Economic Growth and Human Well-Being

[This post, by Carmen Lawrence, (Winthrop Professor, School of Psychology, University of Western Australia) previously appeared at Shaping Tomorrow’s World in three parts. Dr. Lawrence and Shaping Tomorrow’s World retain copyright. Used with permission.

The embedded video was produced by impossiblehamster.org and added by Planet3.0 -ed]

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.

 

Part 2: Revisiting Limits to Growth

Whether the focus is on pollution, biodiversity loss, resource depletion or climate change, the underpinning cause is the same: the human consumption that drives economic growth. As the ecologist Jane Lubchenko said in her address as the president of the American Association for the Advancement of Science in 1998, “During the last few decades, humans have emerged as a new force of nature. We are modifying physical, chemical, and biological systems in new ways, at faster rates and over larger spatial scales than ever recorded on earth. Humans have unwittingly embarked upon a grand experiment with our planet. The outcome of this experiment is unknown, but has profound implications for all of life on Earth”.

Our levels of consumption are high and rising and, in the West, we are more affluent – and wasteful – than we have ever been.  Add to that the rising affluence of the middle classes in India and China who are beginning to consume like we are, and it is obvious that climate change is not the only momentous problem we’re facing; there are many serious commentators who believe we are already overshooting the earth’s carrying capacity.  Visit any large city and witness the vast activity of the modern market place, the mobilisation of resources and energy from around the world. Two questions immediately suggest themselves: How can this last? And do we actually benefit from all that consumption?

Dasgupta (2010) has demonstrated that a country’s wealth per capita can decline even while GDP per capita increases and the UN Development Index records improvement. This is because the GDP does not deduct the depreciation of capital (including natural capital) since nature is taken to be a fixed, indestructible factor of production. As Dasgupta points out (p 6), the problem with this assumption is that it is wrong: “nature consists of degradable resources. Agricultural land, forest, watersheds, fisheries, fresh water sources, river estuaries and the atmosphere are capital assets that are self-regenerative, but suffer from depletion and deterioration when they are overused”.

Consider, too, the world’s fisheries. The global catch rose from 19 million tons a year in 1950 to 80 million tons by 1990, with the result that 70% of the world’s saltwater fish are judged to be overexploited or fully exploited. Some fisheries have collapsed altogether. Similarly, many of the planet’s mineral and energy resources are being used so rapidly that we are fast approaching – and may even have passed – the peak of production, the case of oil being the most often debated (Speth, 2008).

Modern economies evolved on the basis of availability of cheap oil – cheap to extract, cheap to use; oil permeates every corner of our daily lives both as source of energy and a component of manufactured goods. No major industrial society can survive today without oil – food, transport, heating, plastics, cars, drugs, prosthetics, computers, housing. But global oil production is forecast to peak and then begin terminal decline, the “big rollover” where demand will exceed supply. Predictions vary about imminence of problem: some think it is already happening; others put it within the next 10-15 years; others still up to 40 years hence. But all agree that it is a real problem. It means that before oil runs out it will become too expensive to use for many purposes, especially private transport. Of course, it is the least well off in the community who are most vulnerable to such price increases, the same people who are often out of range for reliable public transport. Even if we ignore the global warming imperative to decrease oil use, even the most unvarnished optimists recognise that new fields in prospect will not cover the shortfall if we continue growth as usual. It is estimated that exploration is turning up one new barrel of oil for every six we consume. Just as oil supply is looking uncertain, global demand is rising faster than ever.

Despite optimistic pronouncements  about the dematerialisation of advanced economies, the aggregate volume of material used globally (and in most regions) is also rising quickly and – apparently inexorably; resources like fuels, wood, sand, minerals, biomass are being used at ever increasing rates. Material flow analysis, which tracks the extraction of such resources, shows that in 1980 we extracted and used 40 billion metric tons of such materials. Twenty five year later, the figure had increased by 45% to 58 billion (Schor, 2008). And despite improvements in the efficiency of production, the per capita consumption of such materials has been nearly constant because of the expanded scale of production.

These changes have human impacts too. The World Bank recently highlighted the fact that a third of the world’s population faces water scarcity, that 70% of the world’s fisheries are overexploited, that soil degradation affects a significant proportion of both irrigated and rain fed agricultural lands and that every year at least a million people die prematurely from respiratory illnesses linked to air pollution.

There are strong arguments – including from within profession of economics – that growth indicators like the GDP and the concept of growth itself fail to capture these unfolding environmental and humanitarian challenges. Indeed they mask inequities and fail to register actual declines in well-being, even in the wealthiest of countries

There have been some attempts to move to a more complex set of national accounts.  Work is being undertaken in the EU and within the OECD to construct robust indices to better capture wellbeing: composite indices of elements overlooked in the GDP – the state of environment, social indicators and non-market exchanges. Following international initiatives, Australian researchers (Hamilton & Denniss, 2000) also constructed an alternative index, the “Genuine Progress Indicator” to remedy the deficiencies in the GDP and to measure changes in well being in Australia over the last 45 years. This analysis showed that GDP per person increased from $9 000 to $23 000 or 2.1% per annum over the period 1950-1995 but the GPI rose at a rate of only 1.3% from $9 000 to $16 000.  Of note is that fact that the GPI did not increase at all from late 70s i.e. in the last two decades. In other words, the benefits of economic growth to the society were fully offset by the costs. The principal contributors to this phenomenon were found to be the increasing levels of foreign debt, the costs of underemployment and overwork, the impact of environmental problems, the escalating cost of energy resource depletion and the failure to maintain the national capital stock. Similar results have been obtained in many developed countries.

Economic growth does not appear to be the last word in improving the quality of our lives. On the contrary, it appears to be placing severe stress on our life support systems. As Lester Brown puts it (www.earth-policy.org), we need a Plan B.

 

Part 3: The Psychological Down Side of Growth

(a)  Subjective well being/ happiness

Despite attempts to develop a more complex understanding of human progress, policy makers and many economists still habitually conflate economic growth with improved well-being and greater happiness as did 19th century economic theorists. However, it is now clear that there is no necessary relationship between the two.

While it is true that increasing income improves health and wellbeing up to a point, the gains – whether measured at an individual or a societal level – flatten out very quickly (Bok, 2009). As many have shown, at low levels of economic development, when many people live in poverty, even modest economic gains produce significant effects on the quality of life – better food, clothing, shelter, medical care, education and life expectancy. It also improves people’s happiness and sense of wellbeing. In these circumstances, it makes sense for national policy to focus on economic growth. But beyond a certain threshold, and it turns out to be at quite a modest level of income, further growth results in little gain either in well-being or life expectancy. At this point other factors are more significant influences on the quality and length of life.

There is now a substantial literature on “subjective well being” designed to assess what factors affect people’s perceptions of the quality of their lives. The research is based on large scale surveys of national differences in responses to questions about happiness and general satisfaction. The scope of such studies is extensive, ranging from questions about whether and to what extent increases in income result in greater happiness to the effects of marriage on happiness and the impact of crime levels on life satisfaction. Subjective well being (SWB), measured by self-reports, is the indicator most often used. It refers to ‘a broad category of phenomena that includes people’s emotional responses, domain satisfactions, and global judgements of life satisfaction’ (Diener et al., 1999, p. 277). It consists of two elements: an affective one (positive or negative feelings) and a cognitive one, which is how people judge the extent to which their lives meet their expectations.  According to Diener and Seligman (2004) the major dimensions are pleasure, engagement and meaning.

It is no surprise that the two most important predictors of life satisfaction are health status and family situation, and while studies show that there is also a positive correlation between income and happiness, the effect is largely due to the benefits which accrue to low income earners. Put simply, $10,000 buys a lot more “happiness” for someone earning $20,000 than someone earning $200,000 a year. Although per capita income has continued to increase in the developed economies over the last half century or so, happiness has not, the so-called “Easterlin Paradox”.

Some recent research suggests that, at a national level, subjective well being depends less on income and more on people’s perception that they have free choice in their lives rather than being subject to external authority (Welzel et al., 2003). Radcliff (2001), for example, found that people tend to be happier under social democratic welfare regimes, although he is careful not to argue that this is a causal relationship. Ingelhart and Welzel (2005) have also shown that in all the major cultural groups, happiness is linked with people’s sense of freedom. In their most recent international comparisons,  Ingelhart and his colleagues take this a step further, showing that “democratization, economic growth, and growing social tolerance contributed to a rising feeling that people have free choice and control of their lives.” Using an index of the extent to which a given community accepted people of other races, immigrants and homosexuals as neighbours, they showed that people living in more tolerant societies tended to be happier, no matter what their own beliefs. In their review of the relevant literature, Diener and Seligman (2004) concluded that people with the highest reports of well being are not those who live in the wealthiest countries but those who live in nations which have effective political institutions, where human rights are protected, where corruption is low and mutual trust is high. A rational response would seem to be to shift the policy goals toward improving the quality of life rather than “to continue the inflexible pursuit of economic growth as if it were a good in itself” (Inglehart, 1997, pp. 64–65).

In fact, the research indicates that beyond a certain point, relative income is all that matters. Hence, an across the board rise in income will have little effect on happiness. Furthermore, there is also evidence that people readily adapt to their circumstances; while increased income may have a transitory effect on happiness, the effect quickly dissipates.

 

(b)The effects of environmental degradation on well-being 

 What is often also overlooked in the simple equation of wealth and happiness is that the social and environmental costs of rising consumption may generate health and well-being risks of their own. People exposed to persistent noise, drought and unusual weather are more likely to report feelings of unhappiness – and, in the case of extreme heat in Australia, even to be admitted in increased number to emergency psychiatric care (Nitschke et al., 2003). Sherwood and Huber (2010) have shown that, while it appears to be generally assumed that humans will simply adapt to warmer climates, in reality “even modest global warming could…expose large fractions of the population to unprecedented heat stress, and that with severe warming this would become intolerable” (p 9552).

In recent studies, the state of the environment has been shown to be an important in predictor of national differences in subjective well being. Rehdanz and Maddison (2005), for example, found that for 67 countries tracked  between 1972 and 2000, climate variables were shown to have a highly significant effect on SWB and projections from these trends indicated that countries with very high summer temperatures (like Australia) were the most likely to suffer reductions in wellbeing as a result of climate change. Panel data from 10 European countries were used by Welsch (2006) to analyse the effects of air pollution on SWB. He found that, after controlling for income, differences between countries and changes over time could be predicted by objectively measured air quality.

In one of the few studies to examine the effects of environmental conditions on well being in a developing economy, Smyth and his colleagues (2008) found that people living in Chinese cities with high levels of atmospheric pollution, environmental disasters and traffic congestion reported significantly lower levels of well-being. They later studied the relationship between environmental surroundings and personal well-being across six Chinese cities and found a strong negative association between atmospheric pollution and personal well-being.

The psychologically adverse consequences of destruction of the natural environment have also been documented in Australia (Conner et al., 2004). Interviews with people living in the Hunter Valley of New South Wales found that “the transformation of the environment from mining and power station activities was associated with significant expressions of distress linked to negative changes to interviewees’ sense of place, well-being, and control” (p 47). Pollution can affect well being both through an awareness of the adverse health and ecosystem effects of pollution as well as through the direct health effects. Several researchers (Ferrer-i-Carbonell and Gowdy, 2007; MacKerron and Mourato, 2008) have reported negative correlations between perceptions of pollution and well being.

Economic activities that diminish the quality of the environment and increase pollution harm the communities that are supposed to benefit. Conversely, contact with the natural environment has been shown to reduce stress, improve children’s behaviour and increase well being. Indeed patients appear to recover faster from surgery when they are able to see plants, flowers and trees. Although we might like to think that the natural environment is a tool at our disposal, that we are entitled, as the Book of Genesis suggests, to exercise “dominion” over “all the earth”, in fact we are part of the natural world and, for better and for worse, inextricably tied to the earth and deeply affected by it. Poets understand this. Politicians should too.

 

References

References

Part 1:

Adelman, M.A. (1993). The Economics of Petroleum Supply, Cambridge, MIT Press.

Chang,  Ha-Joon. (2010). 23 Things They Didn’t Tell You About Capitalism. London: Allen Lane.

Dasgupta, P. (2010) Nature’s role in sustaining economic development, Philosophical Transactions of the Royal Society, 365 (1537), 5-11.

Judt, Tony (2010). Ill Fares the Land, New York Review of Books.http://www.nybooks.com/articles/archives/2010/apr/29/ill-fares-the-land/

McNeill, J.R. (2000). Something New Under the Sun: An Environmental History of the Twentieth Century World. New York: Norton, p 336.

Orrell, D. (2010). Economyths: Ten Ways That Economics Gets It Wrong. Sydney: Allen & Unwin.

Stiglitz, J. (2009). A cool calculus of global warming. Project Syndicate Blog.

Part 2

Hamilton, C., & Denniss, R (2000). Tracking Well-Being in Australia: The Genuine Progress Indicator 2000. Discussion Paper no 35, Australia Institute, Canberra.

Lubchenko, J. (1998). Entering the century of the environment, Science, 279, 492.

Schor, J. (2010). Plenitude: The New Economics of True Wealth. Melbourne: Scribe.

Speth, J. (2008). The Bridge at the Edge of the World. New Have: Yale University Press.

Part 3

Bok, D. (2009). The Politics of Happiness What Government Can Learn from the New Research on Well-Being. Princeton University Press.

Conner, L., Albrecht, G., Higginbotham, N., Freeman, S. & Smith, W. (2004). Environmental Change and Human Health in Upper Hunter Communities of New South Wales, Australia. EcoHealth 1 (Suppl. 2), 47–58.

Diener, E & Seligman, M. (2004). Beyond Money. Toward an Economy of Well-Being.Psychological Science in the Public Interest, 5 (1), 1-31.

Diener, E., Suh, E., Lucas, E., & Smith, H. (1999). Subjective wellbeing: Three decades of progress. Psychological Bulletin, 25, 276–302.

Easterlin, R. (2001). Income and Happiness: Towards a Unified Theory, Journal of Economics, 111.

Ferrer-i-Carbonell, A.  & Gowdy, J. (2005). “Environmental Awareness and Happiness,”Rensselaer Working Papers in Economics 0503, Rensselaer Polytechnic Institute, Department of Economics.

Inglehart, R. (1997). Modernization and postmodernization: Cultural, economic and political change in 43 societies. Princeton, NJ: Princeton University Press.

Inglehart, R., Foa, R., Peterson, C. & Welzel, C. (2008). Development, Freedom, and Rising Happiness: A Global Perspective (1981–2007). Perspectives on Psychological Science, 3 (4).

Sherwood, S. & Huber, M. (2010) An adaptability limit to climate change due to heat stress. Proceedings of the National Academy of Science, 107 (21), 9552-9555.

Smyth, R., Nielsen, I., Zhai, Q., Liu, T., Liu, Y, Tang, C.Y., Wang, Z., Wang, Z. & Zhang, J. (2008). Environmental surroundings and personal well-being in urban China,Monash Department of Economics Discussion Paper 32/08.

van Praag, B., & Baarsma, B. (2004). Using Happiness Surveys to Value Intangibles: The Case of Airport Noise (Tinbergen Inst. Discussion Paper No. 04-024/3).

Welsch, Heinz (2006). ‘Environment and happiness: Valuation of air pollution using life satisfaction data.’ Ecological Economics, 58 (4), 801-813.

 

Comments:

  1. Eh. Sometimes I read about events such as ATI's FOI request for Katherine Hayhoe's e-mails, and I wonder, 'what exactly do these goons aim to accomplish with this?' and 'do these goons really think that their actions give their lives meaning?'

    And finally, 'perhaps these goons aren't really thinking anything? Perhaps a better way to think of certain societies isn't as a group of humans making rational decisions, but as a gigantic machine of stupidity?'

    -- frank


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