Economic Growth and Human Wellbeing (Part I)

Economic Growth and Human Wellbeing in Three Parts

The current debate about our planetary future is infused with fear that we may lose some economic prosperity during the transition to a low-carbon economy. Although those fears are largely misplaced, it is nonetheless important to examine to what extent our wellbeing as a species relies on economic growth. Do we need growth to be happy?

This three-part series of posts over the next few days addresses this issue. See Part 2: Revisiting Limits to Growth and Part 3: The Psychological Down Side of Growth.

Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.

Kenneth Boulding, economist (1920-93)

Abstract

The well being of nations and of their people is almost invariably judged by the rate of economic growth. Such growth is driven by the increasing consumption of goods and services. Accordingly, government policy is often based on the premise that higher growth rates and greater affluence are conducive to happiness – if the GDP is rising, we should all be better off, in every sense. Research here and in other developed countries shows that even when people obtain more money and material goods, they do not necessarily become more satisfied with their lives or more psychologically healthy. Once people are above modest levels of income, gains in personal wealth have little or no incremental benefit in terms of happiness and wellbeing.

In fact, research shows that merely aspiring to have greater wealth or more material possessions is likely to be associated with increased personal unhappiness. People with strong materialistic values and desires report more symptoms of anxiety, are at greater risk of depression, and experience more bodily discomfort than those who are less materialistic. They watch more TV, take more alcohol and drugs and have more impoverished personal relationships.

Increasing consumption also results in the accelerated depletion of finite resources; in the pollution of air, land and water; in climate change and biodiversity loss; and, beyond a certain point, human discomfort. What is often overlooked in the simple equation of wealth and happiness is that the social and environmental consequences of rising consumption may also generate psychological risks of their own. People exposed to constant change, persistent noise, drought and unusual weather are more likely to report feelings of unhappiness and to experience in higher rates of mental illness. The ramifications of these effects will be discussed.

Part 1: How we live today

How did we come to think in exclusively economic terms (about policy)?

Tony Judt – ABC Radio National 13/01/2011

There are many who agree with the historian, the late Tony Judt, that “Something is profoundly wrong with the way we live today.” In his book, “Ill Fares the Land”, Judt (2010) argued that for the last three decades we have made a virtue out of the pursuit of material goals to such an extent that “this very pursuit now constitutes whatever remains of our sense of collective purpose”. He suggested that this pursuit is now firmly entrenched in an orthodoxy which judges achievement and public policy in exclusively economic, rather than moral, terms. The result is that when we consider whether to support a particular proposal or initiative, we don’t ask whether it’s good or bad, whether it will help bring about a better society of a better world, but rather, how will it affect the economy, whether it is efficient, whether it will lead to increases in GDP and, if so, how much it will contribute to growth.

Most people do not appear to regard this as a problem; the equation of wellbeing with economic growth is taken as given and the identity of society with the economy as uncontentious. Indeed, they do not see any alternative to this construction; it is simply the way the world works. Almost without exception, politicians, business people, journalists and financial commentators regard the need for economic growth as unarguable. In fact, to raise questions about economic growth is to risk banishment from contemporary political discussion. But as Judt has pointed out, this avoidance of moral considerations in assessing public policy and the restriction of policy discussions to the narrow economic questions of profit and loss is not an inevitable human tendency but, as he put it “an acquired taste”, and a recent one at that.

Much of what we judge to be “natural” today would probably surprise our grandparents; the focus on growth rather than prosperity or the standard of living accelerated during the neo-liberal dominance in the 1980s, when we saw the emergence of an obsession with wealth creation, an increasing push to privatize public assets and growing disparities between rich and poor, both within and between nations. At the core of this is an uncritical admiration for “the free market”, a naive belief in endless growth and, particularly in the United States, hostility toward government action to modify any of these results.

As a consequence, a nation’s progress is now almost invariably judged by how it implements policies which lead to growth in the scale and scope of market activity; growth is the answer to almost every problem – more economic growth is invariably seen as beneficial. Other national attributes such as the level of equality, the incidence of social problems, the respect for human rights, the health and wellbeing of citizens, the state of the environment and contribution to global citizenship, to name but a few, are not given much weight – or much publicity. This near exclusive focus on growth appears to make people uneasy; as the same time as they are experiencing higher and higher levels of material comfort, 83% of Australians endorse the view that ‘Australian society today is too materialistic, with too much emphasis on money and not enough on the things that really matter’^{^[1]}.

However, it remains the case that for many, especially those in a position to influence public policy, the economy and society are identical; if one grows, the other must be improving along with the quality of people’s lives. The market is seen as immutable and inevitable, a mechanical process optimal for arbitrating decisions about what resources are available and who should share in them. We are told that, left alone, markets will produce the most efficient – and just – outcomes. While this confidence may have been shaken a little in the recent financial meltdown, it rebounded remarkably quickly on the foundation of taxpayer funded bailouts of the corporate “victims” of market failure.

There are, of course, people who dissent from this orthodoxy, people who recognise that markets are part of a broader social fabric, human creations which come in a variety of forms, governed by rules and supported by agreed conventions and legislation and which do not always produce optimal outcomes for society. In his very entertaining treatise on capitalism, Cambridge economist Ha-Joon Chang (2010) examines the extravagant claims of the free market fundamentalists and concludes that “the fundamental theoretical and empirical assumptions behind free market economics are highly questionable” (p 252).

The GDP

A cursory perusal of any day’s media will reveal our continued, collective fixation with tracking changes in economic growth, usually indicated by shifts in Gross Domestic Product (GDP). Regular bulletins on the state of the GDP are issued and events, such as the recent Queensland floods and cyclones, are read through the prism of their effects on growth. The goal of economic growth is clearly the touchstone for judging major public policy decisions and is the most familiar subject of economic commentary in the media. Economies and firms are judged not just by whether they are growing, but by how fast they grow. Some have described this as a “secular religion” and the historian J.R. McNeill concluded that “the overarching priority of economic growth was easily the most important idea of the twentieth century” (p 336).

Until fairly recently, little attention was paid to the costs of such a focus; now the consequences of environmental degradation and rising CO2 emissions – together with challenges to economic orthodoxy from within profession – are forcing some reassessment. As Nobel Laureate Joseph Stiglitz (2009) has argued, using the language of orthodox economics, “pollution is a global externality of enormous proportions.” This is similar to the view expressed by Ross Garnaut (2010) in reporting on the economic effects of climate change, that “polluters are not paying the costs of the damage they cause.” Orrell (2010) puts it more bluntly: “the real credit crunch is not the one involving banks, but the one involving the environment” (p 214).

It is obvious that there are two main omissions from the models and theories of growth in neoclassical economics: the planet and the human families and communities which live within it. These models neglect the fact that the human economy is embedded in the biosphere which consists of living things, the products of living things and the necessary resources and conditions for living things to survive and thrive. When they are considered at all, such resources tend to be viewed as infinite; energy economist Adelman, writing in 1993 said, “minerals are inexhaustible and will never be depleted” (p xi). Often such consideration is simply omitted altogether, so problems are effectively defined out of existence. But recently, Nobel Prize winning economist and New York Times columnist Paul Krugman reminded his readers that[2] “we’re living in a finite world, one in which resource constraints are becoming increasingly binding.”

As eminent UK economist Partha Dasgupta (2010) has acknowledged, “we economists see nature, when we see it at all, as a backdrop from which resources and services can be drawn in isolation. Macroeconomic forecasts routinely exclude natural capital. Accounting for nature, if it comes into the calculus at all, is usually an afterthought to the real business of “doing economics”. We economists have been so successful in this enterprise that if someone exclaims “economic growth!” no one needs to ask “Growth in what?” – we all know they mean growth in gross domestic product (GDP)” (p 6).

Common sense tells us that there is a difference between the mere monetary transactions captured by the GDP and a genuine addition to a nation’s well being. It is clear, indeed, that increases in GDP do not necessarily indicate any improvement in the quality of life because it has a number of major shortcomings, including a failure to account for how increased output is distributed, the omission of household and voluntary work, the inclusion of expenditures incurred because of pollution, transport and industrial accidents, war, crime and ill health, the failure to account for changes in the value of stock of both built and natural capital or to measure public services (such as parks) not purchased in the market. Fundamentally, it says nothing about the content of the transactions which make up the GDP. “More” or ”less” of something means nothing, unless we know of “what”.

All this matters because adopting growth as the pre-eminent social and economic goal and using the GDP as its index fixes the direction and content of national policy; if we continue to ignore the shortcomings of both the goal and the measure, policies will head us in the wrong direction, diminishing people’s quality of life and destroying the natural environment on which it depends.