Is Economic Growth Given Too High a Priority?
Winton Bates
Relevant figures can be found on the PDF version

Australians see economic growth as one element of overall national and personal well-being

‘I’ve been rich and I’ve been poor; believe me, honey, rich is better’. Those who agree with the singer, Sophie Tucker, do not necessarily believe that wealth guarantees happiness. Nearly everyone seems to enjoy some of what money can buy whilst readily acknowledging that happiness also depends on other things, including frame of mind, health and relationships with others.

It seems to me that most Australians would not expect further increases in income to make them feel a lot happier than they are already. Survey evidence confirms that increases in per capita income tend not to be accompanied by corresponding increases in reported happiness, or life satisfaction, in countries with per capita incomes higher than a fairly modest level.[1] This raises questions about why people seek to earn more and the rationale for economic growth.

In a recent book Clive Hamilton argued that economic growth is a fetish and should be stopped.[2] Although Hamilton has received little support for this extreme view, he is not alone in asking whether people (and governments) give economic growth higher priority than it deserves in the light of its limited contribution to improving their well-being. For example, a prominent British economist, Richard Layard, has suggested marginal tax rates of about 60% of additional income to discourage work effort and reduce growth in GDP.[3]

To come to grips with the issue of whether economic growth is given higher priority that it warrants it is useful to consider the following questions:

·  What priority do people actually give to economic growth relative to other matters in Australia and other countries with different growth experiences?

• Is it appropriate to interpret surveys showing that growth has not been accompanied by greater life satisfaction as evidence that the benefits of growth are just a mirage?
• Should governments be promoting happiness rather than economic growth?

What priority do people give to economic growth?

Survey data from the 1999-2002 World Values Survey (WVS) lets us see the priority Australians give to economic growth relative to other countries.[4] The results of eight relevant questions from the WVS have been plotted against average per capita income levels using scatter diagrams (see Figures 1 to 8).[5] The data points in the figures all represent countries. For convenience, Australia is shown as a square, 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.

If economic growth is a fetish it would be reasonable to expect that people in high-income countries would be no more satisfied with their financial situation than people in low income countries. The evidence in Figure 1 suggests otherwise. When asked ‘how satisfied are you with the financial situation of your household’, people in high-income countries are more likely to respond 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 work in our lives’ would be ‘a good thing’ represent a lower proportion of the population in Australia than in many countries with comparable income levels (Figure 2). In general, however, a higher proportion of the population of affluent countries favour less emphasis on work.

The proportion of Australians who say ‘protecting the environment should be given priority’ over ‘economic growth and creating jobs’ is similar to that for other countries with comparable per capita income levels (Figure 3). There is no clear relationship evident between per capita income levels and this indicator of environmental attitudes. This is not surprising in the light of evidence that environmental problems tend to be more severe in low-income countries.[6]

People who say ‘less emphasis on money’ would be a good thing make up a higher proportion of the Australian population than in most other countries with comparable income levels (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 Australians who say that leisure is very important in their lives is relatively high among countries with comparable income levels. Of the countries with the top five rankings on this criterion, four are in South America. It is apparent that for most other countries the importance of leisure depends strongly on income levels.

For postmaterialist values Australia stands out as 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 speech’ above ‘maintaining order in the nation’ and ‘fighting rising prices’. [7] More of the population tend to have postmaterialist values in high-income countries.

The proportion of Australians who say that good pay is ‘important in a job’ is relatively low by comparison with countries with similar average income levels (Figure 7). The percentage viewing 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 countries with comparable income levels (Figure 8). Respondents were asked which they considered most important: ‘a high level of economic growth’, ‘seeing that people have more say about how things are done at their jobs and in their communities’, ‘a strong defence for our country’ and ‘cities and countryside more beautiful’. The evidence suggests that people in high-income countries tend to view economic growth as having lower priority.

Are the benefits of economic growth just a mirage?

What do the surveys show?

Three main findings emerge from the survey evidence about the relationship between income and subjective well-being (SWB)[8]:

• People on high incomes tend to be happier than those with low incomes.
• Cross-country comparisons show a strong positive relationship between per capita GDP and average life satisfaction up to a modest per capita GDP level (of about $US15,000) and no clear relationship at higher income levels (See Figure 9).
• In recent decades, economic growth in high income countries has been accompanied by little improvement in SWB.

At an individual level, the survey evidence indicates a stronger correlation between income and SWB in poor countries than in wealthy countries, though studies of income and SWB may understate the overall role of finances. A recent study by Bruce Headey and Mark Wooden, based on Australian data, has concluded that wealth (net worth) matters at least as much income in its effects on SWB.[9] The overall evidence suggests that in wealthy countries other factors, particularly marriage and unemployment, have a greater impact on SWB than does income.[10] But the fact that economic growth in high income countries has been accompanied by little improvement in SWB can only be partly explained by the effects of factors such as rising rates of separation, divorce and unemployment.[11]

What does this survey evidence mean?

Does the SWB evidence imply that economic growth in wealthy countries is not worth having? Those who adopt this interpretation present a variety of arguments:

• people are more interested in relative than absolute income;
• as people earn more they adapt to it and their aspirations rise—so the growth process is like being on a treadmill going nowhere;
• economic growth occurs as a result of manipulation of consumer preferences.

There is no doubt that relative income has an important influence on SWB. This is evident, for example, in the results of a US survey in which students were asked whether they would prefer to live in a world where they had high relative income and low absolute income or in a world where they had high absolute income and low relative income. Half of the students chose high relative income in preference to high absolute income.[12] At the same 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 absolute incomes.

What are the practical implications if, say, every additional dollar increase in your income is associated with a decline in happiness for everyone 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% on all additional income as a disincentive to your polluting activity.[13]

There is a good reason, however, why unhappiness caused by envy has traditionally been seen as a problem that should be resolved by the person who feels envy rather than by removing objects of envy through collective action. It seems likely, to use the words of Leland Yeager, that even though ‘catering to envy and Schadenfreude might (just conceivably) appear to contribute to some persons’ happiness in narrow and short run contexts, institutions and policies according respect to such feelings will impair people’s capacity for happiness, at least broadly and in the long run’.[14]

The concepts underlying adaptation to rising income and rising aspiration levels are well grounded in psychological theory and supported by evidence. US data suggests that over a 36-year period the income that Americans regarded as necessary for a family of four to ‘get along’ has increased, on average, to the same degree as actual income. As people acquire goods they aspire to own, such as a house and car, their aspirations tend to increase for goods, such as a swimming pool or a vacation home, that they were much less likely to want earlier in their lives.[15] The results of a study based on Swiss data, suggest, that insofar as income affects SWB, the gap between income aspirations and actual income is much more important than actual income.[16]

Richard Layard’s comment on the tendency for aspirations to rise with income is interesting. He says: ‘We have essentially a problem of addiction, where past people’s standard of living affects in a negative way the happiness they get from their present standard of living. In this way it is just like 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 that have done this. But it is hard to imagine that a substantial proportion of those who sought higher earnings to purchase better houses, for example, would look back and regret those decisions. By contrast, there is little doubt that a substantial proportion of smokers and former smokers regret their decisions that led to nicotine addiction.

Clive Hamilton argues that economic growth is caused by preference manipulation by the advertising industry. He suggests that ‘discontent must be continually formented if modern consumer capitalism is to survive’. According to Hamilton, the advertising industry targets aspirations and expectations of potential consumers, ‘sometimes setting out to create a sense of inadequacy in order to remedy it with the product.[18]

Whatever small grain of truth this statement may contain, the idea that rising aspirations cause economic growth is not consistent with evidence about the processes involved. There is reason to believe that both economic growth and rising aspirations are closely related to the advance of knowledge. Economists have known since the 1960s that economic growth is largely a consequence of growth in productivity rather than increases in the quantity of capital and labour used in production processes. Growth in productivity is related to technological advances, a more highly educated workforce and better use of available knowledge and resources.

It seems likely that technological advances also play an important role in raising aspirations. We can only aspire to have things after they have been invented and we have become aware that they are valuable to us. As Steven Pinker has pointed out:

 Ice Age people would have been wasting their time if they had fretted about their lack of camping stoves, penicillin and hunting rifles or if they had striven for them instead of better caves and spears. Even among modern foragers, very different standards of living are attainable in different times and places. Lest the perfect be the enemy of the good, the pursuit of happiness ought to be calibrated by what can be attained through reasonable effort in current circumstances.[19]

This suggests that rather than making economic growth akin to chasing a mirage, rising aspirations reflect our innate capability to avoid chasing mirages. It makes more sense to attribute aspirations for greater wealth to human nature than to advertising.

Should governments promote happiness rather than economic growth?

Nearly everyone involved in debate on public policy issues claims to be interested in the well-being of people. Those arguing for governments to reduce disincentives to economic growth acknowledge that growth is not an end in itself, but a means to higher living standards.[20] It has long been widely recognised that governments need to reduce adverse spillover effects, such as environmental pollution, that could otherwise adversely affect the well-being of people. Some anti-growth advocates, who argue for general disincentives to growth such as higher marginal tax rates on income and a heavier regulatory burden on business activities, also claim to be interested in the well-being of people.[21]

Does this mean that there a case for governments to adopt the goal of achieving higher subjective well-being of their citizens as an over-riding objective?

This idea raises similar problems to those involved in viewing GDP growth as a policy objective.

• First, no aggregate indicator of income or well-being can give appropriate weight to everything that is important to individuals.
• Second, any attempt to direct policies toward achieving targets related to any aggregate measure of income or well-being is likely to involve an unwarranted interference with freedom of choice.

The shortcomings of aggregate indicators

The shortcomings of per capita GDP as a measure of well-being have been well known in Australia for a long time. In a recent speech the Secretary to the Treasury, Ken Henry, referred to a Treasury paper, The Meaning and Measurement of Economic Growth, published in November 1964, which highlighted the importance of those aspects of well-being that are not reflected in the statistics of economic growth.[22] Leisure and environmental quality are among the things that are important to human well-being that are not taken into account in GDP as conventionally measured. In addition, national averages do not tell us much about the well-being of any individuals or groups.

Interestingly, similar shortcomings are associated with subjective measures of well-being. As with GDP, some of the things that are important to humans are not taken into account in measures of happiness and life satisfaction. Again, national averages do not tell us much about the well-being of any individuals or groups.

Though many people are willing to make sacrifices for family members and friends, or even for abstract ideals (freedom, democracy etc.), they do not necessarily give much weight to considerations other than personal feelings in making life satisfaction judgements. Cultural factors seem to have an important influence on this. People in individualistic cultures tend to weight heavily their personal emotional experiences, whereas people in collectivistic cultures tend to emphasise interpersonal factors and cultural norms.[23]

Even successful pursuit of some personal goals is not necessarily reflected in greater happiness and life satisfaction.[24] Child-bearing is an interesting example. Although having children is commonly thought of as a source of life satisfaction as well as a personal goal, Australian evidence from longitudinal surveys suggests that, on average, couples who have children do not feel more satisfied with their lives as a result. Married couples (and to a lesser degree people in de facto relationships) have higher life satisfaction than singles, but there seems to be no further increase in life satisfaction among those who have children.[25] Perhaps immediate sacrifices loom large when parents appraise their current life satisfaction, while they were looking forward to satisfaction for decades to come when they decided to have children. Even so, if achieving one of the most basic of all human goals, reproduction, does not result in higher life satisfaction this suggests governments ought to be cautious in the use of life satisfaction as an indicator.

Education is another relevant example. The proportion of highly educated Australians who are satisfied with life as a whole is reported to be about the same as for middle educated Australians. The percentage of highly educated people who are satisfied with life (79%) is lower that the percentage of high income people who are satisfied with life (86%). [26] This is consistent with research showing that the net effects of formal education on subjective well-being to be small or even negative. One possible reason is that achieving some educational goals, such as more critical judgement, does not necessarily lead to greater happiness or life satisfaction.

Some of those opposed to further economic growth on the grounds that it is unlikely to have a strongly positive effect on average life satisfaction could argue that this is consistent with their opposition to motherhood (at least when it results in population growth greater than zero). It does not seem, however, that they are equally opposed to education on the grounds that this does not have a strongly positive effect on life satisfaction.

Interference with freedom of choice

Compulsory superannuation provides a convenient example of the issues involved in viewing GDP growth and growth in subjective well-being as policy goals. Let us assume that the proponents of compulsory superannuation have proved beyond reasonable doubt that it has increased national savings rates and economic growth. Would it follow that national superannuation is a good policy?

Some people might see compulsory superannuation as bad policy on the grounds that individuals are usually better judges of their own interests than are governments. It can be argued, for example, that higher retirement income does not fully compensate for the hardship caused to families when they are forced to save for their retirement while they are also wrestling with home mortgages and the costs of raising children.

However, let us assume away this problem. Say we have evidence that substantial numbers of people are not good judges of their own well-being and fritter away their income rather than making adequate provision for their retirement. It seems to follow that their well-being will be enhanced if the government requires them to make minimal provision for their retirement. Under these stringent assumptions it might be possible to argue that the policy meets the criterion of making some people better off without making anyone else worse off.

This raises the question of whether it is acceptable for governments to interfere with individual freedom as long as people end up happier, or with greater capability to achieve well-being.[27] I am not comfortable with this idea. When people have the mental competence to accept responsibility for their actions, it seems to me that it is good that they should get what they want, in so far as this is possible within the constraints imposed by other people being free to get what they want.[28]

Some would argue, however, that economic freedom is not a sufficient condition to ensure that people get what they want even when they might be considered, according to normal criteria of age and soundness of mind, to be competent to take responsibility for their actions.

In a recent article, Clive Hamilton claimed that ‘the dominating political issue in rich countries today is the conflict between economic and political liberties on the one hand and ‘inner freedom’ on the other, and that only in a society that protects and promotes inner freedom is it possible to live according to our true human purposes’.[29] From Hamilton’s other writings it is clear that his aim is to make the influence of marketing on consumer behaviour a more prominent political issue. He suggests that the commercial messages of the marketers are ‘so forceful and persuasive’ that ‘they have penetrated to some of the deepest recesses of our individuality and must be counted, in the same way as brain washing, as a powerful form of coercion’.[30] It would be a matter of concern if this view could be supported. But when asked about feelings of inner freedom—the ‘choice and control’ they have over their lives—76% of Australians indicated that they felt ‘a great deal’ of choice and control.[31]

People are not defenceless against the technology of persuasion. Daniel Dennett has suggested that ‘there is an arms race here, with ploy and counterploy balancing each other out’.[32] In this area knowledge is power. Humans are capable of observing when and how others are pushing their buttons and of defending themselves. For example, it is not difficult to reduce exposure to the advertising messages on TV. People who want freedom from advertising can have it instantly at the touch of a finger, without necessarily missing any programs they want to watch. Marketing does not prevent people from getting what they want and taking responsibility for their decisions.

The case for freedom does not rest on the proposition that individuals never succumb to temptation, or even on the proposition that individuals are always the best judges of their own interests. We humans are fallible. Arguably, our freedom to make decisions and to take responsibility for them is character-building—it helps us to learn to align our actions to our considered intentions. But the case for freedom does not rest on its character-building effects either. It rests ultimately on the belief that adults who are capable of taking responsibility for their own decisions should be allowed to get what they want, provided that this does not interfere with the similar rights of others.

Conclusions

Survey evidence does not support the view that Australians give unduly high priority to economic growth. Its priority in Australia is about the same as in other countries with similar income levels. Internationally, the priority given to economic growth tends to decline as incomes rise.

It does not make sense to interpret survey data showing little increase in average life satisfaction in high-income countries over the last 40 years as indicating that economic growth’s benefits are just a mirage. There are two main reasons:

• First, it was naïve for anyone to assume that economic growth would result in further increases in SWB in countries that already had high SWB 40 years ago. When economists claim that choice of more goods rather than less implies higher well-being they make the (implicit) assumption that ‘other things remain equal’. In this instance, however, changes in aspirations are particularly important and are directly related to income changes.
• Second, in a world where income aspirations are rising as a result of technological progress and expectations that economic growth will continue, the introduction of policies to stop economic growth could be expected to result in a substantial reduction in SWB.

It is a good sign that the populations of high-income countries have continued to remain relatively happy over the last 40 years. It suggests income increases have generally kept pace with rising aspirations.

The idea that governments should adopt higher ‘life satisfaction’ as a goal raises similar problems to the idea that governments should promote growth in GDP. Neither measure gives appropriate weight to everything that is important to people. Survey information on life satisfaction does not even reflect the successful pursuit of personal goals related to parenthood and education.

Finally, the idea that governments should adopt life satisfaction leads to interventions, like compulsory superannuation, that aim to enhance well-being by interfering with individual choice. Adults who are competent to accept responsibility for their decisions should be free to make them without interference by governments.

Winton Bates is an economic consultant (winton_bates@msn.com.au). He has worked for many years on public policy issues related to economic growth, both in his current role and in his previous career working in the New Zealand Treasury and the Australian Industry Commission (now Productivity Commission).

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