How to shape economic policy when we move beyond GDP

Having a ball: How politicians can make smiley happy people. seanbjack, CC BY-ND

The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems – the problems of life and of human relations, of creation and behaviour and religion.

These are the words of John Maynard Keynes in the first annual report of the Arts Council in 1946. Keynes was writing a lifetime ago, and he was wrong. The “economic problem” of today is firmly in the driving seat of policy with higher economic growth the ultimate goal of many policymakers. But is growth of the economy – producing more goods and services (usually measured as the percentage change of GDP) – a good indicator of well-being or the quality of life? The economist, Simon Kuznets, who developed the concept of GDP in 1934, was sceptical, remarking that: “the welfare of a nation can scarcely be inferred from a measurement of national income.”

Know your limits

Most of the limitations of GDP are well known: it is difficult to measure; it takes no account of the informal economy; it ignores the distribution of income; and damaging the environment can increase “national income”. It is also questionable whether economic growth improves the quality of life: an influential paper by Dick Easterlin identified the “Easterlin Paradox” whereby increased economic growth is not associated with an increase in reported happiness. As shown in the graph below, there are significant national variations in GDP per capita and reported levels of life satisfaction, and many economists suggest that reported happiness does not increase in nations once per capita GDP reaches approximately $15,000.

Some Things Considered, Author provided

There are a range of different metrics including reported happiness and life satisfaction but the broad picture is that having a lot more stuff does little to improve the quality of life in advanced economies. So what does? Of course, there is a lot of variability between places and peoples but there are some common themes which should be the focus of policy.

First, the thing we want most is to live long and healthy lives: with the importance of mental health often been overlooked. Second, relationships are important – including with family and friends but also relationships at work and within the community – with trust being a major determinant of the quality of life. Third, we want a job, not simply because it provides income but because it is a source of satisfaction as it provides a sense of worth and contribution to society.

Well-being and public policy

So, how should public policy reflect the importance of the quality of life? First, increase the provision of health services – especially to prevent and treat mental illness. Second, increase investment in education – not simply because it improves skills but also because it is a prime determinant of trust and social engagement.

Lessons learned. William Creswell, CC BY

The increased demand and provision of health and education have been prime drivers of the growth of the public sector in the advanced economies since the end of the Second World War. Those who argue for the retrenchment of the public sector must grapple with how the increasing demand and need for health and education will be provided and paid for in the future? Third, ensure that macroeconomic policy focuses on jobs and not just on addressing inflation and growth.

And such a policy must be aware of the damage that a “flexible labour market policy” can cause when it results in some working long hours or travelling far to work. There is a trade-off between work and relationships – working long hours is not conducive to engaging with family, friends or within the community. And a long commute to and from work does not help. Evidence from the UK shows that: “commuters have lower life satisfaction, a lower sense that their daily activities are worthwhile, lower levels of happiness and higher anxiety on average than noncommuters”. Policy makers need to focus on an efficient transport network, as well as on encouraging work from home.

Escaping the defunct metric

There are criticisms of the well-being agenda. The libertarian tendency thinks that it is another left-wing plot to control the individual. And some on the left consider it a smokescreen to mask the hardships of austerity. It is an agenda with limitations, including: the difficulties of obtaining reliable data; identifying causality; and understanding the boundaries of public policy – just because being lonely makes us miserable is not a justification for banning divorce; and because our kids may make us miserable is not an excuse to tax making babies.

But is has to be step forward to move beyond the narrow focus on how policy can help us produce more stuff to consider how policy may improve the quality of life. We need to move beyond the confines of GDP: policy-makers will be more effective when they are not the slaves to some defunct metric.

This article is part of an ongoing series, Beyond GDP, which looks at the dominance of GDP in economic thinking and how that might change. Read more here