FEATURE

Is Economic Growth Given Too High a Priority?

Winton Bates finds that Australians see economic growth as one element of overall national and personal well-being

’ve been rich and I’ve been poor; believe me, this extreme view, he is not alone in asking whether honey, rich is better’. Those who agree with people (and governments) give economic growth the singer, Sophie Tucker, do not necessarily higher priority than it deserves in the light of its believe that wealth guarantees happiness. limited contribution to improving their well-being. ‘ Nearly everyone seems to enjoy some of what For example, a prominent British economist, Imoney can buy whilst readily acknowledging that Richard Layard, has suggested marginal tax rates happiness also depends on other things, including of about 60% of additional income to discourage frame of mind, health and relationships with work effort and reduce growth in GDP.3 others. To come to grips with the issue of whether It seems to me that most Australians would not economic growth is given higher priority that it expect further increases in income to make them feel a lot happier than they are already. Survey evidence Winton Bates is an economic consultant confirms that increases in per capita income tend ([email protected]). He has not to be accompanied by corresponding increases in reported happiness, or life satisfaction, in worked for many years on public policy countries with per capita incomes higher than a issues related to economic growth, fairly modest level.1 This raises questions about both in his current role and in his why people seek to earn more and the rationale for previous career working in the New economic growth. Zealand Treasury and the Australian In a recent book, Clive Hamilton argued that Industry Commission (now Productivity economic growth is a fetish and should be stopped.2 Commission). Although Hamilton has received little support for

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warrants, it is useful to consider the following

questions: 90 • What priority do people actually give to 80 economic growth relative to other matters in 70 Australia and other countries with different 60 growth experiences? 50 • Is it appropriate to interpret surveys showing 40 that growth has not been accompanied by 30 20 greater life satisfaction as evidence that the 10 benefits of growth are just a mirage? 0 • Should governments be promoting happiness 0 20 40 60 80 100 rather than economic growth?

What priority do people give to economic growth? 70

Survey data from the 1999-2002 World Values 60

Survey (WVS) shows us the priority Australians 50 give to economic growth relative to other 40 countries.4 The results of eight relevant questions 30 from the WVS have been plotted against average per capita income levels using scatter diagrams (see 20 Figures 1 to 8).5 The data points in the figures all 10 0 represent countries. For convenience, Australia 0 20 40 60 80 100 120 140 is shown as a diamond, New Zealand as a dot and the United States as a triangle. Some other countries are also labelled where their results differ markedly from other countries with similar per capita income levels. 90 If economic growth is a fetish it would be 80 70 reasonable to expect that people in high-income 60 countries would be no more satisfied with their 50 financial situation than people in low income 40 countries. The evidence in Figure 1 suggests 30 otherwise. When asked ‘how satisfied are you with 20 the financial situation of your household’, people 10 0 in high-income countries are more likely to respond 0 20 40 60 80 100 120 that they are satisfied. The percentage in Australia is similar to other countries with comparable income levels.

People who say that ‘less importance placed on 90 work in our lives’ would be ‘a good thing’ represent 80 a lower proportion of the population in Australia 70 than in many countries with comparable income 60 levels (Figure 2). In general, however, a higher 50 proportion of the population of affluent countries 40 30 favour less emphasis on work. 20 The proportion of Australians who say ‘protecting 10 the environment should be given priority’ over 0 0 20 40 60 80 100 120 140 ‘economic growth and creating jobs’ is similar

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to that for other countries with comparable per capita income levels (Figure 3). There is no clear 70 relationship evident between per capita income 60 levels and this indicator of environmental attitudes. 50 This is not surprising in the light of evidence that environmental problems tend to be more severe in 40 low-income countries.6 30 People who say ‘less emphasis on money’ would 20 be a good thing make up a higher proportion 10 of the Australian population than in most 0 other countries with comparable income levels 0 20 40 60 80 100 120 140 (Figure 4). There does not seem to be a strong relationship between emphasis on money and average income level. As indicated in Figure 5, the proportion of 40 Australians who say that leisure is very important 35 in their lives is relatively high among countries 30 with comparable income levels. Of the countries 25 with the top five rankings on this criterion, four 20 are in South America. It is apparent that for most 15 other countries the importance of leisure depends 10 strongly on income levels. 5 0 For postmaterialist values Australia stands out as 0 20 40 60 80 100 120 140 having the highest ranking of any of the countries included in the World Values Survey (Figure 6). People are classified as having postmaterialist values if they rank ‘giving people more say in important government decisions’ and ‘protecting freedom of 100 90 speech’ above ‘maintaining order in the nation’ and 80 7 ‘fighting rising prices’. More of the population 70 tend to have postmaterialist values in high-income 60 countries. 50 40 The proportion of Australians who say that 30 good pay is ‘important in a job’ is relatively low by 20 comparison with countries with similar average 10 0 income levels (Figure 7). The percentage viewing 0 20 40 60 80 100 120 140 good pay as important tends to be lower in high- income countries. Finally, a ‘high level of economic growth’ is given a lower priority by Australians than in some other 100 countries with comparable income levels (Figure 90 8). Respondents were asked which they considered 80 70 most important: ‘a high level of economic growth’, 60 ‘seeing that people have more say about how things 50 are done at their jobs and in their communities’, 40 ‘a strong defence for our country’ and ‘cities and 30 20 countryside more beautiful’. The evidence suggests 10 that people in high-income countries tend to view 0 0 20 40 60 80 100 120 economic growth as having lower priority.

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countries other factors, particularly marriage and

100 unemployment, have a greater impact on SWB than 10 90 does income. But the fact that economic growth 80 in high income countries has been accompanied 70 by little improvement in SWB can only be partly 60 50 explained by the effects of factors such as rising rates 11 40 of separation, divorce and unemployment. 30 20 What does this survey evidence mean? 10 0 Does the SWB evidence imply that economic 0 20 40 60 80 100 120 140 growth in wealthy countries is not worth having? Those who adopt this interpretation present a variety of arguments: Are the benefits of economic growth just • people are more interested in relative than a mirage? absolute income; What do the surveys show? • as people earn more they adapt to it and their Three main findings emerge from the survey aspirations rise—so the growth process is like evidence about the relationship between income being on a treadmill going nowhere; and subjective well-being (SWB)8: • economic growth occurs as a result of manipulation of consumer preferences. • People on high incomes tend to be happier than those with low incomes. There is no doubt that relative income has an • Cross-country comparisons show a strong important influence on SWB. This is evident, for positive relationship between per capita GDP example, in the results of a US survey in which and average life satisfaction up to a modest per students were asked whether they would prefer to capita GDP level (of about $US15,000) and no live in a world where they had high relative income clear relationship at higher income levels (See and low absolute income or in a world where they Figure 9). had high absolute income and low relative income. • In recent decades, economic growth in high Half of the students chose high relative income in income countries has been accompanied by little preference to high absolute income.12 At the same improvement in SWB. time, there is no shortage of people who have high relative incomes who are seeking to migrate from poor countries to rich countries to obtain higher In wealthy countries other absolute incomes. factors, particularly marriage and What are the practical implications if, say, unemployment, have a greater every additional dollar increase in your income is impact on subjective well-being associated with a decline in happiness for everyone than does income. else equal to 30 cents? Richard Layard’s answer is that your income increase ‘is a form of pollution’, so you (the polluter) should pay a tax rate of 30% At an individual level, the survey evidence indicates on all additional income as a disincentive to your a stronger correlation between income and SWB in polluting activity.13 poor countries than in wealthy countries, though There is a good reason, however, why unhappiness studies of income and SWB may understate the caused by envy has traditionally been seen as a overall role of finances. A recent study by Bruce problem that should be resolved by the person who Headey and Mark Wooden, based on Australian feels envy rather than by removing objects of envy data, has concluded that wealth (net worth) matters through collective action. It seems likely, to use the at least as much as income in its effects on SWB.9 words of Leland Yeager, that even though ‘catering The overall evidence suggests that in wealthy to envy and Schadenfreude might (just conceivably)

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appear to contribute to some persons’ happiness about the processes involved. There is reason to in narrow and short run contexts, institutions believe that both economic growth and rising and policies according respect to such feelings aspirations are closely related to the advance of will impair people’s capacity for happiness, at least knowledge. Economists have known since the 1960s broadly and in the long run’.14 that economic growth is largely a consequence of The concepts underlying adaptation to rising growth in productivity rather than increases in the income and rising aspiration levels are well grounded quantity of capital and labour used in production in psychological theory and supported by evidence. processes. Growth in productivity is related to US data suggests that over a 36-year period, the technological advances, a more highly educated income that Americans regarded as necessary for workforce and better use of available knowledge a family of four to ‘get along’ has increased, on and resources. average, to the same degree as actual income. As It seems likely that technological advances also people acquire goods they aspire to own, such as play an important role in raising aspirations. We a house and car, their aspirations tend to increase can only aspire to have things after they have been for goods, such as a swimming pool or a vacation invented and we have become aware that they are home, that they were much less likely to want valuable to us. As Steven Pinker has pointed out: earlier in their lives.15 The results of a study based Ice Age people would have been wasting their on Swiss data, suggest, that insofar as income time if they had fretted about their lack of affects SWB, the gap between income aspirations camping stoves, penicillin and hunting rifles and actual income is much more important than or if they had striven for them instead of actual income.16 better caves and spears. Even among modern Richard Layard’s comment on the tendency for foragers, very different standards of living are aspirations to rise with income is interesting. He attainable in different times and places. Lest says: ‘We have essentially a problem of addiction, the perfect be the enemy of the good, the where past people’s standard of living affects in a pursuit of happiness ought to be calibrated negative way the happiness they get from their by what can be attained through reasonable present standard of living. In this way it is just like effort in current circumstances.19 smoking’.17 It seems to me that before disparaging the decisions of individuals we should consider whether they regret them. I know of no studies It makes more sense to attribute that have done this. But it is hard to imagine that a aspirations for greater wealth to substantial proportion of those who sought higher earnings to purchase better houses, for example, human nature than to advertising. would look back and regret those decisions. By contrast, there is little doubt that a substantial proportion of smokers and former smokers regret This suggests that rather than making economic their decisions that led to nicotine addiction. growth akin to chasing a mirage, rising aspirations Clive Hamilton argues that economic growth reflect our innate capability to avoid chasing is caused by preference manipulation by the mirages. It makes more sense to attribute aspirations advertising industry. He suggests that ‘discontent for greater wealth to human nature than to must be continually formented if modern consumer advertising. capitalism is to survive’. According to Hamilton, the advertising industry targets the aspirations and Should governments promote happiness expectations of potential consumers, ‘sometimes rather than economic growth? setting out to create a sense of inadequacy in order Nearly everyone involved in debate on public policy to remedy it with the product’.18 issues claims to be interested in the well-being of Whatever small grain of truth this statement people. Those arguing for governments to reduce may contain, the idea that rising aspirations cause disincentives to economic growth acknowledge economic growth is not consistent with evidence that growth is not an end in itself, but a means to

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higher living standards.20 It has long been widely averages do not tell us much about the well-being recognised that governments need to reduce adverse of any individuals or groups. spillover effects, such as environmental pollution, Interestingly, similar shortcomings are associated that could otherwise adversely affect the well- with subjective measures of well-being. As with being of people. Some anti-growth advocates, who GDP, some of the things that are important to argue for general disincentives to growth such as humans are not taken into account in measures higher marginal tax rates on income and a heavier of happiness and life satisfaction. Again, national regulatory burden on business activities, also claim averages do not tell us much about the well-being to be interested in the well-being of people.21 of particular individuals or groups. Does this mean that there a case for governments Though many people are willing to make to adopt the goal of achieving higher subjective sacrifices for family members and friends, or well-being of their citizens as an over-riding even for abstract ideals (freedom, democracy objective? etc.), they do not necessarily give much weight to considerations other than personal feelings in Married couples (and to a making life satisfaction judgements. Cultural factors lesser degree people in de facto seem to have an important influence on this. People in individualistic cultures tend to weight heavily relationships) have higher life their personal emotional experiences, whereas satisfaction than singles, but there people in collectivistic cultures tend to emphasise seems to be no further increase in interpersonal factors and cultural norms.23 life satisfaction among those Even successful pursuit of some personal goals who have children. is not necessarily reflected in greater happiness and life satisfaction.24 Child-bearing is an interesting example. Although having children is commonly This idea raises similar problems to those thought of as a source of life satisfaction as well as a involved in viewing GDP growth as a policy personal goal, Australian evidence from longitudinal objective. surveys suggests that, on average, couples who have children do not feel more satisfied with their lives • First, no aggregate indicator of income or well- as a result. Married couples (and to a lesser degree being can give appropriate weight to everything people in de facto relationships) have higher life that is important to individuals. satisfaction than singles, but there seems to be no • Second, any attempt to direct policies toward further increase in life satisfaction among those achieving targets related to any aggregate who have children.25 Perhaps immediate sacrifices measure of income or well-being is likely to loom large when parents appraise their current life involve an unwarranted interference with satisfaction, while they were looking forward to freedom of choice. satisfaction for decades to come when they decided The shortcomings of aggregate indicators to have children. Even so, if achieving one of the The shortcomings of per capita GDP as a measure most basic of all human goals, reproduction, does of well-being have been well known in Australia for not result in higher life satisfaction, this suggests a long time. In a recent speech the Secretary to the governments ought to be cautious in the use of life Treasury, Ken Henry, referred to a Treasury paper, satisfaction as an indicator. The Meaning and Measurement of Economic Growth, Education is another relevant example. The published in November 1964, which highlighted proportion of highly educated Australians who the importance of those aspects of well-being are satisfied with life as a whole is reported to be that are not reflected in the statistics of economic about the same as for middle educated Australians. growth.22 Leisure and environmental quality are The percentage of highly educated people who are among the things that are important to human satisfied with life (79%) is lower that the percentage well-being that are not taken into account in GDP of high income people who are satisfied with life as conventionally measured. In addition, national (86%). 26 This is consistent with research showing

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that the net effects of formal education on subjective I am not comfortable with this idea. When people well-being to be small or even negative. One have the mental competence to accept responsibility possible reason is that achieving some educational for their actions, it seems to me that it is good that goals, such as more critical judgement, does they should get what they want, in so far as this is not necessarily lead to greater happiness or life possible within the constraints imposed by other satisfaction. people being free to get what they want.28 Some of those opposed to further economic Some would argue, however, that economic growth on the grounds that it is unlikely to have a freedom is not a sufficient condition to ensure that strongly positive effect on average life satisfaction people get what they want even when they might could argue that this is consistent with their be considered, according to normal criteria of age opposition to motherhood (at least when it results and soundness of mind, to be competent to take in population growth greater than zero). It does responsibility for their actions. not seem, however, that they are equally opposed In a recent article, Clive Hamilton claimed that to education on the grounds that this does not have ‘the dominating political issue in rich countries a strongly positive effect on life satisfaction. today is the conflict between economic and political liberties on the one hand and “inner freedom” on Interference with freedom of choice the other, and that only in a society that protects Compulsory superannuation provides a convenient example of the issues involved in viewing GDP growth and growth in subjective well-being as When people have the mental policy goals. Let us assume that the proponents of competence to accept responsibility compulsory superannuation have proved beyond for their actions, it seems to me reasonable doubt that it has increased national that it is good that they should get savings rates and economic growth. Would it follow what they want, in so far as this that national superannuation is a good policy? Some people might see compulsory is possible within the constraints superannuation as bad policy on the grounds that imposed by other people being individuals are usually better judges of their own free to get what they want. interests than are governments. It can be argued, for example, that higher retirement income does not fully compensate for the hardship caused to families and promotes inner freedom is it possible to live when they are forced to save for their retirement according to our true human purposes’.29 From while they are also wrestling with home mortgages Hamilton’s other writings it is clear that his aim is and the costs of raising children. to make the influence of marketing on consumer However, let us assume away this problem. behaviour a more prominent political issue. He Say we have evidence that substantial numbers of suggests that the commercial messages of the people are not good judges of their own well-being marketers are ‘so forceful and persuasive’ that ‘they and fritter away their income rather than making have penetrated to some of the deepest recesses adequate provision for their retirement. It seems of our individuality and must be counted, in the to follow that their well-being will be enhanced if same way as brain washing, as a powerful form of the government requires them to make minimal coercion’.30 It would be a matter of concern if this provision for their retirement. Under these stringent view could be supported. But when asked about assumptions it might be possible to argue that the feelings of inner freedom—the ‘choice and control’ policy meets the criterion of making some people they have over their lives—76% of Australians better off without making anyone else worse off. indicated that they felt ‘a great deal’ of choice and This raises the question of whether it is control.31 acceptable for governments to interfere with People are not defenceless against the technology individual freedom as long as people end up happier, of persuasion. Daniel Dennett has suggested or with greater capability to achieve well-being.27 that ‘there is an arms race here, with ploy and

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counterploy balancing each other out’.32 In this • Second, in a world where income aspirations area knowledge is power. Humans are capable are rising as a result of technological progress of observing when and how others are pushing and expectations that economic growth will their buttons and of defending themselves. For continue, the introduction of policies to stop example, it is not difficult to reduce exposure to economic growth could be expected to result the advertising messages on TV. People who want in a substantial reduction in SWB. freedom from advertising can have it instantly at the It is a good sign that the populations of high-income touch of a finger, without necessarily missing any countries have continued to remain relatively happy programmes they want to watch. Marketing does over the last 40 years. It suggests income increases not prevent people from getting what they want and have generally kept pace with rising aspirations. taking responsibility for their decisions. The idea that governments should adopt higher The case for freedom does not rest on the ‘life satisfaction’ as a goal raises similar problems to proposition that individuals never succumb to the idea that governments should promote growth temptation, or even on the proposition that in GDP. Neither measure gives appropriate weight individuals are always the best judges of their own to everything that is important to people. Survey interests. We humans are fallible. Arguably, our information on life satisfaction does not even reflect freedom to make decisions and to take responsibility the successful pursuit of personal goals related to for them is character-building—it helps us to learn parenthood and education. to align our actions to our considered intentions. Finally, the idea that governments should But the case for freedom does not rest on its adopt life satisfaction leads to interventions, like character-building effects either. It rests ultimately compulsory superannuation, that aim to enhance on the belief that adults who are capable of taking well-being by interfering with individual choice. responsibility for their own decisions should be Adults who are competent to accept responsibility allowed to get what they want, provided that for their decisions should be free to make them this does not interfere with the similar rights of without interference by governments. others. Endnotes Conclusions 1 This evidence has been surveyed in several Survey evidence does not support the view that publications. See, for example: Ed Diener and Robert Australians give unduly high priority to economic Biswas-Diener, ‘Will money increase subjective growth. Its priority in Australia is about the same well-being?’, Social Indicators Research 57 (2002), as in other countries with similar income levels. pp.119-169. Internationally, the priority given to economic 2 Clive Hamilton, Growth Fetish (Sydney: Allen & growth tends to decline as incomes rise. Unwin, 2003). This book was reviewed by Andrew It does not make sense to interpret survey data Norton in Policy 19(3), Spring 2003. 3 showing little increase in average life satisfaction Richard Layard, ‘Happiness: has social science a clue?’ in high-income countries over the last 40 years as Lionel Robbins Memorial Lectures 2002/3, London School of Economics, March 2003, Lecture 2, p.11. indicating that economic growth’s benefits are just Available at: http://cep.lse.ac.uk/layard/ a mirage. There are two main reasons: 4 Ronald Inglehart, Miguel Basanez, Jaime Diez- • First, it was naïve for anyone to assume that Medrano, Loek Halman and Ruud Luijkx, Human economic growth would result in further beliefs and values, a cross-cultural sourcebook based increases in SWB in countries that already had on the 1999-2002 values surveys (Mexico: Siglo high SWB 40 years ago. When economists XXI Editores, 2004). Differences in the number of observations shown in different charts are caused by claim that choice of more goods rather than differences in the items covered in surveys in different less implies higher well-being they make the countries. (implicit) assumption that ‘other things remain 5 Per capita income data from Alan Heston, Robert equal’. In this instance, however, changes in Summers and Bettina Aten, Penn World Table aspirations are particularly important and are Version 6.1, Centre for International Comparisons, directly related to income changes. University of Pennsylvania, October 2002.

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6 See, for example, Global Leadership of Tomorrow 21 See, for example, Hamilton, Growth Fetish, pp 220, Environmental Taskforce, 2002 Environmental 222, 238. Sustainability Index, World Economic Forum, 2002, 22 Ken Henry, ‘Enhancing freedom, generating pp.14-15. opportunities—challenges for governments, 7 See: Inglehart et al., Human Beliefs and Values, p. chances for citizens’, Address to Institute of Public 410. Administration (Victorian Division), Melbourne, 20 8 ‘Subjective well-being’ is an umbrella term covering July, 2004. a variety of measures such as happiness and life 23 Ed Diener and Eunkook Suh, ‘National differences in satisfaction. Different measures of SWB tend to subjective well-being’, in D. Kahneman, Ed Diener correlate well with one another. Reported responses and N. Schwarz (eds) Well-being: The Foundations are consistent with more objective measurements of of Hedonic Psychology (New York: Russell Sage relevant variables eg authentic smiles, brain electrical Foundation, 1999). activity and various measures of responses to stress. 24 As might be expected there is some evidence that Psychological literature providing comprehensive people are more likely to be happy if they are making discussions of measurement problems is cited in progress toward their goals. See, for example: Ed Bruno Frey and Alois Stutzer, ‘What can economists Diener and Robert Biswas-Diener, ‘New directions learn from happiness research?’, Journal of Economic in subjective well-being research’, February 28, Literature 40(2), June 2002. 2000, p. 5. Available at http://www.psych.uiuc. 9 Bruce Headey and Mark Wooden, ‘The effects of edu/~ediener/hottopic/NEW_DIRECTIONS. wealth and income on subjective well-being and html ill-being’, The Economic Record 80, Special issue, 25 Nicole Fleming and Gary Marks, ‘Well-being among September 2004. young Australians: effects of work and home life 10 David Blanchflower and Andrew Oswald, Well-being for four youth in transition cohorts’, Longitudinal Over Time in Britain and the USA, Working Paper Surveys of Australian Youth, Research Report Number 7487, National Bureau of Economic Research, 6, Australian Council for Educational Research, Cambridge MA, January 2000. September, 1998. 11 For a relevant econometric study see Blanchflower 26 Inglehart et al, Human Beliefs and Values, Table and Oswald, Well-being Over Time in Britain and the A170. USA. 27 I use the term, ‘freedom’, here according to its 12 Sara Solnick and David Hemenway, ‘Is more always classical liberal meaning, as a condition in which better?: A survey on positional concerns’, Journal of coercion of some by others is reduced as much as Economic Behavior & Organisation 37(3), November possible. This should not be confused with Amartya 1998. Sen’s concept of ‘substantive freedom’ that is closely 13 Layard, ‘Happiness: has social science a clue?’, linked to capability to achieve well-being. Amartya Lecture 2, p.9. Sen, Development as Freedom (Oxford: Oxford 14 Leland Yeager, Ethics as Social Science: The moral University Press, 1999). philosophy of social cooperation, (Cheltenham, UK: 28 This is how Robert Sugden restates the principle of Edward Elgar, 2001), p. 142. consumer sovereignty without making assumptions 15 See, for example, Richard Easterlin,‘Do aspirations about the coherence of preferences. See: Robert adjust to the level of achievement?’, paper prepared Sugden, ‘The Responsibility Criterion: Consumer for European Science Foundation Exploratory sovereignty without the assumption of coherent Workshop on Income, Interactions and Subjective preferences’, CSERGE Working Paper, EDM 03- Well-Being, Paris, September, 2003. Available at 02. http://www.delta.ens.fr/swb/ 29 Clive Hamilton, ‘Diseases of affluence and other 16 Alois Stutzer, ‘The role of income aspirations in paradoxes’, Review, The Australian Financial Review, individual happiness’, Journal of Economic Behavior October 15, 2004. and Organisation 54(1), May 2004. 30 Clive Hamilton, ‘The Disappointment of Liberalism 17 Layard, ‘Happiness: has social science a clue?’, Lecure and the Quest for Inner Freedom’, The Australia 2, p. 6. Institute, Discussion Paper 70, August 2004, p 18 Hamilton, Growth Fetish, pp. 80-81. 42. 19 Steven Pinker, How the Mind Works (New York: W.W. 31 These figures were taken from Inglehart et al., Human Norton, 1997), p. 390. beliefs and values, Tables A170 and A170. 20 See, for example, Productivity Commission, Annual 32 Daniel Dennett, Freedom Evolves (London: Penguin Report 1997-98, (Canberra: AusInfo, 1998), pp. 5-6. Books, 2004), p. 270.

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