1. The Economics Of Well-Being
Have we found a better measure of
success than GDP?
by Justin Fox
Harvard Business Review
2. GDP
GDP = private consumption + gross investment +
government spending + (exports − imports)
3. • 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”
4. • 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)
5. 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.)
6. • 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
7. • 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”
8. • 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.”
9. • 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
10. Measurement Error
• GDP does not reflect all production
E.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
11. 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.
12. 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
13. • 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
14. Top Countries by Human
Development
1. Norway
2. Australia
3. Netherlands
4. United States
5. New Zealand
6. Canada
7. Ireland
8. Liechtenstein
9. Germany
10. Sweden
http://hdr.undp.org/en/countries/
15. 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
