow. Yet this is the season when, for devout Christians at least, the ineffable supplants the material (and the other way around for most folk). That makes it a good time to ponder whether maximising income should really be the be-all and end-all of economic policy.

Few people consider a big income as an end in itself—with the notable exception of Ebenezer Scrooge, the “squeezing, wrenching, grasping, scraping” anti-hero of Charles Dickens’s “A Christmas Carol”. But we do sense that income helps people to lead more comfortable lives. Indeed, people in the ten richest countries in the world have a life expectancy 25 years higher than people in the ten poorest. People with more cash can afford better education, more varied leisure activities and healthier food, all of which improve the quality of life.

Income is not the only thing that matters, however. A paper from 1999 by William Easterly, of New York University, used data from 1960 to 1990 to see how close the correlation was between economic growth and 81 different indicators of quality of life.* He found that it outweighed other factors (technological change, say, or changing social mores) for only 32 of them. A survey of 43 countries, published on October 30th, found that people in emerging markets are within a whisker of expressing the same level of satisfaction with their lives as people in rich countries.

If income is an imperfect proxy for quality of life, are there any plausible alternatives? In recent years many have instead focused on happiness. The United Nations has been publishing an annual “World Happiness Report” since 2012. The British government measures “personal well-being” across the country on an annual basis. Yet happiness has its own shortcomings, argues Martha Nussbaum of the University of Chicago. While Scrooge found it easy to count his riches, happiness is harder to pin down. People are prone to what philosophers call “adaptive preferences”, meaning that they may fail to report their “true” happiness. “Tiny Tim” Cratchit, the annoyingly saintly hero of “A Christmas Carol”, should not, by rights, be happy: he is crippled and desperately poor. Scrooge, despite his fabulous wealth and good health (Yuletide hallucinations aside), is miserable. Yet it would seem odd to conclude that Tiny Tim is better off.

If measuring happiness is so difficult, what else could economists look at? Amartya Sen, of Harvard University, argues that “capabilities” are the way to go. The definition of a capability is a bit fuzzy: at its simplest, a capability is something that people have reason to value. The list of potential capabilities is endless: the opportunity to live a long and healthy life, the freedom to take part in political life or to be well nourished. Capabilities, says Mr Sen, are ends that economists should strive to maximise: income is just one of the many means by which we get there.

That begs the question of which capabilities a society should maximise. Some worry that the capability approach is deeply paternalistic, with governments deciding what is best for their citizens. Leading theorists have reinforced that perception: Ms Nussbaum goes so far as to recommend “ten central capabilities” that are essential for a good life. For economists, who tend to be lovers of freedom, this is controversial stuff.

But the capability approach may be less illiberal than it seems. Insisting that GDP is the true measure of economic progress is itself a value-judgment. What is more, according to Mr Sen and Ms Nussbaum, people must have the freedom to select which capabilities they ultimately pursue. Freedom of choice has an impact on well-being; if you give people decent opportunities, what they ultimately decide to do gets less important. Someone who chooses to forgo a Christmas dinner with family and friends (as Scrooge does) is better off than someone who does not have any invitations to turn down, even though both people seem to end up in the same position. Everyone need not go to a Christmas dinner, even though many people get a lot from it.

Life, liberty and the pursuit of capabilities

Measuring capabilities may be even more difficult than measuring GDP or happiness. There are, though, decent proxies. A country with a high life expectancy probably offers its citizens things like good health care and helps to shield them from pollution, which makes it easier for them to live a long, healthy life. A country where girls miss out on schooling or women are not allowed to drive is presumably failing to give them the opportunity to participate fully in civic life.

Some measures of economic success use such data. The Human Development Index (HDI), which Mr Sen helped to devise in 1990, considers not only income, but also life expectancy and schooling, as elements of development (by GDP per person, Norway is the sixth-richest country in the world, but according to the HDI its inhabitants are the world’s best-off). On December 10th the UN released the latest version of its “inclusive-wealth index”, which puts a dollar value on things like education and health.

It is no easier to raise capabilities, however, than it is to increase income. Bhutan, where the concept has driven government policy, still does not rank that highly on the HDI. Moreover, the capability approach has spawned so many measures, each more complicated than the last, that GDP starts to look appealing again. What other single number can give a decent approximation of quality of life? And yet, by the end of a “Christmas Carol”, even Scrooge realised that there was more to life than GDP.

*Studies cited in this article
"Life during growth", by William Easterly, Journal of Economic Growth, September 1999

"People in emerging markets catch up to advanced economies in life satisfaction", Pew Research Centre, October 2014

Economist.com/blogs/freeexchange

This article appeared in the Finance & economics section of the print edition under the headline "Joy to the world"

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