Week 1
The challenge of affluence: self-control and well-being in the United States and Britain
since 1950 – Offer
Pages 15-38
Economic growth does not always improve the well-being of humans the importance of
economic growth seems to depend on historical factors and tends to decrease as affluence
increases
System of National Accounts (SNA): this facilitated international and intertemporal
comparisons, and generated a competitive preoccupation with economic growth its
purpose was to provide an efficient measure of cyclical changes in total economic activity
(not to monitor human welfare) but this measurement at the micro-level is a little
problematic: there is the problem of disaggregation from market prices and quantities to
household and to individual since the nation is not a single person, a higher level of Gross
Domestic Product per head (GDP) might fail to deliver more welfare
Alternative measures of welfare have followed 3 approaches:
1. Extended accounts: are mostly designed to measure welfare they start out with
the SNA score, and adjust on consumption and capital account: they typically
eliminate some commodities and services which are not seen as final goods in
themselves (but as regrettable necessities) they impute a value to sources of
welfare from outside the market extended welfare has been positively correlated
with GNP over the long run, though the actual growth rates have differed; and more
welfare is derived from nonmarket than from market activities this doubts on the
assumption that all well-being can be priced extended accounting relies heavily
on the allocation of time (this can also be a measure of welfare)
2. Social indicators: inspired by the idea that real welfare was not captured by SNA
indicators access to certain goods constitutes a precondition of welfare
typically these goods consisted of nutrition, housing, education, health and life
expectations, environmental quality, crime, and poverty levels they might also
include such objectives as the freedoms of movement, expression, and political
organization implicit in social indicators is some notion of adequacy: there is too
little of some things or too much of others social indicators are rarely scaled in
the metric of money, or set within an accounting framework but this was difficult
to measure because of the absence of a coherent account framework social
indicators not only depend on norms, but could also help to create them
3. Psychological indicators: to understand the economy, more needs to be known
about the mind psychological approaches attempt to reach directly into the
experience of welfare they test the validity of the national accounting measure of
welfare: static measures estimate the correlation between SNA goods and
psychological indicators of well-being and dynamic approaches probe deeper into
the hedonics of satisfaction
Pursuit of welfare is not always satisfied by economic growth alone and may require
different measures at different times
,Ideas about extended accounts:
Sustainable consumption: Hicks defined this as the maximum value of consumption
which would leave the individual afterwards as well off as before Nordhaus and
Tobin attempted to estimate sustainable welfare which they took as consumption
plus net investment (they admitted the need to deduct the depletion of non-
renewable natural resources) Weitzman: national product net of asset depletion
also described the discounted sustainable productive potential of the economy
Zolotas: incorporated pollution and natural resource depletion into a set of extended
accounts and also imputed shadow costs to some social detriments his index of
the economic aspects of welfare (EAW) rose progressively more slowly than GNP; a
time would come when an increment of economic growth would produce no welfare
at all it would appear that when an industrial society reaches an advanced state of
affluence, the rate of increase in social welfare drops below the rate of economic
growth, and tends ultimately to become negative Daly and Cobb: incorporated
inequality (based on Gini coefficients) into a new measure: the Index of Sustainable
(referred primarily to the depletion of nonrenewable resources) Economic Welfare
(ISEW) this had effect of depressing the index: inequality had worsened and it
offset the benefits of nonrenewable resources if we regard society as a unitary
actor, then the growth in economic activity has been producing a reduction in
aggregate welfare (problem of aggregation should be considered) they also
removed the imputation for leisure time (because it dominated the index and was
conceptually unsound; this item had tended to offset the increase in inequality in less
radical accounting exercises) while GNP continued to grow, the ISEW generally
declined ISEW is explicitly normative (SNA only implicitly) Genuine Progress
Indicator is bolder and introduces imputations for divorce and crime
Atkinson: Atkinson’s index provided a measure for evaluating the effect of income
inequality on welfare, which could be adjusted to the amount of inequality tolerated
(or desired) this has been applied to extended accounts several times
Arrow, Dasgupta, and others: consumption may be too high on the ‘maximize
present value’ criterion, and several nations (especially poor ones) do not invest
enough to offset the depletion of natural capital
Ideas about social indicators:
Morris: introduced an unweighted Physical Quality of Life Index (PQLI), made up of
infant mortality, literacy, and life expectation at age 1, as a single measure of welfare
Morris’ updated index (which covered a longer time span) exposed the ambiguity
of the links between growth and welfare
There was a focus on basic needs, but that came into conflict with the structural
adjustment policy, and with the increasing market orientation within development
economics the impression was that costs fell often disproportionately on the poor
the Human Development Index (HDI) was developed which was made up of
income per head, life expectation at birth, and an education indicator, expressed in a
single figure between 0 and 1
Sen’s capabilities approach: moved to the view that income alone does not
satisfactorily capture welfare Sen has not privileged any goods (he has liberal
values) even under indigence it was necessary to respect individual priorities
, well-being consists in having the capabilities with which to achieve valuable
functionings his approach influenced HDI
One justification of SNA as a measure of welfare is its correlation with social
indicators which enjoy normative consensus as ‘good things’ the correlation is
strong under conditions of indigence but loses its power at surprisingly low levels of
real income HDI already incorporates a turning point in its premises, by including
income per head (with a lower value placed on incomes higher than the whole
sample average)
Easterly: used indicators that were regressed on income per head, with fixed time
effects the criterion of robustness was an impact on the quality of life indicator
that was significant, positive, and stronger than exogenous shifts exogenous shifts
capture the effect of global socio-economic progress which may arise from the
diffusion of knowledge or of norms this study confirmed that the relationship of
well-being and income per head is weak (both in cross-section and over time)
There are good descriptive indicators of inequality but what is lacking are standard,
simple, social indicators of the consequences of inequality for affluent societies (an
index of deprivation)
John Ruskin: a significant result of affluence is the large extension of life expectation
incorporating life expectation (and health) into extended accounts has the effect
of raising the level of measured welfare very substantially and would double the rate
of growth in the recent past whereas income growth increases life expectation
over time, higher wealth does not guarantee longer lives in the cross-section when
countries are compared for income and longevity (link between life expectation and
income per head has weakened considerably)
Ideas about psychological indicators:
Static happiness approach: constitutes survey data on responses to a simple question
about current subjective well-being on a bounded ordinal scale the response to
such questions is subjective well-being (SWB) the indicator is crude, but this is not
necessarily a defect and empirical validity is robust levels of reported well-being
are remarkably high in affluent societies Easterlin highlighted the absence of
relation between country income levels and SWB but Veenhoven challenged this and
he identified a curvilinear relation Diener and others found out that SWB rose
moderately but significantly with income (above a certain level income did not
provide any increment to SWB) Offer: when social ranking is controlled for,
absolute levels of income provide virtually no increment in SWB SWB has been
correlated with an array of socio-economic determinants and domains and the
predictive power of each individual determinant of global well-being was low
income counted little for happiness and the relation is curvilinear (effect was
strongest at lower incomes); quality of relationships, leisure, and work experience
counted considerably more for aggregate well-being than income and consumption
measures; materialism was negatively correlated with SWB; relative income (position
on the ladder of earnings) had significant influence on well-being
Relative income hypothesis: states that what counts is not absolute income, but
relativities even a large rise in income will leave no impact on well-being if
distribution is unchanged as incomes increase, so do consumption norms;
, consumers become habituated to new levels of consumption hedonic treadmill:
income must rise to sustain satisfaction at a constant level
Offer: although absolute income (and educational levels) has little effect on
subjective well-being, the richer countries are happier Helliwell: those who have
the highest levels of SWB are not those who live in the richest countries, but those
who live where social and political institutions are effective, where mutual trust is
high, and corruption is low
Longitudinal studies indicate that personality is a strong predictor of SWB (people are
simply born happy or unhappy)
Culture contributes to stability, and as societies become more affluent, they tend to
shift away from emphasizing economic security and traditional authority this
adaptation suggests that increased affluence diminishes concerns about economic
security, and cultural values slowly adjust to changes in economic conditions
(Inglehart) in affluent societies, culture appears to affect SWB more strongly than
income ideas to individual well-being may be culturally specific
Easterlin has hypothesized that expectations are formed by comparisons with
parents, and that demographic cycles have led different cohorts to have different
expectations Inglehart’s post-materialism: the post-war cohorts have shifted their
preferences from economic to non-economic rewards, because of their experience of
economic security
One psychological approach explores the hedonic dynamics of satisfaction in
welfare economics, it is assumed that consumers are well-informed, self-aware,
consistent, and acquisitive, essential for revealed preference to equal welfare
other perspectives question consumer’s cognitive abilities the debate between a
social indicator poverty line (focusing on normative consumption) and a money
metric one (measuring resource access) reflects different views on the legitimacy of
lifestyle choices
Novelty may undermine well-being as new rewards are compelling, while their costs
are not yet known economic competition driven by novelty and innovation can
lead to myopic choices, as new forms of stimulation are highly compelling in the
absence of prior experience the pace of economic growth has an inverse
relationship with SWB
Offer: a more systematic targeting of ill-being, its determinants, and the economic costs of its
amelioration, is needed to make the reduction of ill-being the focus of international
competition it might be more useful to shift the focus of measurement from happiness to
unhappiness prospect theory: losses are more acutely experienced than gains it may
be easier to reach consensus about welfare ‘bads’ than about welfare ‘goods’ but GNP
goods retain relevance, since a society dependent on exponential growth for a stable
experience of well-being might suffer badly if growth is withdrawn the determinants of
human well-being are considered historically contingent, suggesting that societies may
experience different needs over time
Report by the commission on the measurement of economic performance and social
progress – Stiglitz, Sen, and Fitoussi
Pages 19-40
The challenge of affluence: self-control and well-being in the United States and Britain
since 1950 – Offer
Pages 15-38
Economic growth does not always improve the well-being of humans the importance of
economic growth seems to depend on historical factors and tends to decrease as affluence
increases
System of National Accounts (SNA): this facilitated international and intertemporal
comparisons, and generated a competitive preoccupation with economic growth its
purpose was to provide an efficient measure of cyclical changes in total economic activity
(not to monitor human welfare) but this measurement at the micro-level is a little
problematic: there is the problem of disaggregation from market prices and quantities to
household and to individual since the nation is not a single person, a higher level of Gross
Domestic Product per head (GDP) might fail to deliver more welfare
Alternative measures of welfare have followed 3 approaches:
1. Extended accounts: are mostly designed to measure welfare they start out with
the SNA score, and adjust on consumption and capital account: they typically
eliminate some commodities and services which are not seen as final goods in
themselves (but as regrettable necessities) they impute a value to sources of
welfare from outside the market extended welfare has been positively correlated
with GNP over the long run, though the actual growth rates have differed; and more
welfare is derived from nonmarket than from market activities this doubts on the
assumption that all well-being can be priced extended accounting relies heavily
on the allocation of time (this can also be a measure of welfare)
2. Social indicators: inspired by the idea that real welfare was not captured by SNA
indicators access to certain goods constitutes a precondition of welfare
typically these goods consisted of nutrition, housing, education, health and life
expectations, environmental quality, crime, and poverty levels they might also
include such objectives as the freedoms of movement, expression, and political
organization implicit in social indicators is some notion of adequacy: there is too
little of some things or too much of others social indicators are rarely scaled in
the metric of money, or set within an accounting framework but this was difficult
to measure because of the absence of a coherent account framework social
indicators not only depend on norms, but could also help to create them
3. Psychological indicators: to understand the economy, more needs to be known
about the mind psychological approaches attempt to reach directly into the
experience of welfare they test the validity of the national accounting measure of
welfare: static measures estimate the correlation between SNA goods and
psychological indicators of well-being and dynamic approaches probe deeper into
the hedonics of satisfaction
Pursuit of welfare is not always satisfied by economic growth alone and may require
different measures at different times
,Ideas about extended accounts:
Sustainable consumption: Hicks defined this as the maximum value of consumption
which would leave the individual afterwards as well off as before Nordhaus and
Tobin attempted to estimate sustainable welfare which they took as consumption
plus net investment (they admitted the need to deduct the depletion of non-
renewable natural resources) Weitzman: national product net of asset depletion
also described the discounted sustainable productive potential of the economy
Zolotas: incorporated pollution and natural resource depletion into a set of extended
accounts and also imputed shadow costs to some social detriments his index of
the economic aspects of welfare (EAW) rose progressively more slowly than GNP; a
time would come when an increment of economic growth would produce no welfare
at all it would appear that when an industrial society reaches an advanced state of
affluence, the rate of increase in social welfare drops below the rate of economic
growth, and tends ultimately to become negative Daly and Cobb: incorporated
inequality (based on Gini coefficients) into a new measure: the Index of Sustainable
(referred primarily to the depletion of nonrenewable resources) Economic Welfare
(ISEW) this had effect of depressing the index: inequality had worsened and it
offset the benefits of nonrenewable resources if we regard society as a unitary
actor, then the growth in economic activity has been producing a reduction in
aggregate welfare (problem of aggregation should be considered) they also
removed the imputation for leisure time (because it dominated the index and was
conceptually unsound; this item had tended to offset the increase in inequality in less
radical accounting exercises) while GNP continued to grow, the ISEW generally
declined ISEW is explicitly normative (SNA only implicitly) Genuine Progress
Indicator is bolder and introduces imputations for divorce and crime
Atkinson: Atkinson’s index provided a measure for evaluating the effect of income
inequality on welfare, which could be adjusted to the amount of inequality tolerated
(or desired) this has been applied to extended accounts several times
Arrow, Dasgupta, and others: consumption may be too high on the ‘maximize
present value’ criterion, and several nations (especially poor ones) do not invest
enough to offset the depletion of natural capital
Ideas about social indicators:
Morris: introduced an unweighted Physical Quality of Life Index (PQLI), made up of
infant mortality, literacy, and life expectation at age 1, as a single measure of welfare
Morris’ updated index (which covered a longer time span) exposed the ambiguity
of the links between growth and welfare
There was a focus on basic needs, but that came into conflict with the structural
adjustment policy, and with the increasing market orientation within development
economics the impression was that costs fell often disproportionately on the poor
the Human Development Index (HDI) was developed which was made up of
income per head, life expectation at birth, and an education indicator, expressed in a
single figure between 0 and 1
Sen’s capabilities approach: moved to the view that income alone does not
satisfactorily capture welfare Sen has not privileged any goods (he has liberal
values) even under indigence it was necessary to respect individual priorities
, well-being consists in having the capabilities with which to achieve valuable
functionings his approach influenced HDI
One justification of SNA as a measure of welfare is its correlation with social
indicators which enjoy normative consensus as ‘good things’ the correlation is
strong under conditions of indigence but loses its power at surprisingly low levels of
real income HDI already incorporates a turning point in its premises, by including
income per head (with a lower value placed on incomes higher than the whole
sample average)
Easterly: used indicators that were regressed on income per head, with fixed time
effects the criterion of robustness was an impact on the quality of life indicator
that was significant, positive, and stronger than exogenous shifts exogenous shifts
capture the effect of global socio-economic progress which may arise from the
diffusion of knowledge or of norms this study confirmed that the relationship of
well-being and income per head is weak (both in cross-section and over time)
There are good descriptive indicators of inequality but what is lacking are standard,
simple, social indicators of the consequences of inequality for affluent societies (an
index of deprivation)
John Ruskin: a significant result of affluence is the large extension of life expectation
incorporating life expectation (and health) into extended accounts has the effect
of raising the level of measured welfare very substantially and would double the rate
of growth in the recent past whereas income growth increases life expectation
over time, higher wealth does not guarantee longer lives in the cross-section when
countries are compared for income and longevity (link between life expectation and
income per head has weakened considerably)
Ideas about psychological indicators:
Static happiness approach: constitutes survey data on responses to a simple question
about current subjective well-being on a bounded ordinal scale the response to
such questions is subjective well-being (SWB) the indicator is crude, but this is not
necessarily a defect and empirical validity is robust levels of reported well-being
are remarkably high in affluent societies Easterlin highlighted the absence of
relation between country income levels and SWB but Veenhoven challenged this and
he identified a curvilinear relation Diener and others found out that SWB rose
moderately but significantly with income (above a certain level income did not
provide any increment to SWB) Offer: when social ranking is controlled for,
absolute levels of income provide virtually no increment in SWB SWB has been
correlated with an array of socio-economic determinants and domains and the
predictive power of each individual determinant of global well-being was low
income counted little for happiness and the relation is curvilinear (effect was
strongest at lower incomes); quality of relationships, leisure, and work experience
counted considerably more for aggregate well-being than income and consumption
measures; materialism was negatively correlated with SWB; relative income (position
on the ladder of earnings) had significant influence on well-being
Relative income hypothesis: states that what counts is not absolute income, but
relativities even a large rise in income will leave no impact on well-being if
distribution is unchanged as incomes increase, so do consumption norms;
, consumers become habituated to new levels of consumption hedonic treadmill:
income must rise to sustain satisfaction at a constant level
Offer: although absolute income (and educational levels) has little effect on
subjective well-being, the richer countries are happier Helliwell: those who have
the highest levels of SWB are not those who live in the richest countries, but those
who live where social and political institutions are effective, where mutual trust is
high, and corruption is low
Longitudinal studies indicate that personality is a strong predictor of SWB (people are
simply born happy or unhappy)
Culture contributes to stability, and as societies become more affluent, they tend to
shift away from emphasizing economic security and traditional authority this
adaptation suggests that increased affluence diminishes concerns about economic
security, and cultural values slowly adjust to changes in economic conditions
(Inglehart) in affluent societies, culture appears to affect SWB more strongly than
income ideas to individual well-being may be culturally specific
Easterlin has hypothesized that expectations are formed by comparisons with
parents, and that demographic cycles have led different cohorts to have different
expectations Inglehart’s post-materialism: the post-war cohorts have shifted their
preferences from economic to non-economic rewards, because of their experience of
economic security
One psychological approach explores the hedonic dynamics of satisfaction in
welfare economics, it is assumed that consumers are well-informed, self-aware,
consistent, and acquisitive, essential for revealed preference to equal welfare
other perspectives question consumer’s cognitive abilities the debate between a
social indicator poverty line (focusing on normative consumption) and a money
metric one (measuring resource access) reflects different views on the legitimacy of
lifestyle choices
Novelty may undermine well-being as new rewards are compelling, while their costs
are not yet known economic competition driven by novelty and innovation can
lead to myopic choices, as new forms of stimulation are highly compelling in the
absence of prior experience the pace of economic growth has an inverse
relationship with SWB
Offer: a more systematic targeting of ill-being, its determinants, and the economic costs of its
amelioration, is needed to make the reduction of ill-being the focus of international
competition it might be more useful to shift the focus of measurement from happiness to
unhappiness prospect theory: losses are more acutely experienced than gains it may
be easier to reach consensus about welfare ‘bads’ than about welfare ‘goods’ but GNP
goods retain relevance, since a society dependent on exponential growth for a stable
experience of well-being might suffer badly if growth is withdrawn the determinants of
human well-being are considered historically contingent, suggesting that societies may
experience different needs over time
Report by the commission on the measurement of economic performance and social
progress – Stiglitz, Sen, and Fitoussi
Pages 19-40
