Centre for Confidence and Well-being

According to the dictionary, economics is "the study of the production, distribution and consumption of goods and services". If we assume that this study is in order to maximise utility then it is the definition of utility that concerns us most.

Again the dictionary definition of the economic meaning of utility is "the amount of satisfaction or pleasure that somebody gains from consuming a commodity, product or service". However, as we have seen, modern economics only measures this pleasure in relation to items that have a financial value measured at the margin. This is done through GDP. This measure omits many of the elements of life that contribute satisfaction or pleasure but which are not captured by the monetary elements that make up GDP. Hence utility is wrongly recorded. 

What can be done in order to measure utility, or life satisfaction, in a more complete way?

There are a whole range of indicators that could be used in order to complement the useful information that can still be gathered from a simple measure of GDP. These range from:

• Amending GDP by adjusting it with other information
• Using GDP as part of an index that incorporates other, easily measurable, indicators of welfare
• Using direct measures of well-being that are calculated using new survey techniques.

Attempts at creating new measures have been made which take into account GDP’s limitations in measuring a full range of activity within a society, such as services or unpaid labour. The Index of Sustainable Economic Welfare (ISEW) makes adjustments for domestic labour services, environmental degradation and unequal income distribution to come up with an Index that shows, for example, that there has been an absolute decline in sustainable living standards in the UK since the mid-1970’s, a result that chimes with well-being survey findings. However, this work has been criticised (Crafts, 2002) as too pessimistic and in particular that if a positive adjustment were made for life expectancy gains then growth rates higher than those seen for GDP alone could be calculated.

The Measure of Domestic Progress (MDP) was designed to factor in the environmental and social costs of growth and, again, highlights how such an Index remains flat over the second half of the twentieth century. However, the MDP can also be criticised as being too negative and ignoring some of the positive by-products of faster economic growth like rising life expectancy.

In terms of taking account of GDP’s inability to reflect the real components of well-being and human flourishing, wider measures of progress than GDP already exist. For example:

• The United Nations Human Development Index (HDI combines GDP per capita   with life expectancy and education enrolment
• The Fraser Institute Index of Human Progress extends the basic UN HDI by using 10 indicators across – health, education, technology and GDP p.c.
• The University of Pennsylvania Index of Social Progress includes 40 variable across 10 groupings
• The Economist’s Quality of Life Index includes 9 factors including – gender equality, climate divorce rates etc.

Two problems remain, however. The first is that such measures vary tremendously from one another as does the data available for analysis from individual nations. None of these can claim to be an internationally recognised measure or ‘gold standard’. The second is that such indices continue t meausre supposed inputs to well-being – e.g. health, divorce, attainment rates etc – rather than subjective well-being itself.  

Influential academics are now putting the case for such an internationally recognised measure of national well-being. For example:

• Kahneman et al (2004) have proposed ‘National Well-Being Accounts’ based on time budgets and affective ratings of experience as measured by Experience Sampling Method (ESM), Daily Reconstruction Method (DRM) or Event Recall Method (ERM).
• Diener and Seligman (2004) have proposed creating a national well being index that systematically assesses key well-being variables for representative samples of the population.

However, it is clear from reading the work of both sets of academics, that considerable further investments in survey and measurement techniques would be needed in order to make such indices robust enough to be able to confidently impact on government policy. For example, reports of life satisfaction across countries indicate that the difference between the French and the Danes is more than twice as large as the difference between the employed and the unemployed in either country. Such a difference seems implausibly large.

As a result Diener and Seligman (2004) acknowledge that it is essential to keep using GDP as a measure but suggest that  it should be increasingly used in tandem with well-being measures.

Thus, there is considerable on-going debate around extensions to, or replacement of, GDP as a measure of economic and social progress but little in the way of agreement over the best way to proceed in order to improve or replace it. Nevertheless, it would be relatively easy for any country to begin to consistently measure its relative position and annual advancement based on some of the expanded Indices highlighted earlier.

Copyright: John McLaren, 2006