Freedom and Flourishing

Should wasteful competition for positional goods be taken into account in tax policy?

2012-01-25T17:19:00.000+11:00

In my last post I began my review of Robert Frank’s ‘The Darwin Economy’, by outlining howAdam Smith viewed the strivings of people to better their condition as beingmotivated to a large extent by concerns about their relative position insociety. I suggested that if there are negative externalities associated withstrivings to improve relative position, these should be balanced against thepositive externalities relating to technological progress identified by Smith.

The negativeexternalities that Robert Frank is most concerned about arise when people forgosomething that they value (e.g. leisure or workplace safety) in order to engagein competition for positional goods. The basic idea is that while thiscompetition makes sense from the perspective of each individual, it is sociallywasteful because individuals are forgoing something they value in order tocompete for positional goods.

There is animportant definitional issue, which I will come to later, about whether thesupply of positional goods is fixed. Let us assume initially, however, thatthere is only one positional good which is fixed in supply – housing land withviews – and that humans have such a strong urge to obtain a house with a goodview that, once their subsistence needs have been satisfied, all their efforts gointo obtaining better views. If we now make the additional assumption that thegovernment has to raise a certain amount of revenue to fund provision of publicgoods (e.g. defence, law enforcement) I think it would probably be reasonableto suppose that a tax on income above a certain level, which causes people tosubstitute leisure for income, would be an efficient tax to use in suchcircumstances. (This runs counter to my prior view which would have been infavour of a tax, or combination of taxes, with a neutral impact onincome-leisure choices.)

Now, let usadd some complications relating to the real world. Account should be taken of the factthat different people have different preferences and tastes. Some people areparticularly interested in houses with views, some like to live near water, someare interested in living near good educational facilities and some like to livenear their work. Then, there are the people who prefer to spend additional incomeon goods other than housing.

House sitesin good locations are not the only good for which there is a relatively highincome elasticity of demand. In the case of most high income elasticity goods,however, an increase in demand tends to result in a supply response and areduction in price. Moreover, many studies suggest that there is a relativelyhigh income elasticity of demand for leisure. Such considerations suggest to methat potential economic losses associated with competition for positional goodsare likely to be quite small.

At this pointI should introduce the further complication relating to the definition of positionalgoods. Frank adopts Fred Hirsch’s definition of positional goods ‘as ones whoseevaluations are particularly sensitive to context’. House sites with viewswould be considered to be strongly sensitive to context if people would generallyprefer to live in a location where they have better views than their neighbours,than to live in a location where the views are generally much better, but theirneighbours have better views than they have.

On the basisof thought experiments he has asked students to undertake, Frank suggests thatsize of house is strongly sensitive to context, whereas workplace safety andtime spent on vacation are not strongly sensitive to context. Frank argues thatpositional concerns are stronger for luxury goods than for necessities. Hesuggests that since ‘luxury is an inherently context-dependent phenomenon, it’suncontroversial to say that the last dollars spent by those who spend most aremost likely to be spent on luxuries’. This reasoning leads him to argue infavour of a steeply progressive consumption tax to replace personal income tax.

In the end,it seems to me that the view Frank is presenting boils down to an assertionthat those fortunate (or silly) enough to have high levels of consumption spending imposean externality on the rest of the community who feel that their relativestanding is diminished unless they make the sacrifices required to emulate thisbehaviour. The main problem I have with this this line of reasoning is that peoplecan choose not to get involved in such emulation games, and many people havemade such choices.

Furthermore,I don’t think relative income or consumption levels are nearly as important tolife satisfaction as people might suggest in their responses to thoughtexperiments. A rough calculation I reported on this blog a few years ago suggeststhat the probability of a poor person in a rich country being satisfied withlife is about 60 percent higher than for a rich person in a poor country.

Internationalmigration patterns are also inconsistent with the view that relative positionis of huge importance. Many people seem to be willing to migrate from poorcountries, where they are relatively wealthy, to wealthy countries, where theyare relatively poor, in order to give better opportunities to their children.

My bottomline is that while I think there may be a grain of truth in the idea thatcompetition for some positional goods (goods which are fixed in supply) iswasteful, Robert Frank has not succeeded in establishing a case on efficiencygrounds for a steeply progressive consumption tax.

What did Adam Smith think of externalities associated with the efforts of individuals to improve their relative position?

2012-01-24T15:13:00.000+11:00

I haveenjoyed reading Robert Frank’s new book, ‘The Darwin Economy: Liberty,Competition and the Common Good’, more than I thought I would. This may be becauseI felt that the book had been written for people like me - the author seems towant people who have a strong regard for individual liberty to give seriousconsideration to his views.

I hadexpected Frank to argue that competition for positional goods involves anegative externality because those who are most successful are envied by manyof those who are less successful. However, the view he presents of the natureof externalities associated with competition for positional goods is moresubtle and less easily dismissed.

The startingpoint of Frank’s analysis is the ‘invisible hand’ of the market, which AdamSmith had suggested in ‘Wealth of Nations’ leads self-interested individuals topromote the greater good of society, without intending to do so. Frankdescribes Smith’s invisible hand as ‘a genuinely groundbreaking insight’, eventhough, as Smith recognized, the invisible hand ‘breaks down’ to some extent in the presence of externalities,public goods, and so forth. The particular negative externality that Frank ismost concerned about in this book is associated with circumstances whereindividual rewards depend on relative performance and result from the strivingsof individuals to improve their relative position. He contrasts this striving toimprove relative position (which he describes as Darwinian competition) withthe benign competitive forces associated with Adam Smith’s invisible hand.

Frank’sdiscussion of the different views of competition that he attributes to Darwinand Smith reminded me that Adam Smith had actually written about the strivingsof individuals to improve their relative positions in ‘The Theory of MoralSentiments’ (TMS). Smith suggested in TMS that what people hope to achieve bybettering their condition is not ‘ease’ or ‘pleasure’ but ‘to be taken noticeof with sympathy, complacency and approbation’ (p 50-51, Liberty Fund edition,1982). Later in the book, Smith suggests, however, that ‘the poor man’s son,whom heaven in its anger has visited with ambition’ imagines that if he attainedwealth and greatness ‘he would sit still contentedly, and be quiet, enjoyinghimself in the thought of the happiness and tranquillity of his situation’.According to the story, this ambitious man endures a great deal of miserystriving to better his position. By the time he achieves his goal, however, heis near the end of his life ‘his body wasted with toil and diseases, his mindgalled and ruffled by the memory of a thousand injuries and disappointments …’.At this point he begins to think that ‘wealth and greatness are mere trinketsof frivolous utility’ offering little ‘ease of body or tranquillity of mind’ (p181).

In my view,Smith’s story understates the benefits that people obtain from wealth becauseit doesn’t take account of the greater autonomy wealth enables them to enjoy. (Ihave discussed the link between wealth and autonomy previously on this blog.)

Smith wassuggesting that people tend to make cognitive errors of the kind discussed byDaniel Gilbert in his book, ‘Stumbling on Happiness’. This view of strivings toimprove relative position differs from that of Robert Frank, who does not relyon departures from the individual rationality assumptions normally used inneo-classical economics.

Thesimilarity between the views of Adam Smith and Robert Frank in relation to strivingsto improve relative position lies in the fact that both seem to see this asmore or less a zero sum game, with externalities involved. Adam Smith wrote asfollows about the externalities associated with the strivings of individuals tobetter their condition:

‘Thepleasures of wealth and greatness … strike the imagination as something grandand beautiful and noble, of which the attainment is well worth all the toil andanxiety which we are apt to bestow upon it.

And it iswell that nature imposes upon us in this manner. It is this deception whicharouses and keeps in continual motion the industry of mankind. It is this whichfirst prompted them to cultivate the ground, to build houses, to found citiesand commonwealths, and to invent and improve all the sciences and the arts,which ennoble and embellish human life; which have entirely changed the wholeface of the globe, have turned the rude forests of nature into agreeable andfertile plains, and made the trackless and barren ocean a new fund ofsubsistence, and the great high road of communication to the different nationsof the earth’ (p 183).

These daysmany people would be less inclined to count as a benefit some of the ways inwhich the face of the globe is being changed by the motion of industry. ButSmith’s insight that strivings of individuals to improve relative position can encouragetechnological progress is still relevant. If such strivings also result in negativeexternalities, those need to be balanced against the positive externalitiesthat Adam Smith identified.

I promise towrite about Robert Frank’s views in my next post.

Can measurement of subjective well-being help us to assess whether life is getting better?

2012-01-21T17:46:00.000+11:00

The British government has recently taken some steps towardmeasurement of subjective well-being in the hope that this will provide ‘ageneral picture of whether life is improving’ and eventually ‘lead togovernment policy that is more focused not just on the bottom line, but on allthose things that make life worthwhile’.

The quoted words are from David Cameron, the British primeminister. I find it interesting that he refers to ‘the bottom line’ as thoughthe bottom line in British politics has always had a pound sign in front of it.Philip Booth, editor of the recent Institute of Economic Affairs (IEA) publication‘… and the Pursuit of Happiness’, suggests that the prime minister wasattacking a ‘straw man’; the British government has always had a multitude ofobjectives.

Booth makes the point that attempts to ‘centrally directpolicy toward improving general wellbeing’ will fail just as attempts toincrease GDP growth through use of central planning also failed. I agree withthe point, but I suspect that it is also a straw man. I doubt whether DavidCameron is proposing to adopt some form of central planning in an attempt toraise national happiness. It seems to me that attempts to obtain a betterpicture of whether life is improving are no more likely to encourage centralplanning than was the measurement of national income likely to encouragecentral planning. Like many happiness researchers, the pioneers in the field ofnational income measurement were of an interventionist frame of mind. They actuallywanted better measures of economic activity as an aid to implementation of Keynesianmacro policies. The central plannerswere not slow to jump on the national income measurement bandwagon, but therewas no slippery slope leading inevitably from national income measurement toincreased government intervention.

However, I can’t claim to know what the British primeminister has in mind. Initial survey work by the Office of National Statistics(ONS) has focused on a comparison of different measures of subjective well-being.Some of the results are interesting. For example, there is a fairly high levelof correlation (0.66) between responses to a standard life satisfactionquestion (How satisfied are you with your life nowadays?) and a eudenomicquestion (Overall, to what extent do you think the things you do in your lifeare worthwhile?).

Yet, that kind of information will not tell us muchabout whether life is getting better. As Paul Ormerod demonstrates in hischapter of the IEA publication, levels of life satisfaction in high incomecountries tend to fluctuate over time without any obvious trend – and despiteimprovements in many different well-being indicators. I think the metaphor of aladder attached to a helicopter, which I used in a recent post, is helpful toan understanding of why successive snapshots of life satisfaction cannotmeasure progress. If I am climbing a ladder that is attached to a helicopter,my height above the ground depends on the height of the helicopter as well ason which rung of the ladder I have reached. The ladder represents the benchmarkof possibilities against which I assess my life satisfaction, but upward movementof the helicopter (i.e. expanding possibilities) may be my main source of progress.

In my view, if you want to know whether people feel thattheir lives are improving you need to provide them with an appropriate benchmarkagainst which to make that comparison. The ONS survey enables this by also askingrespondents to rate their life satisfaction a year ago and five years ago. Thescores for life satisfaction five years ago and one year ago were slightly lowerthan those for current life satisfaction. This suggests, somewhat surprisingly,that Brits generally feel that their lives are still improving despite theglobal financial crisis and its aftermath. That kind of information seems to meto be worth having.

Unfortunately, I couldn’t find any discussion in the IEApublication of what measures of progress would be superior to the successivesnapshots of life satisfaction that are targeted for criticism by several ofthe authors. The publication certainly serves a useful purpose in bringingtogether the contributions of a range of authors who question false assertionsthat have been made on the basis of happiness research and caution against governmentattempts to use the findings of happiness research to introduce policies to promotehappiness. Nevertheless, I was slightly disappointed that the editor did notshow a little more sympathy for the idea that there could be some merit in theaim of the British prime minister to obtain a better picture of whether life isimproving in that country.

I expect that if government policies were focusedmore clearly at expanding the opportunities that make life worthwhile, there would actually beless government regulation in most countries, including the UK.

Does GNH measure progress towards a better society?

2012-01-17T10:35:00.000+11:00

In my lastpost, ‘Can happiness be aggregated?’, I suggested that any statement aboutaggregate happiness or gross national happiness (GNH) involves judgements –explicit or implicit – about the characteristics of a good society.

I used theexample of Mary, who is flourishing at level 9, and Jane, who is just surviving atlevel 1, and asked whether their combined level of flourishing is equivalent tothat of two other people who are flourishing at level 5 ( i.e. (9+1)/2). I suggested that you may feel that combining theratings of different individuals together should involve value judgementsrather than just arithmetic. I argued that if we introduce value weights intothe process of aggregating the flourishing of different individuals, we aremaking a judgement about the extent to which the distribution of flourishing isconsistent with our views about characteristics of a good society.

I think the issuesraised by the example of Mary and Jane can be brought into sharper focus if weconsider whether aggregate flourishing increases to the same extent if Mary’s levelof flourishing rises from 9 to 10 as when Jane’s level of flourishing risesfrom 1 to 2. I think most people would feel that Jane’s increased flourishingshould receive more weight than Mary’s in the assessment of aggregatehappiness. As argued above, the assignment of relative weights involves a valuejudgement. Different people can be expected to have different opinions aboutthis matter.

The peopleresponsible for the GNH survey in Bhutan have taken the position that ‘beyond acertain point, we don’t need to keep adding in higher achievements to thequality of life mechanically’. Their methodology would not count the increasein Mary’s level of flourishing as making any contribution to GNH on the groundsthat it is appropriate to confine attention to ‘a middle band of achievementsthat contribute significantly to human wellbeing for most people’. I am notsure whether these implicit weightings reflect a consensus of the people ofBhutan, but in any case the weightings in the GNH index have validity as anexpression of the values of the elected government.

The way I see it, Bhutan’s GNHindex is the method that the government of Bhutan has chosen to measureprogress toward a better society.

Can happiness be aggregated?

2012-01-16T14:13:00.000+11:00

My startingpoint for this post is take it as given that everyone agrees that for publicpolicy purposes it is appropriate to view happiness in terms of individualflourishing. My reasons for this view have been presented in the draft ofchapter 2 of the book that I have been writing.

I doubt whether it is possible to obtain an accurate measure of the extent to which each individual in the community is flourishing because some of the subjective information involved is probably not accessible to people conducting surveys. But let us assume that we have a measure that is good enough to compare theextent to which different people are flourishing in terms of a rating scale from 1 to 10, with a ratingof 1 indicating that the individual is just surviving and a rating of 10indicating that the individual is fully flourishing.

Themeasurement system that I am assuming would enable us to determine the percentage ofpeople at different levels of flourishing within a particular community. Ifother communities adopted the same measurement system we could makeobservations about the percentage of people who are flourishing in differentcommunities. It might be possible to say, for example, that 50 per cent of thepopulation in community A are flourishing at a moderate level (with a rating of7 or above) whereas the corresponding percentage in community B is only 40 percent. There could be considerable interest in such observations, particularlyif they enabled comparisons to be made between countries and over time.

Would such ameasurement system enable us to say that the aggregate or average level offlourishing is higher in one country than another? I don't think so. For exampleif you are told that 50% of the population is flourishing in country A and 40%is flourishing in country B, that doesn’t necessarily mean that the averagelevel of flourishing is higher in A than B. It is possible that 20% arestruggling for survival in country A while only 5% are struggling for survivalin country B. The average (mean) calculated from the percentages flourishing ateach level might indicate that the level of flourishing is higher in B than inA. In this instance, is the mean a better measure of the 'average' than the median?

There isalso a more fundamental problem. Let us assume that Mary is flourishing atlevel 9 and Jane is just surviving at level 1. Is their combined level offlourishing equivalent to that of two other people who are flourishing at level5 ( i.e (9+1)/2) ? I don’t think so. It seems to me that, other things equal, it is preferableto have two people flourishing at level 5 than to have one person at level 1 andthe other at level 9. But that judgement reflects my own values and is notrelated to the preferences of the people most directly concerned? We should askMary and Jane what they think. But their views might differ. Perhaps we couldask a random sample of the population what they think, or conduct experimentsto find out what choices most people might make behind a veil of ignorance. (Ihave in mind the kind of experiment conducted by Hörisch Hannah, which Idescribed in an earlier post.)

The point Iam getting to is that even if you can conceive of ratings corresponding todifferent levels of flourishing, you may have good reasons to feel that combining the ratings ofdifferent individuals together should involve value judgements rather than justarithmetic. You may not be comfortable in thinking of the combined level offlourishing of Mary and Jane as though these individuals are just metric stations.

However, ifwe introduce value weights into the process of aggregating the flourishing ofdifferent individuals, are we not then making a judgement about the extent towhich the distribution of flourishing is consistent with our views about the characteristics of a good society? It seems to me that any statement aboutaggregate happiness or gross national happiness involves judgements – explicit orimplicit – about the characteristics of a good society.

So, why notask directly whether society A is better than B, rather than asking whetheraggregate happiness is greater in A than B? This would mean attempting to achieve consensus on the characteristics of a good society. I presented some thoughts about this in a post a couple of years ago.

Has the United States become a secular theocracy too?

2012-01-14T11:25:00.000+11:00

Secular theocracy is a result of the tendency in the modern worldfor faith in government to replace faith in God. In the past I have tended toassociate secular theocracy with Australia, New Zealand, Britain and other countriesin Europe, rather than the United States. When I first visited the US in the1970s, I remember mentioning to someone that Americans seemed to take religionmuch more seriously than I had expected. He pulled a bill from his wallet andpointed to the words, ‘In God we trust’, suggesting that those words were a keyto understanding America.

Until very recently I thought that the differing influenceof secular theocracy in different countries could be explained entirely by thediffering influence of collectivist ideas – a desire for security beingsatisfied by the welfare state rather than by religion. From where I sit, in Australia,it seemed that secular theocracy could be attributed to the varying influenceof ideas of people like Karl Marx and J S Mill, leading to establishment of moreextensive welfare states in some countries than in others. While I am anadmirer of many of Mill’s writings, it seems to me that his introduction of theterm ‘social justice’ played a significant role in the development of seculartheocracy in some countries. The faith that many people have in social justiceseems to me to be much like religious faith. When people say that social justice demandsthis or that, it seems to me that they are actually using nebulous secularlanguage to make claims about our religious duties toward other humans.

So, how did I react when it was suggested to me recentlythat secular theocracy stems from the separation of church and state? Myinitial reaction was not favourable. From my limited knowledge of history, theseparation of church and state seems to be inextricably linked to the historyof recognition of religious freedom and individual liberty. According to thisview, the separation of church and state stems from recognition that in orderto promote and preserve individual liberty it is necessary for religious organizations to be kept away from exercise of thecoercive powers of the state.

An article recently published by David Theroux, president ofthe Independent Institute in the US, presents a somewhat different view of seculartheocracy. David suggests that modern America has become a secular theocracy,with a civic religion (nationalism) replacing God. The view he presents is linkedto that of C S Lewis, who argued that there is no sacred/secular divide andthat a theopolitical world view of hope, joy, liberty and justice enabledChristians to discover objective natural-law principles of ethics, science andtheology, producing immense human flourishing.

In support of his view that nationalism has replaced God, DavidTheroux points to a statement by Supreme Court Justice William Brennan in a land mark case in 1963 relating to bible reading in schools. Brennan argued that thefunction of public schools is the training of American citizens in anatmosphere in which children may assimilate a heritage that is ‘civic andpatriotic’. He went on to suggest that ‘patriotic and united allegiance to theUnited States is the cure for the divisiveness of religion in public’.

David Theroux argues that in the United States seculartheology ‘exalts a sovereign and powerful state that pervades all of life andcompels obedience not just to its mandates but to secular nationalism of theZeitgeist itself, for which the populace is forced to conform to and to fund’. Theflag has become the most sacred object in US society. He suggests: ‘Thereligious-secular split enables public loyalty by Christians to the nationstate’s secular violence, including invasive wars, torture, and “collateraldamage”, while avoiding direct confrontation with Christian beliefs about thesupremacy of God and natural law teachings’.

I have no hesitation in recommending David Theroux’s article.The existence of a pervasive secular theology of nationalism seems to me to be anotherimportant key to understanding modern America.

When can you trust your intuitions?

2012-01-12T23:40:00.000+11:00

In my last post I discussed the part of Daniel Kahneman’s ‘ThinkingFast and Thinking Slow’ that I like least. In this post I will to discuss the partthat I most enjoyed reading.

At the beginning of his book Kahneman sets up the idea thatthe human mind can be thought of as being comprised of two systems. System 1operates quickly, with little effort and no sense of voluntary control. System2 allocates attention to the effortful mental activities that demand it.

When I read that I immediately began to search for links toTimothy Gallwey’s concept of Self 1 and Self 2. Gallwey is a sports andbusiness coach and author of popular ‘inner game’ books. I have read nearly allof Gallwey’s books and have written about them previously on this blog.

Gallwey observed that when he was playing tennis he seemedto have two identities. Self 2 was playing tennis and Self 1 was constantlyinterfering by telling him how to play and trying to get him to conform to hisinstructions.

It struck me that Gallwey’s Self 1 might correspond roughly toKahneman’s System 2 and that Gallwey’s Self 2 might correspond with Kahneman’sSystem 1. Anyhow I didn’t find the link until I read Chapter 22 of ‘ThinkingFast and Thinking Slow’ in which Kahneman discusses his collaboration with GaryKlein, who turns out to be an admirer of Tim Gallwey's books.

Klein and Kahneman collaborated in a study directedtoward answering the question of when you can trust an experienced professionalwho claims to have an intuition. Kahneman’s scepticism about intuitions wasshaped by observing failures of intuitive judgements by experienced professionals. He observed that experienced professionale.g. clinicians, stock pickers and political scientists often had too muchconfidence in their intuitions. He suggests that this occurs because System 1tends to produce quick answers to complex questions, creating coherence wherethere is none.

Klein’s optimism about intuitive judgements by experiencedprofessional was shaped by studies of leaders of fire fighting teams who seemto be able to make good decisions in emergencies without comparing options or knowinghow they are able to sense the best course of action to take.

Klein and Kahneman agreed that successful intuitivejudgement involves pattern recognition. Two basic conditions are necessary foracquiring a skill in intuitive judgement: an environment with sufficientstatistical regularity for patterns to exist; and an opportunity to learn theseregularities through prolonged practice.

Examples of statistically regular environments include sports,games such as chess, bridge and poker, and professions such as medical practice,nursing and fire fighting. By contrast, the failure of stock pickers andpolitical scientists who make long term forecasts reflects the unpredictabilityof the events they are trying to forecast.

This all makes sense to me. When I am playing golf I should learnto trust Self 2 (System 1) and when I am trying to understand economic issues Ishould employ System 2 (Self 1).

However, that is an over-simplification. It probably isn’twise to rely entirely on intuition when selecting which club to use whenplaying golf and the intuitions of economists have probably been the source ofmany a useful hypothesis about relationships between economic variables.

I particularly liked the way Kahneman ends his discussion ofthe relationship between System 1 and System 2 in the final chapter of his book.He suggests that System 2 is who we think we are – it articulates judgementsand makes choices. (That is presumably why Tim Gallwey labelled it as Self 1.) Kahneman goes on to make the point that while System 1 is the origin of most of whatwe do wrong, it is also the origin of most of what we do right. The judgementsand choices made by System 2 often involve endorsement or rationalization ofideas and feelings generated by System 1.

Does libertarianism rest on rational actor assumptions?

2012-01-04T15:57:00.000+11:00

‘The assumption that agents are rational provides theintellectual foundation for the libertarian approach to public policy: do notinterfere with the individual’s right to choose, unless the choices harmothers’ – Daniel Kahneman, ‘Thinking Fast and Slow’, Penguin, 2011.

I feel as though I am being somewhat churlish in protestingabout Kahneman’s comments on libertarianism, which amount to only a few pages nearthe end of a 400 page book. In my view Kahneman’s book deserves high praise andit has indeed been widely praised (for example, even in a post on his blog by David Friedman, who describes himself as an anarchist-anachronist-economist). Having thought slowlyabout the matter, however, it seems to me that it is important to try toprevent paternalists from getting a free kick from the reasoning that Kahnemandevelops in this book.

Much of Kahneman’s book is a discussion of research findingsrelating to biases in intuitive thinking. The view presented is that intuitivethinking (fast thinking) tends to be much more influential than we realize – itis responsible for many of the choices and judgements that we make.The confidence we have in our intuitions is usually justified, but they canlead us badly astray on issues that require deliberation (slow thinking). For example, most people have particulardifficulty in making judgements that require an understanding of probabilities.Kahneman is not optimistic that people can easily learn to recognize when theyare in a cognitive minefield in which they need to slow down and question theirintuitions. When people feel the stress of having to make a big decision, more doubtis likely to be the last thing they want.

My intuitions tell me that Kahneman may be too pessimisticabout our ability to recognize when we are about to enter a cognitive minefield.It seems to me that many people have developed emotional systems that provideample warnings when they are about to enter cognitive minefields. Since I amfeeling such warning signals right now, however, my intuitions about this couldwell be wrong. I should confine my remarks to matters about which I can writewith some confidence.

When I set out to write this post the plan in the back of mymind was to refer to some earlier posts in which I distance myself from therational actor model employed by people like Gary Becker (whose theory ofrational addiction is cited by Kahneman) and then to proceed to demonstratethat the classical foundations of libertarianism do not require the assumptionsof that model. However, my early warning system suggested to me that it mightbe a good idea to check whether Becker actually bases his defence oflibertarianism on the rational actor model. It turns out that in the defence of libertarianismthat I found, Becker actually distances himself from rational actor assumptions. (Thisis a post he wrote on the Becker-Posner blog in 2007 on the peculiar concept oflibertarian paternalism - supported by Kahneman, but advocated originally by CassSunstein and Richard Thaler.)

Becker presents the view that I had planned to present moreeloquently than I could, so I will quote him:

‘Classical arguments for libertarianism do not assume thatadults never make mistakes, always know their interests, or even are ablealways to act on their interests when they know them. Rather, it assumes thatadults very typically know their own interests better than governmentofficials, professors, or anyone else ... . In addition, the classicallibertarian case partly rests on a presumption that being able to make mistakesthrough having the right to make one's own choices leads in the long run tomore self-reliant, competent, and independent individuals. It has beenobserved, for example, that prisoners often lose the ability to make choicesfor themselves after spending many years in prison where life is rigidlyregulated. In effect, the libertarian claim is that the "process" ofmaking choices leads to individuals who are more capable of making good choices’.

Arnold Kling’s views on the implications of the cognitivebiases documented by Kahneman are also worth quoting:

‘If social phenomena are too complex for any of us tounderstand, and if individuals consistently overestimate their knowledge ofthese phenomena, then prudence would dictate trying to find institutionalarrangements that minimize the potential risks and costs that any individualcan impose on society through his own ignorance. To me, this is an argument forlimited government.

Instead of using government to consciously impose aninstitutional structure based on the maps of cognitively impaired individuals,I would prefer to see institutions evolve through a trial-and-error process.People can be “nudged” by all manner of social and religious customs. I wouldhope that the better norms and customs would tend to survive in a competitiveenvironment. This was Hayek's view of the evolution of language, morals, commonlaw, and other forms of what he called spontaneous order. In contrast, countingon government officials to provide the right nudges strikes me as a recipe forinstitutional fragility.

If Kahneman is correct that we have “an almost unlimitedability to ignore our own ignorance,” then all of us are prone to mistakes. Weneed institutions that attempt to protect us from ourselves, but we also needinstitutions that protect us from one another. Limited government is one suchinstitution’ (‘The PoliticalImplications of Ignoring Our Own Ignorance’, The American, December 2011).

In responding to comments on his post, David Friedman has made a similar point that onbalance Kahneman's work may actually favour the libertarian position thatmarket decision processes are superior to political decision processes:

‘The arguments suggest that people are more nearly rational when they use theslow mind than the fast and, since the slow mind's attention is a scarceresource, they are more likely to use it the more important getting a decisionright is. My market decisions are almost always more important to me than mypolitical decisions, since the former directly affect outcomes for me, thelatter do not. That suggests that people will be less rational in theirpolitical decisions than their market decisions.’

It is also worth noting that we do not have to choose between relying on our own individual thinking processes and relying on governments to guide us. In those areas of decision-making where we may not be able to rely on our intuitions and deliberations we have family, friends, representatives of voluntary organizations of various kinds and paid professionals who may be willing to act as our advisers or our agents (as well as the social norms and customs mentioned by Kling). If I need an agent to make decisions for me, it seems to me to be preferable to appoint one to act as my servant than to appoint one to act as my master.

Finally, we should also recognize that when governments make paternalistic laws to criminalize stupidity they don't necessarily stop people from behaving stupidly. They may just add to the problems of the people they are trying to help.

How should we measure progress?

2011-12-31T16:45:00.000+11:00

There seems to be a lot of talk about progress, or lack ofit, at the end of each year. I tend to get caught up in this even though a yearis far too short a period to measure the kind of progress that most interestsme.

Two years ago I wrote a post entitled ‘What is progress?’This was the first post I had written with the ‘progress’ label on it. At thetime I intended to read several books and articles relating to the concept ofprogress and then to write something more definitive about the meaning andmeasurement of progress.

Since then I have read several books and articles aboutprogress – from an historical perspective and looking towards the future – and havewritten 38 posts related in some way to the concept of progress. However, I don’tthink I have written anything as definitive as my first post on this subject.

The main point I made in that first post about progress isthat if progress is to have any meaning from a public policy perspective itmust mean movement toward a good society or movement from a good society to abetter society.

A fairly obvious response that might come to mind is that it could be just about as difficult to define what we mean by a good society as to definewhat we mean by progress. As things happened, however, I had just spent a fewmonths in 2009 thinking about the characteristics of a good society.

I had reached the conclusion that just about everyone shouldbe able to agree that a good society is good for its individual members. Such asociety would enable its members to live together in peace. It would provideits members with opportunities to flourish. It would also provide its memberswith some security against threats to their flourishing. I had also come to theconclusion that these characteristics of a good society are measurable.

It follows, or so it seems to me, that the best way tomeasure progress is to bring together relevant indicators of the peacefulnessof societies, opportunities for flourishing (including consideration of economic,environmental and social capital indicators) and security (including considerationof security against misfortunes such as ill health and unemployment).

The approach I am suggesting is similar to that followed bythe Australian Bureau of Statistics (ABS) in its ‘Measure of AustralianProgress’ (MAP). The difference is that ABS offers a smorgasbord of social,economic and environmental indicators which could, in principle, covereverything that anyone has ever suggested might have some relevance to thequestion of whether life is getting better. I think attention should focus on indicatorsthat nearly everyone would agree to be closely related to importantcharacteristics of a good society.

I strongly support the ABS’s approach of recognizing thatprogress is multidimensional and refraining from any attempt to combineindicators into a single measure. It seems to me that so called ‘genuine’ progressindicators which reflect the value judgements of individual researchers relatingto such matters as income distribution and environmental values are useless. Therelative importance of progress in various dimensions must remain a matter for publicdiscussion and judgement by individual citizens. If a collective judgement isrequired about the priority that should be given to various dimensions ofprogress, we have constitutional processes including elections and parliamentaryprocesses to perform this task.

Since the combining of progress indicators must involveindividual value judgements, why not just ask individuals to make an evaluationof their own lives (on a scale of 1 to 10), combine these evaluations in someway and use this as our measure of progress? There are several problems withmeasurement of subjective well-being in this way, as discussed elsewhere onthis blog. As I see it the main one is in ensuring that respondents have anappropriate benchmark in mind for measuring progress when they make their evaluations.If you ask people to assess their own lives relative to ‘the best possible life’as in the Gallup surveys, the results of successive surveys cannot provide ameasure of progress because perceptions about ‘the best possible life’ can beexpected to rise as a result of progress. If I am climbing a ladder that isattached to a helicopter, my height above sea level depends on the height ofthe helicopter as well as on my ability to climb the ladder.

So, I think our measurement of progress should focus on widelyaccepted criteria that are relevant to the question of whether we are makingprogress toward more peaceful societies that offer greater opportunities andmore security. There is also a more fundamental question, however, of whetherthe institutional drivers of progress – for example, institutional factors leadingto productivity improvements - are also moving in the right direction. PerhapsI should write more about that next year.

Have important factors been omitted from the HALE index of well-being?

2011-12-12T16:52:00.001+11:00

The aim of the Fairfax organization in sponsoring thedevelopment of the Herald/Age - Lateral Economics (HALE) index of the well-being of Australians seems to have been to publish a broad indicator of social progress in the hope that this will help people toavoid viewing GDP as ‘the supreme indicator of our wellbeing’.

In contrast to some previous attempts to create ‘genuine’ progressindexes for Australia, which seem to have been aimed at maximizing the weightplaced on possible negative spillovers associated with economic growth, theauthors of this index seem to have adopted a fair-minded approach. However, I stillhave some concerns about the methodology adopted. I discussed one of thoseconcerns in my last post – namely that it would be desirable for the index totake into account changes in uncertainty about the economic situation if it isto be taken seriously as an indicator of short term changes in well-being. Inthis post I want to identify important factors that have been omitted from theHALE index that might affect its use as an indicator of longer-term changes inwell-being.

It seems to me that the most important factors affecting individualwell-being are social capital (respect for person and property, quality ofgovernance, individual safety, inter-personal trust) national security(peacefulness of the international environment, relations with other countries,security threats) physical and financial capital (financial wealth, housing, infrastructure,indebtedness, economic security) human capital (skills, health, personalrelationships and emotional well-being) and natural capital (natural resources,environment). The relatively importance of different factors must ultimately bea subjective judgement, but this does necessarily mean that all importantfactors are taken into account when people are asked to rate their satisfactionwith their lives. For example, there is empirical evidence that even though personalsafety is obviously fundamental to individual well-being its contribution to measuredlife satisfaction is negligible in Australia (see, for example, a study I have undertaken using the Australian Centre on Quality of Life data set). One possible explanation is that most peoplefeel so safe living in Australia that safety concerns do not even register intheir minds when they are asked about their life satisfaction.

The most obvious omissions in the HALE index are socialcapital and national security. Those factors are unlikely to affect well-beingmuch from year to year, but their impact over several decades could besubstantial. For example, looking back over the last 40 years, there hasarguably been a substantial improvement in the well-being of Australians as aresult of improvements in relations among countries in the Asia-Pacific region.

Some less obvious omissions in the HALE index may also beimportant. The starting point of the index, net national income, reflects some flowsof services from human, physical, financial and natural capital and one sourceof change in capital stocks (net investment in physical capital). Subsequentadjustments to take into account changes in environmental capital and humancapital are presumably aimed at measuring changes in capital stocks morecomprehensively to obtain a comprehensive income measure (based on the Haig-Simonsdefinition of income i.e. consumption plus change in net wealth). I use theword ‘presumably’ because change in human capital from improvements in schooleducation is measured in terms of the estimated effects of an improvement incurrent PISA scores on long-run GDP, without any discounting to take account ofthe passage of time required before improved PISA scores could possibly be reflectedin the human capital of members of the labour force. It seems to me that,rather than fluctuating widely depending on literacy and numeracy skills of thecurrent crop of school children, the value of human capital stocks probablychanges gradually over time as people with differing skill levels enter andleave the labour force.

The market values of some forms of wealth obviouslyfluctuate fairly widely from year to year, but this is not taken into accountin the methodology used in calculating the index. Changes in the value offinancial capital and housing are ignored in calculating the index. This raisesthe question of whether the effects on well-being of such unrealized capitalgains and losses are as great as for changes in current income. My feeling isthat they are probably not as great. Investors are likely to view capital gainsand losses in a different light to changes in dividends. Home owners who obtainunrealized capital gains on their homes would probably not generally feel thatthere has been much change in their well-being – their home still provides thesame services to them as it did previously. Their lives probably remain largelyunchanged unless, of course, they run down their liquid assets of borrow fundsin order to spend their capital gains.

However, this brings me to what seems to be an importantomission in the HALE index - it doesn’t make any allowance for changes in debtlevels. Well-being is more closely related to net wealth than to total physicaland financial assets. Looking at Australia as a whole, debts cancel out to alarge extent – the liabilities of one person are the assets of another – but theydo not cancel out completely. Changes in net foreign debt levels may have importantimplications for the average well-being of Australians. Changes in interestrates on foreign debt should also be taken into account because they influencethe extent to which current income is available for purposes other than debtservicing.

Research by the Australian Centreon Quality of Life several years ago shows that people who have difficultyin repaying debt tend to have lower subjective well-being than those who do nothave such problems (Survey 11, Report 11, August 2004). In the light of currentdebt problems in many developed countries it seems remarkable that happinessresearchers have not given a great deal more attention to the effects ofexcessive debt on personal well-being.

What factors should be taken into account in assessing short term changes in well-being?

2011-12-10T17:08:00.001+11:00

This is one of the questions I have been pondering as I havebeen reading about the Herald/Age - Lateral Economics (HALE) index of thewell-being of Australians.

The aim of the Fairfax organization in sponsoring thedevelopment of this new index seems to have been to publish a broad indicatorof social progress in the hope that this will help people to avoid viewing GDPas ‘the supreme indicator of our wellbeing’.

The timing of publication – a few days after quarterly GDPdata are published – is clearly intended to invite comparison with quarterlyGDP data. Indeed, a report in the Sydney Morning Herald makes such acomparison:

‘Wellbeing grew twice as fast as GDP in the Septemberquarter thanks to a big rise in national income from the boom in commodityprices and cheaper imports’.

The HALE index rose by 2.2% in the September quarter primarilybecause net national income (NNI) is the starting point for calculation of theindex and NNI reflects terms of trade movements. I don’t have any problem atall with the idea that well-being is more closely related to NNI than to GDP,but I can’t help thinking that the relationship between well-being and shortterm fluctuations in the terms of trade must be tenuous, at best.

Perhaps the terms of trade improvement in the Septemberquarter raised the well-being of some people by enabling them to enjoy anoverseas holiday that they might not otherwise have been able to afford. Peoplewho purchased imported consumer durables might also have benefited. In general,however, it isn’t obvious to me that changes in the terms of trade have mucheffect on living standards unless they are sustained over several years. It iseven possible that short term improvements in the terms of trade could have anegative impact on well-being by adding to uncertainty in the context ofconcerns about possible effects of increased import competition on jobs in someindustries. Such impacts might, of course, be offset by optimism about improvedemployment prospects elsewhere in the economy.

It seems to me that uncertainty is a factor that should betaken into account in assessing short term changes in well-being. Researchbased on surveys data relating to subjective well-being suggests that increaseduncertainty can have a substantial short-term impact on well-being. Forexample, Carol Graham has reported that average life satisfaction in the USfell by 11% during the 08-09 financial crisis, mirroring a larger fall in thestock market. However, life satisfaction bounced back to previous levels oncethe immediate crisis was over, even though the stock market remained relativelydepressed (‘The Pursuit of Happiness’, pp 88-89). A fall of 11% in lifesatisfaction is a very large change in a statistic that is normally very stableover time.

In an earlier post I noted that there was even a blip inlife satisfaction data for Australia at the onset of the global financialcrisis. A much larger decline in consumer confidence occurred at that timereflecting, amongst other things, increased pessimism about the economicoutlook for the next five years. Pessimism about the economic outlook hasincreased again over the last year or so and now stands at levels almostcomparable to those during 08-09.

If the HALE index is intended to be taken seriously as anindicator of short term changes in well-being it seems to me that it would bedesirable for it to reflect changes in uncertainty about the economic outlook.

Is there a house price bubble in Australia?

2011-12-08T21:26:00.001+11:00

An article in ‘The Economist’ last week suggests that the‘bursting of the global housing bubble is only halfway through’ (‘Economicsfocus: House of horrors, part 2’, November 26, 2011). On the basis of the measures used, theauthors claim that home prices are over-valued by 25% or more in Australia,Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain andSweden.

How did the authors arrive at this conclusion? Two measures ofvaluation were used in the analysis: the house price to income ratio, which isa gauge of affordability; and the house price to rent ratio, which reflects therelationship between house prices and the benefits of home ownership i.e. rentsearned by property investors and rents saved by owner-occupiers.

The reasoning seems OK so far. If the price to income ratiois above an appropriate benchmark of affordability and the price to rent ratiois relatively high compared with an appropriate benchmark of returns availablefrom owning other assets, then there might possibly be some grounds to suspect theexistence of a housing bubble.

The critical issue is what benchmark should be used to makesuch comparisons. ‘The Economist’ asserts: ‘if both of these measures are wellabove their long-term averages, which we have calculated since 1975 for mostcountries, this could signal that property is overvalued’. In the chart below Ihave graphed the data from the table that the authors use to make theirassessment.

The chart shows that the price to income and price to rentratios for a heap of countries, including Australia, are well above long-termaverages for the period from 1975 to the present. I think mean reversion(sometimes referred to as regression to the mean) deserves some respect. If wedon’t have good reasons to expect a variable to remain substantially above orbelow its long term average at a particular point, it is often sensible toassume that deviation from the mean is more or less random and that thevariable is more likely to return to the mean than to remain at extreme levels.

So, do we have good reasons to expect rental yields (theinverse of the house price to rent ratio) in Australia to remain below theirlong term average for the period since 1975? In order to answer this questionit might be helpful to consider the level of rental yields inAustralia at present and how much capital appreciation (expected growth inhouse prices) is implicit in current rental yields. The underlying reasoning isthat if potential home buyers – including investors - perceive that there islikely to be substantial capital gain in the years ahead they will tend to bidup house prices to a greater extent (other things being equal) and thus tend todepress rental yields. You need to work out how much capital appreciation theyanticipate in order to assess whether or not their expectations are excessivelyoptimistic.

Current rental yields in Australia - of the order of 3% to4% in net terms – do not seem to me to imply unduly optimistic expectationsabout future capital appreciation if we use an annual nominal return on investmentof say 8% per annum as a benchmark. One way of looking at this is to ask yourselfwhether you would expect average house prices and rentals to grow more or lessrapidly than nominal GDP. I expect average house prices and rentals to growmore rapidly than nominal GDP in Australia because the effects of growth ofpopulation and incomes will tend to intensify the locational advantages of themedian house relative to houses in the outer suburbs. A recently publishedReserve Bank research discussion paper by Mariano Kulish, Anthony Richards andChristian Gillitzer (‘Urban Structureand Housing Prices: Some Evidence from Australian Cities’) uses a model toillustrate, among other things, how growth in population tends to raise houseand land prices to a greater extent in suburbs that are closer to the CBD oflarge cities. This is consistent with the empirical evidence presented in thepaper that house prices in the inner suburbs in Australia rose by about 1.3%more per annum more than in the outer suburbs over the period 1992/3 to2009/10.

Why are rental yields in Australia currently so much lowerthan the long term average over the period since 1975? The most plausiblereason, it seems to me, is that as in many other countries high nominalinterest rates (reflecting high inflation rates) were suppressing demand forhousing over the first half of that period. As inflation rates and interestrates came down, housing affordability improved markedly during the 1990s, butthis led to increased demand for housing, a sharp rise in house prices and adecline in rental yields. Mean reversion doesn’t apply in this instance becausethe mean was distorted.

Why should we expect house prices in Australia to avoid thefate of house prices in the US in recent years? Luci Ellis of the Reserve Bankgave some reasons why the US housing market is different in a speech she madelast year. Unlike other developed countries, mortgage arrears on home loans inthe US started to rise in 2006, more than a year before the unemployment ratebegan to rise. The leverage of the housing stock in the US was substantiallyhigher than in Australia before the global financial crisis.

In addition, the decline in housing prices in the US thatresulted from the bursting of the housing credit bubble was exacerbated bydeflationary monetary policies that led to a major recession. This suggests tome that current rental yields in the US (of the order of 8% to 12% in someareas) should be viewed as being extraordinarily high at present and unlikelyto persist in the longer term.

The final sentence of the article in ‘The Economist’ states:‘A credit crunch or recession could cause house prices to tumble in many morecountries’. Well yes, that does seem quite possible. If it does happen,however, I think there is a good chance that rental yields in Australia willeventually return to somewhere near the ‘normal’ levels that currently exist inthis country.

What is the inner game of stress?

2011-12-04T15:59:00.001+11:00

I am reluctant to write about personal development issues onthis blog. The most important reason is that I don’t have much professionalknowledge relevant to the subject. That should not prevent me from writingabout my personal experience, but the blog isn’t really meant to be about me.

Actually, that line of argument might be a bit suspectbecause a fair amount of what I write about reflects my personal perceptions.The real reason I am reluctant to write much about my personal experience in dealing with stress is that readers might think that I am claiming to be a top performer in thatrespect. I don’t like the idea of having to explain, for example, why I stilldon’t perform very well when I am trying to think on my feet.

Perhaps the problem is that when I have been trying to thinkon my feet my mind has been occupied in thinking about what observersmay be thinking of me, rather than in accessing the emotions that the questionshould be evoking as I compose a response. Anyhow, whatever I say or writeother people have to make up their own minds about me. I don’t control otherpeople’s thought processes.

There now, I have written myself into a state where I amsufficiently stress-free to write about ‘The Inner Game of Stress’, by TimothyGallwey (with Edward Hanzelik and John Horton). This is the latest of a series of innergame books by Tim Gallwey. He has previously written books about the inner gameinvolved in several sports, including tennis and golf, and the inner game ofwork - based on his experience as a coach and trainer. Hanzelik and Horton aremedical practitioners who conduct stress seminars drawing on their understandingof the inner game as well as on their medical knowledge.

I think it would be fair to say that all of Gallwey’s booksare to a large extent about avoiding the adverse effects of stress on ourability to function. This book is as much a pleasure to read as Tim Gallwey’sother inner game books. Gallwey is an expert in getting his message across bytelling interesting stories based on his own personal experience. I have read allbut one of his books. I wrote an article a few years ago describing how thebooks had helped me in dealing with a stress-related problem.

The main point in this book is that stress involves an innergame as well as external stressors. The inner game arises largely from tryingto live with illusions about our own identities. It is as though an internal ‘StressMaker’ has stolen our identities and substituted an illusion in order to createfear, doubt and confusion. The illusions woven by the ‘Stress Maker’ originatefrom the concepts, perceptions and expectations of other people.

The great strength of the inner game approach, it seems tome, is that it avoids the extravagant claim that we can be whatever we imaginethat we want to be. It encourages the belief that each of us has a realidentity (perhaps I could call it a ‘natural self’) that we, as individuals,are ultimately responsible for developing. Other people may see our identitiesas illusions that we have created in our own minds, but we should know better.We know intuitively how to be who and what we are when we by-pass the illusionsthat seem to be pressuring us, and recognize that we own our own lives. We alsorecognize our inner resources and the opportunities for learning and enjoymentthat are available in association with pursuit of our performance goals. We canlearn to trust ourselves to function more successfully.

The book provides practical guidance on how to break themomentum of stress – how to stop and become aware of what you are trying tocontrol and what you can control. It discusses the potential we have toliberate ourselves from illusions by re-assessing the meaning of experiences.

From what I have written, some readers might be concernedthat the book might encourage people to become too self-centred – to questionthe social norms that were instilled in them during childhood and to pursuetheir own interests at the expense of other people. I think such concerns aremisplaced. People don't question norms that they have internalized - adherence to such norms is a matter ofself-respect rather than fear. The book recognizes that it isimportant for individuals to have deep relationships with others. One of theexercises in the book involves seeing problems in a relationship from the perspectiveof the other person – to understand what they may be thinking, feeling andwanting.

My only reservation about the book is that much of theadvice presented in it is based on case studies and has not, as far as I know,been subjected to rigorous scientific testing. Many of the recommendationsshould, perhaps, be thought of as having the status of hypotheses that have yetto be tested. Readers who try the exercises suggested in the book should beaware that they are conducting little experiments. I don’t think that is asignificant problem. One of the themes of the book is to encourage readers to becomemore aware of what they are doing at present and of the effects of doing thingsdifferently.

It is possible that this book, and Tim Gallwey’s other innergame books, may benefit some people more than others. On the basisof my own experience, all I can say is that the ideas in Tim Gallwey’s books haveserved me well.

Does the modern world make us feel like powerless creatures in the coils of an invisible monster?

2011-12-01T11:57:00.001+11:00

‘What most alarms us in our contemporary world, whatunsettles and scares us, is the extent to which the forces that shape our livesare no longer personal – they know nothing of us; and to the extent that weknow nothing of them – cannot put a face on them, cannot find in them anythingwe recognize as human – we cannot deal with them. We feel like small, powerlesscreatures in the coils of an invisible monster, vast but insubstantial, thatcannot be grasped or wrestled with.’

That quote seems to me to sum up the main point that David Maloufwas making in: ‘The Happy Life; The Search for Contentment in the ModernWorld’, Quarterly Essay, March 2011.

In the paragraphs preceding the quoted passage, the authorargues that it is possible for humans to be happy even in the most miserableconditions if they perceive their world as having human dimensions. He explainsthat a world with human dimensions is one that humans can recognize andencompass. In his words:

‘We start always from the body, and relate everything backto it. In a way that goes back to our most primitive beginnings, we use it toestablish direction – where we are facing, where we might move to; to gaugedistance – how far off an object is and how far we have got along the waytowards it; to determine how each thing we are observing stands in relation toour own being – its size in relation to ours, how light or heavy it is when wetry to lift it or weigh it on our palm; how much it occupies of the space weshare; how it smells and tastes, how it feels to the touch or when we roll itbetween finger and thumb’.

I feel in awe of people who manage to maintain tranquillityin the most miserable conditions. It is probably correct to say that suchpeople do experience the sources of human misery as having human dimensions –they feel uncertainty, discomfort, pain, fear and anger just like the rest ofus – but they are not overwhelmed by such feelings. The fact that they havenormal human feelings doesn’t mean, however, that they necessarily see majorsources of human misery – extreme climatic events, for example – as havinghuman dimensions.

Irrespective of their capacity to maintain tranquillity inthe face of misfortune, our ancestors saw God (or the gods) as the most likelyexplanation for extreme climatic events – and just about everything else theyexperienced. Malouf acknowledges this, but he suggests that when we were in thehands of the gods we had stories that made these distant beings human andbrought them close. Of the gods, he writes:

‘They watched over us and were concerned, though in momentsof wilfulness or boredom they might also torment us as “wanton boys” do flies.We had our ways of obtaining their help as intermediaries. We could deal withthem’.

By contrast:

‘The Economy is impersonal. It lacks manageable dimensions.We have discovered no mythology to account for its moods. Our only source ofinformation about it, the Media and their swarm of commentators, bring us“reports”, but these do not help: a possible breakdown in the system, a newcrisis, the descent on Greece or Ireland or Portugal, like Jove’s eagle, of theIMF. We are kept in a state of permanent low level anxiety broken only byoutbreaks of alarm’.

I admire David Malouf’s writing style, but I have a coupleof problems with this line of reasoning. First, personal gods left good peoplebewildered as to why bad things were happening to them. Remember the biblical storyof Job, the virtuous man who suffered from ‘acts of God’. Job was not a happychappy – he cursed the day he was born. My reading of the story is that Jobtried to deal with God, but that didn’t work. Job found tranquillity only afterhe accepted that God was not a person that he could deal with. He had to learnto accept that some factors affecting his life were beyond his capacity tounderstand and influence.

Second, many people seem to have difficulty in accepting thateconomic forces are impersonal. Economic crises, in particular, are oftenviewed in very personal terms – for example, in terms of the excessive greed ofhuman agents, such as Wall Street bankers, or even in terms of conspiraciesinvolving bankers and politicians. Modern conspiracy theories have their demons(and super-heroes) in much the same way as ancient religions had their personalgods.

One of the features of the modern world is that the role ofthe personal gods has tended to be displaced impersonal scientific explanationsof the forces that shape our lives. Do these scientific explanations leavepeople feeling unsettled? I don’t think so. Psychological evidence discussed byTimothy Wilson (in his book ‘Redirect’, discussed recently on this blog) indicatesthat people who are affected by negative events tend to feel worse when theyare uncertain about the nature of those events and why they occurred. Reducing uncertainty about negative events isa good way to bounce back from those events.

It seems to me that it is the uncertainty associated withrecent economic crises that has made them particularly unsettling. With theonset of the global financial crisis there was a great deal of public discussionamong economists about the inadequacy of existing scientific explanations ofwhat was happening. When leading economists admit that they can’t understand aneconomic crisis, other people have good reason to feel unsettled. Over the lastcouple of years, however, there has been growing support among economists forthe idea that (unconventional) monetary policy can be influential in shapingexpectations about the growth of aggregate demand, even when interest rates arevery low. This provides grounds for optimism that the world will be able toavoid a major economic downturn over the next few years. (At the same time, asI suggested in a post a few weeks ago, there are still some grounds for concernthat the European Central Bank will maintain deflationary policies that willexacerbate the financial crisis in Europe and impact adversely on the worldeconomy.)

More robust scientific explanations of economic crises couldbe expected to help the people who have adversely affected to adjust to theirmisfortune, but would they not still feel like small, powerless creatures inthe coils of an invisible monster? Quite possibly. Yet, a better understanding of the economicforces involved may give them reason to hope for better outcomes in future. Asurfer who is dumped by a wave might feel like a powerless creature inthe coils of a monster, even if he has some understanding of wave mechanics.But his understanding of why he was dumped might give him reason to hope thatin future he is more likely to experience the exhilaration of riding the wave.

Why occupy Sydney?

2011-11-29T16:48:00.001+11:00

‘So, you think I am in favour of occupying Wall Street, doyou? What makes you think that?’

I knew it was Jim as soon as he spoke, but it took me amoment to work out where his voice was coming from. When Jim wants to have adiscussion with you, he seems to appear from nowhere and just start askingquestions. I suppose he thinks that gives him some kind of advantage. It doesn’twork! Everyone I know just ignores his opening questions and goes through theusual preliminaries of saying hello and asking after his health while they composea response.

Jim had obviously read a brief comment on my last post inwhich I had speculated that he might be in favour of occupying Wall Street, butnot Sydney. I reminded Jim about our previous discussions about banking andlimited liability. In our previous discussion about banking Jim had suggestedthat it was a scam for banks to promise to repay deposits on demand even thoughthey knew that they would be unable to meet that promise if all depositorsasked for their money at the same time. In our discussion about limited liability, Jim had suggested that it was wrong to allow owners of banks togamble with borrowed money, secure in the knowledge that if their gambles donot pay off then the most they stand to lose is the value of their shares. I alsomentioned that when banks have been declared by governments to be ‘too big tofail’, bankers have a strong incentive to take abnormal risks because they knowthat they will be bailed out by governments if they make large losses. I endedby telling Jim that I could picture him in Wall Street carrying a placardsaying ‘Bankers are Wankers!’.

Jim seemed satisfied with my explanation, but when I hadfinished he asked: ‘So, doesn’t all that apply to Australia as well as the US?Don’t you think I should be in favour of occupying Sydney, too?’

I tried to explain that prudential regulation seems to haveworked reasonably well in Australia, so there doesn’t seem to be much toprotest about in terms of the way the financial system is working in thiscountry.

Jim’s response was quite robust and is not quotable verbatim. After deletingexpletives I think the message he was giving me was that although I tell peoplethat I am a libertarian, he thinks I am actually a neo-socialist because I amin favour of some prudential regulation of the finance sector. (Jim can call mea neo-socialist if he likes – it makes a change from being called a neo-liberal.My views on banking regulation are actually fairly close to those of Adam Smith,so I am in good company.) Jim ended his outburst by telling me that while I wasentitled to my own views, I should refrain from misrepresenting his views.

‘Well, does that means you actually support the OccupySydney movement?’, I asked.

Jim didn’t respond for a long time. Eventually, he asked, ‘Whatare the Occupy Sydney people actually on about?’ I wasn’t sure, but I suggestedthat the main theme of the Occupy movement all over the world seemed to be theinjustice of unequal distribution of wealth and power – particularly the ideathat the top 1% of the population in many countries tend to benefitdisproportionately from economic growth.

‘And who do you think is responsible for that?’ Jim said. ‘Itis the 99% who are responsible for making the 1% wealthy. We make a few filmstars fabulously wealthy by going to the movies that they star in. We make afew sporting heroes fabulously wealthy by watching the games they play andbuying the products they endorse. The same system applies in the businessworld. The CEO of a successful company develops a reputation as a starperformer just like film stars and sporting heroes. Successful companies areonly successful because the 99% buy the goods they produce’.

‘So’, I said, ‘you don’t think there is anything to protestabout?’

Jim said, ‘No, that’s not what I mean. The Occupy Movementshould be protesting about celebrity culture and the vacuousness of consumerism.They should be poking fun at the idea that a good is worth buying just because itis popular and that entertainment is worth watching just because the performeris a star. They should be asking people whether they actually get pleasure byhelping Kim Kardashian to become wealthier’.

I was left wondering why Jim was picking on Kim Kardashian.One possibility that crossed my mind is that she might have green hair. Jimdoesn’t like green hair.

Does Sophie know she is dumping on free trade?

2011-11-16T16:03:00.001+11:00

When Jim asked me to have a drink with him I didn’t expectto be just sitting there watching him read ‘The Australian’ - and certainly notone that was a couple of days out of date. But when I looked more closely, hewasn’t actually reading. He was just scanning as though he was looking forsomething.

‘Ah, here it is’ he said at last. ‘What do you think ofSophie Mirabella?’

Sophie Mirabella is the federal opposition spokeswoman oninnovation, industry and science. I told Jim that I thought Sophie was a cleverlawyer. I said I would rather have her on my side of the argument than as an opponent.

‘What about the dumping issue?’ Jim asked.

I said that in my view she was out of order when she dumpedon Julia Gillard a few months ago by comparing her to Muammar Gaddafi.

Jim replied: ‘Nah, I mean anti-dumping policy – preventing foreignersfrom selling goods here at prices lower than they charge in their home markets.Sophie writes here that dumping seeks to exploit Australia’s commitment to freetrade and is a distortion of our domestic market’.

‘That’s crap!’ I said. ‘It is quite normal for firms to beable to sell goods in their home markets at prices that are higher than theycan obtain in international markets. How could our domestic market be distortedby importing goods at the world price?’

Jim ignored my response and read on. After a minute, hesaid: ‘Sophie says that when Abbott comes to power she is going to provide forpreliminary affirmative determinations (PADs) to “create a shift in the balanceof anti-dumping investigations, requiring the foreign producer to prove itsconduct hasn’t hurt the Australian industry”. What do you think of that?’

It was hard to know where to start. I could have said it seemedto me to be a peculiar legal principle to ask anyone to prove something thatthey are not capable of knowing. Instead, I reflected a little on thedifficulty that lawyers often seem to have in coming to terms with economicissues. I said: ‘I think Sophie makes the same mistake that a lot of lawyersmake when they get involved in economic issues. They see an economic practicethat they can’t understand and assume that it must be unfair. In this instance,they see firms selling in export markets at a lower price than in their homemarkets and jump to the conclusion that they are engaged in some kind of unfairpractice, such as predatory pricing. They don’t consider that the firms mightbe able to obtain higher prices on home market sales because of brand loyaltyand other home market advantages. Her efforts to shift the balance in favour ofdomestic industry will just encourage the rent seekers.

Jim replied: ‘You don’t have a very high opinion of the ability of lawyers to understand economics,do you?’

When I protested to the effect that I think some lawyershave an excellent grasp of economics, he asked me to name one. The name thatcame to mind immediately was Richard Epstein. (Actually, that stretches thetruth a little. I find that names rarely come to mind immediately. RichardEpstein’s name came to mind after just a moment’s reflection.)

Jim asked: ‘So, what does Richard Epstein say aboutanti-dumping policy?’ I mentioned that I had recently read a short article hewrote about the concept of fair trade that seemed relevant. I suggested thatEpstein had made the point that it doesn’t make sense to view businesspractices in international trade as unfair that would be considered quitenormal in inter-state trade within the United States. (When I just re-readEpstein’s article, ‘The “Fair” Trade Delusion’, however, I find that he didn’tquite use those words. And he seems to be implying that FTAs promote free trade– which is hard to sustain. But I am digressing - and at risk of spoiling my story!)

Jim’s line of questioning then took a surprising turn. Heasked: ‘Do you think Craig Emerson would understand that the benefits of inter-stateand international trade are basically the same?’

Craig Emerson, the current Minister for Trade, has a PhD ineconomics from a respectable university and knows quite a lot aboutinternational economics. I said I was sure that he would know that the benefitsof trade between, say, Victoria and Western Australia would not be any less ifWestern Australia was in a different country.

Jim then said: ‘Then don’t you think you and your mates in Canberrashould stop picking on Craig Emerson? How would you like to have Sophie Mirabellarunning trade policy? Or, perhaps even Doug Cameron, or Bob Katter?’

I responded that it must be time for me to buy Jim a drink.

On reflection, how can anyone respond to a suggestion thatwhat seems to be a disappointment is actually a blessing compared withsomething worse that might happen? Even the GFC could look like a blessingcompared to the aftermath of the European meltdown that the world might experienceover the next few months if everything that could go wrong does go wrong. WhenI think about the approach that Sophie is proposing to take with anti-dumpingpolicy, Craig does seem like a little blessing. My problem is that I thoughthaving Craig in control of trade policy might be a huge blessing for the Australianeconomy, rather than just a little one.

How should we encourage people to adopt more healthy lifestyles?

2011-11-13T13:41:00.001+11:00

Timothy Wilson’s book, ‘Redirect: The Surprising New scienceof Psychological Change’, is primarily about what he describes as ‘storyediting’ – a set of techniques designed to redirect people’s narratives aboutthemselves and the social world in a way that leads to lasting changes inbehaviour. Some of this story editing involves writing exercises, such as becomingmore optimistic by writing about the process by which you have enabledeverything in your future life to go as well as it could. But story editingalso involves such things as providing information about social norms tocorrect mis-perceptions about what everyone else is doing. I suggest thatanyone interested in a brief overview of the book should take a look at theinterview of Tim Wilson by Gareth Cook, for ‘Scientific American’ and a reviewby Mario Popova for ‘The Atlantic’.

I want to focus here on what light the book sheds on how weshould encourage people to adopt more healthy lifestyles. Some people who arereading this will be thinking that I must have worked in the public sector fortoo long and become addicted to the ‘we’ word. Why should ‘we’ encourage peopleto live healthy lifestyles? Shouldn’t ‘we’ mind our own business? Well, in thisinstance I am using the ‘we’ word because it is appropriate. I think we wouldall want members of our own families and our friends to live healthy lifestyles,and probably feel that it would be good to encourage them to do that.

A logical place for an economist to begin would be to considerwhether incentives - rewards, threats or punishments - should be used toencourage people to adopt healthy lifestyles. The message that I get from TimWilson’s book is that while incentives can change behaviour, they are notlikely to bring about a desired change in the way people see themselves or intheir intrinsic motivations. For example, in commenting on incentive programsdesigned to encourage kids to read more, Wilson writes:

‘If we want kids to read more, then rewarding them can work– as long as the incentives continue to be available. Rewards can producecompliance, just as punishment can. But … we want our kids to internalizedesired attitudes and values … . After all, we can’t reward them for reading abook for the rest of their lives’.

Wilson also refers to experimental evidence that rewards canactually undermine intrinsic interest in an activity by convincing kids that they are doing it for the reward and not because it is enjoyable. When thereward is removed, participation in the activity was lower than in thepre-reward baseline period.

The conclusion Wilson comes to is that parents should userewards and threats that are minimally sufficient to get kids to do the desiredbehaviours, i.e. not so strong that the kids view the threat or reward as thereason they are acting that way. If the child is told you will be ‘very upsetand angry’ if she does something wrong she will desist to avoid getting in totrouble. If she is told you will be ‘a little annoyed’ she will still desistbecause she sees herself as a good kid.

So, incentives are no panacea. What else doesn’t work? Thebook provides quite a few examples of programs that bring people who areconsidered ‘at risk’ or ‘potential delinquents’ together in various ways (bootcamps, counselling sessions etc.) to try to change their behaviour. Theexperimental evidence suggests that such programs don’t work because people whoare brought together learn from each other and identify with group norms.

Another form of intervention that apparently doesn’t work is to scarethe hell out of people by showing them very graphically what might happen ifthey engage in binge drinking, smoke cigarettes, take drugs and so forth. Threateningpeople with dire consequences for doing things they don’t want to do in thefirst place can have paradoxical effects. For example, some people may get themessage that maybe they are tempted to engage in the undesirable behaviour, afterall, since people are going to extreme lengths to talk them out of it.

So, what does work? One approach that works is autonomysupport. This involves helping youngpeople understand the value of different alternatives facing them and conveyinga sense that they are responsible for choosing which path to follow.

Encouraging young people to become involved in volunteeringseems to have desirable effects on many aspects of their behaviour. The authorwrites:

‘Involving at-risk teens in volunteer work can lead to abeneficial change in how they view themselves, fostering the sense that theyare valuable members of the community who have a stake in the future, therebyreducing the likelihood that they engage in risky behaviours …’

It may be possible to encourage young people to adopthealthier lifestyles by correcting incorrect perceptions about the behavior andattitudes of other young people. Forexample, there is apparently a tendency for young people to over-estimate theamount of alcohol their peers drink. When correct information is disseminated,they lower their estimates of how much their peers drink and reduce their owndrinking.

I don’t think Tim Wilson makes any broad generalizations inthis book about how we should encourage people to adopt healthy lifestyles. Infact, he doesn’t make many generalizations about anything. One of the importantmessages in the book is the need for appropriate experimental testing to seewhat actually works. It seems to me, however, that it would be fairly safe toconclude from the book that the best way to encourage people to adopt more healthylifestyles is through subtle interventions that redirect the narratives thatthey have about themselves.

Do commercial interests have excessive influence on people in modern societies?

2011-11-09T12:01:00.000+11:00

JeffreySachs makes it difficult for any libertarians who happen to look at his book,‘The Price of Civilization’, to consider seriously his claim that powerfulcorporate interests have excessive influence in America. He claims that libertarians‘hold that the only ethical value that matters is liberty, meaning the right ofeach individual to be left alone by others and by the government’.

There are alot of other ethical values that matter to me – and probably to most others whoview themselves as libertarians. In my view, liberty deserves primacy onlybecause it makes it possible for people to live in peace – with minimal coercionof one person or group by another.

Perhaps I amexcessively naïve, but it seems to me that anyone who is concerned that peopleare being manipulated by corporate propaganda might see libertarians aspotential allies. Can a case for individuals to be protected from techniques ofpersuasion that undermine individual sovereignty be argued along similar linesas the case for laws to protect against force and fraud? If it could be, Iimagine many libertarians would support additional action to protect individualsovereignty.

Why doesJeff Sachs think that corporate interests have too much influence in America? DrSachs, the clinical economist, identifies a range of symptoms. The media isprivately owned and funded by advertising revenue. Corporate interests generatepropaganda which the media disseminates. Corporate interests largely fundcampaigns of candidates for political office. People spend a lot of timewatching electronic media.

Sachs writes:

‘Therelentless streams of images and media messages that confront us daily areprofessionally designed to distort our most important decision makingprocesses. We are encouraged to act on fantasy instead of reason’.

Cartoon byNicholson from “The Australian”newspaper: www.nicholsoncartoons.com.au

Sachs claimsthat America has become a corporatocracy – a political system in which powerfulcorporate interests dominate the political agenda. As he sees it:

‘The media,major corporate interests, and politicians now constitute a seamless web ofinterconnections and power designed to perpetuate itself through themanufacture of illusion’.

So, somereaders may ask, does this explain why Americans no longer see much merit inequality of opportunity, don’t think governments should do more to help peoplein need and don’t think the rich should pay more tax? No! Dr Sachs actuallycites evidence that a high proportion of Americans still want more equality ofopportunity, favour more help for those in real need who are prepared to helpthemselves and favour taxing the rich more heavily.

Where doesthat leave Dr Sach’s diagnosis? I’m not sure. Perhaps the disease has notprogressed very far at this stage. Sachs claims that the patient is sufferingfrom a disconnection between shared values and national politics. He sees thedisconnection as arising from various aspects of the political system thatenhance the power of corporate interests – particularly the military industrialcomplex, Wall Street, big oil and transport, and health care.

Jeff Sachshas left me as confused as ever about the American political system. He has notpersuaded me that America is a corporatocracy. Corporate interests are powerfulin America, but so is religion, the teaching profession, environmentalists, etc.,etc.

It seems tome to be the main problem in American politics, which is shared by other modernsocieties, is the trivialization of politics by media that is primarily in thebusiness of selling entertainment. The media can’t be expected to evaluate theclaims made by interest groups, but if journalists have access to suchevaluations from respected sources they can hold politicians to account for theviews they express (or fail to express). Think tanks perform the task of policyevaluation to some extent, but can be too easily dismissed because they are notseen to be above interest group politics. Paradoxically, the government itselfis the only organization capable of creating sources of policy advice that are sufficientlyabove interest group politics to have some hope of commanding widespreadrespect in the community at large.

Despite thereservations I have about ‘The Price of Civilization’ (in an earlier post about taxation levels as well as here) I want to end this post on a positive note. Istrongly endorse Jeff’s view that individuals can benefit themselves and the societiesin which they live by making efforts to become more mindful. We will do lessharm and may do a lot of good if we become more moderate in our habits, achievemore balance in our lives, improve our knowledge, exercise more compassion,have more regard for the effects of our actions on the environment and futuregenerations, consider how we can promote more constructive politicaldeliberations and be more accepting of diversity as the path to peace.

What motivated Roger Kerr?

2011-11-06T12:32:00.002+11:00

There isn’tanyone I have known who could match the enthusiasm and energy that Roger Kerrbrought to his work. I have had the privilege of working with quite a fewhighly principled individuals involved in public policy work - people who areclearly motivated to a large extent by the belief that they are contributing tothe greater good of society. Roger stands out, however, as a person who alwaysseemed to be enthusiastic and optimistic – he seemed to respond to setbacks byincreasing his efforts to obtain better outcomes in future. It was obvious toeveryone that he had a passion for presenting his views clearly, logically andforcefully, but it would not have been obvious to casual observers what wasmotivating him.

Inhis role as executive director of the New Zealand Business Roundtable (NZBR),for the last 25 years, Roger was perceived by some people as a free marketideologue. It is evident from various speeches he gave, however, that he was somewhatbemused (if not annoyed) by that description. In a speech he gave in 2005 he suggestedthat to characterize policy proposals as either ‘ideological’ or ‘pragmatic’is at best a confusion and at worst a rhetorical trick that appeals to anti-intellectualismas a substitute for serious argument. He made the point that everyone involvedin the debate about public policy argues on the basis of some set of principlesor ideas, whether or not they are conscious of them or make them explicit. Healso suggested that serious policy debate cannot proceed unless ideas are articulatedand tested. His support for free markets was not unbounded. It was based ultimatelyon pragmatic grounds – evidence that free market outcomes are generally superiorto the alternatives. I think Roger viewed himself as a principled empiricist.

Inhis eulogy to Roger, Bryce Wilkinson, who worked closely with him over manyyears, mentioned that Roger seldom spoke about his motivations and never worehis heart upon his sleeve. Bryce notes that at some point early in his careeras a diplomat - when Britain entered the EEC - Roger decided that New Zealand'seconomic decline was in fact largely self-inflicted. That prompted him totransfer to the New Zealand Treasury in 1976 and to relaunch his career doingan economics degree part time. Roger’s interest in economic policy wasprompted by a desire for New Zealanders to be able to enjoy more prosperousand satisfying lives. Bryce provides evidence that Roger cared particularly aboutthe effects of bad policies on those who are most vulnerable.

Bryceargues that Roger's optimism was based on his belief that ideas actually matterin policy debates. In support, Bryce referred to an essay that Roger wrote onthe subject of ideas, interests and policy advice on leaving the Treasury in1986.

Ihave just re-read the version of this essay that was published in ‘WorldEconomy’ in June 1987. In this article, Roger argued that economic policyadvisors should be aware that they do not have a comparative advantage inmaking judgements about what courses of action might or might not bepolitically feasible.

Rogernoted:

Perceivedpolitical constraints are not always immutable. They can be shifted by reasonedanalysis and well-constructed strategies for policy change … . Second-guessingpolitical reactions can lead to a narrowing of policy options and does lessthan justice, in recent New Zealand circumstances at least, to the intelligenceof a number of politicians, on both sides of the political fence, who have beenmore aware of the gravity of New Zealand’s economic problems and prepared totell the story like it is than many of their advising bureaucrats’ (pp144-5).

Rogeralso noted the importance of institutional structures in determining policyoutcomes:

‘Thereis an important role for public information, open government, policytransparency and public inquiry processes in order to expose to criticalscrutiny the claims of special interest groups and the performance ofbureaucrats (including the propensity of some of the latter to act as taxpayerfunded lobbyists for some of the former)’ (p 150).

Roger alsomade the claim ‘that the emergence of interest groups with broad representation,which are thus forced to take more of an economy-wide view, may be a source ofinfluence which is more coincident with the interests of the community atlarge’ (p 150). That claim might seem excessively modest in the light of the subsequentperformance of the NZBR – but Roger played an important role himself inensuring that the NZBR maintained an economy-wide focus. A decade ago, NewZealand Institute of Economic Research chairman Michael Walls said of Roger:

‘No singleindividual has done more over the last 15 years to persuade important parts ofthe business sector to support economic policies which, though often contraryto the interests of individual ﬁrms, were in the interests of the country as awhole.’

Roger wasmotivated by a desire to play a part in promoting policy reforms – to avoidfurther economic decline and to enable New Zealanders to enjoy greater economicopportunities. He was enthusiastic because he knew he was fighting the goodfight and he was optimistic because he knew that good policy evaluation andadvice can make a difference. Above all, Roger was motivated by the impulse toensure that his life was meaningful.

I urgereaders to take a look at the many personal tributes to Roger that can be foundon his blog.

Should we be more concerned about the policies being followed by the European Central Bank?

2011-10-31T19:21:00.000+11:00

Jim was obviously agitated by my response to his question. Hehad just asked me whether I thought that the latest political deal in Europewould resolve the European financial crisis. Instead of saying I didn’t know Ihad tried to list some relevant factors, none of which I knew much about. Iended my list by mentioning that the policies being followed by the EuropeanCentral Bank (ECB) were preventing the governments of southern Europe fromfollowing their pre-euro strategy of using high inflation to fund theirprofligacy.

‘I suppose that means you would be a strong supporter of theECB’s anti-inflation policies’, Jim said. ‘You were an inflation hawk back inthe 1980s. And I can remember a discussion in 2006 when you told me you wereworried about expectations of higher inflation in America and the possibilityof a re-run of the stagflation of the 1970s and 1980s. A year or so laterinflation expectations started to fall. Then in 2008 we had the globalfinancial crisis and it became obvious to everyone that there was actually morereason to be concerned about deflation than inflation’.

Jim was right about the 1980s, but I couldn’t recall ourconversation in 2006. I pointed out that it wasn’t necessarily inconsistent to beconcerned about rising inflation expectations in 2006 and to be concerned aboutthe emergence of deflation a couple of years later. I suggested that centralbanks should be aiming to keep inflation expectations low and stable.

Jim said: ‘The fact that you keep talking about inflation expectationssuggests you must have read some of the material on Scott Sumner’s ‘MoneyIllusion’ blog. I started to try toexplain that Scott actually recommends that central banks should target NGDP(nominal GDP i.e. aggregate demand) rather than inflation expectations, but Jimcut me off. He said: ‘I followed the link on your blog to Sumner’s blog to tryto understand the European financial crisis. You obviously haven’t read whatSumner wrote a couple of weeks ago about the ECB’.

I had to admit that I haven’t been reading Scott’s blogregularly over the last couple of months. Jim said that in the post about theECB Scott had a chart about inflation expectations in Europe that had been sentto him by Lars Christensen. At that point Jim got slightly distracted. He toldme that I should read a post that Christensen had written recently on his blog,‘The Market Monetarist’, about Calvinist economics and the gold standardmentality. ‘Christensen must have written that post with people like you inmind’, Jim said.

Jim eventually came back to the chart showing inflationexpectations in Europe. He explained that the chart implies that the ECB hasbeen driving inflation expectations sharply lower during August and September despiteits mandate to produce stable inflation.

Jim ended by saying: ‘Look, why don’t you write something onyour blog telling people to read Scott Sumner’s post about the ECB. And don’tforget to quote the passage where he points out how why it is so important forinflation expectations to be kept stable in Europe at present’.

I’m not sure which passage Jim wants me to quote, but thisone seems to capture the main point:

‘I’m not saying a policy of steady eurozone inflation wouldsolve the debt crisis, obviously it wouldn’t. But the current policy ismaking it far worse than it needs to be. The US made the same mistake inmid-2008. Even at that time the subprime crisis was well understood, andestimated losses to the US banking system were quite high. But when theFed drove NGDP expectations much lower in late 2008 … the debt situationgot far worse, and spread far outside the original subprime sector. Nowwe are seeing the euro sovereign debt crisis spread to more and more countries.’

Perhaps we should be more concerned about the potentialeffects of the aggressive anti-inflation policies being followed by the ECB.

Will Bhutan succeed?

2011-10-26T06:51:00.000+11:00

Some readerswill know exactly what I mean by this question. Others may be wondering: Whereis Bhutan? What does he mean by success? And why should we care?

Bhutan is asmall country which has not had much exposure to the modern world. The firstroads were built in the 1960s and TV was only introduced in 1999. It is locatedat the eastern end of the Himalayas, sandwiched between India and China. Itcovers about the same area as Switzerland and has a population of about 700,000 people. About 75% of the population are Buddhists and most of the remainderare Hindus of Nepali descent.

The 'Tiger's Nest' monastery, near Paro

What do Imean by success? About 40 years ago the former king of Bhutan famously declaredthat ‘gross national happiness is more important than gross national product’. Thisplay on words led eventually to gross national happiness becoming a nationalobjective of Bhutan. In terms of this objective, Bhutan will succeed if it canmodernize so that the people can enjoy the benefits of the modern world,without major social problems, loss of culture or environmental damage.

Why shouldwe care? Bhutan’s approach to pursuit of happiness is a social experiment thatis attracting a lot of attention around the world. A few months ago the UnitedNations General Assembly accepted unanimously a resolution sponsored by Bhutanwhich recognizes the pursuit of happiness as a universal goal. In the years tocome we can expect to hear a lot about the success or otherwise of Bhutan’sapproach to pursuit of happiness.

So, willBhutan succeed? If we look at the matter from a management perspective, some ofthe necessary conditions for successful pursuit of goals have been established:

The government has a fairly clear view of what pursuit of gross national happiness means. It involves promoting socio-economic development and good government (including a vibrant democracy), while preserving cultural heritage and protecting the environment.
Surveys are being conducted to monitor progress. The surveys monitor the views of the people about the performance of government as well as resilience of cultural traditions, ecological knowledge, living standards and psychological well-being.
Survey results are used in de veloping policy e.g. a finding that meditation was not being practiced as often as expected led to meditation classes being offered in schools.

Archery: the national sport and an important cultural activity

The chances of success might look good from a management perspective, but will the people of Bhutan actually be any more successful in coping with themodern world than the people in other countries have been?

The firstpoint, which seems obvious to me from my short visit, is that most of the peopleof Bhutan, like most people elsewhere, want the amenities of modern life. Themore they know about how people live in wealthy countries, the more they arelikely to aspire to have the stuff that people in wealthy countries take for granted – the householditems that take the drudgery out of life, the phones and internet access thatenable us to stay in touch with each other, motor vehicles – all that and more.It will become obvious to an increasing proportion of Bhutanese that a lot ofthis stuff can be useful - even though they may be happy with what they have atthe moment.

My secondpoint is that Bhutan’s government is not likely to come under much, if any,pressure from the public to sacrifice environmental or cultural objectives toachieve a higher economic growth rate. There is considerable potential for economicdevelopment that does not involve major conflict with environmental or culturalobjectives. For example, there is potential to sell more hydro power to Indiaand to expand tourism based on cultural and environmental resources.

The bigquestion, in my view, is the extent to which Bhutan will be able to obtain thebenefits of modernity without ending up with the social problems of modernsocieties? How will they cope with the potential for weakening of traditionalvalues and support systems as larger numbers migrate from rural areas in searchof a better life in the cities? How can they ensure that young people continueto acquire social values and avoid the weakening of the social fabric (whichseemed evident, for example, in the orgy of rioting and looting in London acouple of months ago)? How can they provide a social welfare safety net withoutending up with large numbers dependent on welfare benefits? How can they avoidthe excesses of a consumer society, with substantial numbers of peopleincurring excessive debts to live unaffordable lifestyles? How can they avoidhaving large numbers of people living unhealthy lifestyles, addicted to TV orthe internet and vulnerable to inducements of advertisers?

I think thereare grounds for hope that the government of Bhutan will learn from the mistakesof other countries and come up with sensible answers to such questions. It isobvious from the international conferences it has been holding that thegovernment is actively seeking to learn from experiences of other countries.The way survey results are being used also provides grounds for hope thatBhutan will succeed. For example, the emphasis that the government is placingon providing opportunities for children to learn skills in mindfulness makes mehopeful that young people in Bhutan are more likely to learn as they grow up thatit is their individual responsibility to make best use of the opportunitiesavailable to live a meaningful life. What that means at a practical level islearning to accept responsibility for the important choices in their lives,including choices about such mundane matters as what to eat and when to switchoff the TV.

On balance, Ithink there is a better than even chance that Bhutan will succeed inmodernization with fewer social problems than have been experienced elsewherein the world.

Thimphu: the capital city of Bhutan

What is the price of civilization?

2011-10-21T15:15:00.001+11:00

According to Jeffrey Sachs, in his new book ‘The Price of Civilization’, the United States needs an increase in tax revenue equal to about 6 percent of GDP in order to balance the budget and ‘pay for civilization’. He arrives at this figure after making allowance for some cuts in government spending and increases in spending of about the same magnitude in areas such as education, training, childcare, infrastructure modernization and foreign aid.

Jeff Sachs asks himself a ‘crucial question’: ‘how do Canada, Denmark, Norway, Sweden, and other countries manage to educate their young, fight poverty, modernize their infrastructure, enjoy life expectancy well above America’s, and still maintain a budget that is more in balance than America’s?’ He concludes: ‘The answer, of course, is that the other countries tax their citizens more heavily in order to supply more public goods, including in the case of the Scandinavia, universal access to health care, higher education, and child care and support for families with young children’.

Jeff’s revenue-raising proposals would increase America’s tax revenue as a share of GDP to a magnitude similar to that of Canada, New Zealand and Britain. He points out that America’s tax revenue as a share of GDP is currently current second-lowest among the high-income jurisdictions considered, ‘just slightly larger than Australia’. (The comparison doesn’t include Singapore or Hong Kong.)

I was surprised to see that America now has a bigger government than Australia. This must have something to do with the relatively poor economic performance of the US over the last couple of years. It certainly can’t be attributed to any recent cuts in government spending in Australia.

But let us not get side-tracked by the trivia of short-term movements in GDP. There is a fairly clear implication in what Jeff has written that he thinks Australia must be uncivilized because tax revenues as a share of GDP are relatively low in this country.

Australians are so used to being told that they are uncivilized that they rarely take offence. But it is surprising to see this implied in the writings of an American. We tend to associate the view that Australians are uncivilized with chinless members of the English aristocracy, rather than people who espouse democratic principles.

Nevertheless, I think Jeff may have a point. I don’t want to undermine the efforts of Australia’s foreign minister to portray us as civilized people, but it is a difficult case to make. Australians generally make little effort to even appear to be civilized. Most of us require very little lubrication before singing our national song, which is a eulogy to a hobo who steals sheep. With very little more lubrication many of us can be encouraged to sing an advertising jingle we learnt as children, that identifies us ‘as happy little Vegemites, as bright as bright can be’. In this instance it may be equally true that ‘what we identify with establishes our identity’ and that ‘we are what we eat’!

More seriously, perhaps, it is difficult to argue that social outcomes in Australia are up to the standards that might be expected of a civilized country. Australia’s rating according the UN’s human development index (HDI) is only 0.937, just 6 percent higher than that for Sweden. When inequality is taken into account, our performance is even worse – a rating of 0.864, just 5 percent ahead of that for Sweden. Average life expectancy at birth in Australia is only 81.9 years, just a few months ahead of Sweden. Australians only spend about 12 years at school on average, again only a few months more than Swedes. In the few years Australians do spend at school, they don’t actually learn much. Not only are our PISA scores well below those in Shanghai and Korea, they are only slightly higher than those for Sweden.

I hope that anyone from Sweden reading this has a sense of humour. My real point is not that Sweden is uncivilized – just that it is not high levels of taxation that make Sweden a civilized country. Those who argue that Sweden is civilized because it has a big government should consider how they would respond to the view that Sweden is civilized country because it generally adopts market-friendly policies. According to the Heritage Foundation’s measures of economic freedom, Sweden’s policies are more market-friendly than those in the United States in relation to business, trade, investment, finance, monetary policy and corruption - just about all aspects of policy other than size of government and the labour market.

The general point I have been trying to make (in case anyone has missed it) is that it doesn’t make much sense to equate civilization with the size of government. Social outcomes in high-income countries with big governments tend to be fairly similar to those of high-income countries with smaller governments. It is possible to provide a decent social safety net, without huge levels of taxation if benefits are means tested. I have provided some references to research on this topic in a paper I wrote last year for New Zealand’s 2025 taskforce (‘How much does size of government matter for economic growth?’, 2010, p11).

I started off to review ‘The Price of Civilization’, but I haven’t progressed very far. The recommendation for higher taxes is probably the most important recommendation in the book – and it is the issue raised in the title – but that is only part of what the book is about. In particular, the book contains an interesting discussion about what is wrong with American politics, which I will consider in a later post.

Are freedom and trust linked to social values and support for free markets?

2011-10-18T23:59:00.000+11:00

In my last post I presented a table showing that countries in which people have strong social values tend also to have high proportions of the population supporting free markets. Unfortunately, that table is difficult to read because of the amount of information it contains, so I am presenting a ‘pruned’ version below.

Apart from presenting fewer indicators, the main difference has to do with the ranking of countries. In my last post, the countries are ranked according to levels of interpersonal trust. In the table below, the countries are ranked by an index (not shown) that gives equal weight to interpersonal trust and feelings of individual agency. As before, each entry in the table is presented against a green, yellow, orange or red background depending on how favourable it is to either the market economy or community values.

The table suggests that values supporting both community and free markets tend to be stronger in countries in which there are relatively high levels of trust (or absence of distrust) and relatively strong feelings of individual agency (a high proportion of individuals who feel that they have some freedom of choice and control of their lives). It seems reasonable to expect that societies that encourage tolerance and respect for others, as well as confidence in the justice system, would tend to foster both trust and the feelings of agency that are necessary for entrepreneurial innovation. Paul Zak and Stephen Knack noted that high levels of trust are favourable to economic activity because they reduce transactions costs (‘Trust and Growth’, The Economic Journal, 2001). Zak has argued subsequently that moral behaviour - i.e. trustworthy behaviour - is necessary to reduce cheating without exorbitant transactions costs. It also enables employees, for example, to be given greater opportunities for self-direction (Zak, ‘Moral Markets’, 2008, xvii and 273).

Favourable economic outcomes generated by relatively high levels of trust and strong feelings of individual agency could be expected to generate attitudes more favourable to the functioning of a market economy. As noted in a recent post, individuals with relatively strong feelings of agency tend to have favourable attitudes towards markets.

The next step in the analysis is to consider the available evidence on changes over time. What changes have occurred in community values in market economies over the last couple of decades?

Why do people in countries with strong social values tend to support free markets?

2011-10-14T22:53:00.001+11:00

This question presupposes that people in countries with strong social values do actually tend to support free markets. Some evidence in support of this is provided in the table below.

The table has been constructed from information in the World Values Surveys conducted in 2005 to 2008. Countries are ranked by levels of inter-personal trust i.e. the percentage of people who are more inclined to agree with the proposition that ‘most people can be trusted, rather than that ‘you can’t be too careful’. Each entry in the table is presented against a green, yellow, orange or red background depending on how favourable it is to either the market economy or community values. Further information about the definition of the variables in the tables may be obtained from the last couple of posts (here and here).

Hint: If you click on the table you might still need a magnifying glass to read it!

The fact that there is more green and yellow at the top of the table and more red and orange at the bottom reflects a positive relationship between values supporting the market economy and community values. Why is this so? I suspect the answer has to do with the development of institutions that support both inter-personal trust and strong feelings of individual agency.

I will write more about this later (and possibly present some information from the table in a more readable form).

Do people who have negative attitudes toward wealth accumulation have greater concern for community?

2011-10-12T17:32:00.003+11:00

If people are cynical about the potential for everyone to share in the benefits of wealth creation it might seem reasonable to expect they would tend to have relatively more concern for community. If they think it is only possible for individuals to get rich at the expense of others, it might be reasonable to expect them to have a particular concern for helping other people and/or protecting the environment. On the other hand, as noted at the end of my last post, people who have strong feelings of individual agency - who tend to have positive attitudes toward wealth accumulation – do not tend, as a group, to be particularly selfish in their attitudes.

The simple analysis I have used to test these conjectures has involved comparing responses in the World Values Survey (WVS) to a range of questions relating to attitudes toward community of people with relatively negative and relatively positive views about capital accumulation. In asking about attitudes toward wealth accumulation, the WVS specifies a rating of 1for agreement that ‘people can only get rich at the expense of others’ and of 10 for agreement that ‘wealth can grow so there’s enough for everyone’. Data used in this exercise are from the 2005-2008 survey covering about 75,000 people in 57 countries.

The results of the exercise are reported in the following chart. For the purpose of constructing the chart, responses to the capital accumulation question of 1 to 3 have been labelled ‘negative’ and responses of 8 to 10 have been labelled ‘positive’.

The chart suggests that there isn’t much difference, on average, between the social values of people with positive and negative attitudes towards capital accumulation. People with positive attitudes seem to somewhat less selfish than those with negative attitudes on all the items considered.

Some readers might be wondering whether this finding reflects a greater concentration of people with negative attitudes toward capital accumulation in countries in which the social fabric tends to be weaker. If that is so, it is not likely to be entirely coincidental. The question deserves further research.

Are attitudes towards success, wealth accumulation and competition linked to feelings of individual agency?

2011-10-09T14:43:00.000+11:00

People with strong feelings of agency feel that they have a great deal of choice and control over the way their lives turn out. As shown in the charts below, such people tend to have more positive attitudes toward hard work and success, wealth accumulation and competition. However, people who do not feel that they have a great deal of choice and control do not, in general, seem to be particularly cynical; they are just tend to be less positive than those with strong feelings of agency.

Readers who would like to know why I am considering questions such as this might find an answer in an earlier post.

The data used in this exercise are from the World Values Survey 2005-2008 which surveyed about 75, 000 people in 57 countries. The question concerning feelings of agency asks respondents how much freedom of choice and control they feel over the way their lives turn out. A rating of 1 means none at all and a rating of 10 means a great deal. The average rating is 7. Ratings of 1 to 4 are relatively uncommon and responses with those ratings have been aggregated in the charts shown below.

The first chart shows how responses relating to attitudes towards the relationship between hard work and success vary among people with stronger and weaker feelings of personal agency. The survey asks whether respondents agree with the statement ‘hard work brings success’. A rating of 1 means that ‘in the long run hard work usually brings a better life’, whereas a rating of 10 means that ‘hard work doesn’t bring success – it is more a matter of luck and connections’. Ratings have been aggregated in the chart to show the differences more clearly; ratings 1to3 have been labelled ‘positive’, ratings 4 to 7 have been labelled ‘mixed’ and ratings 8 to 10 have been labelled ‘negative’. The data in each of the charts add to 100% on the depth access (i.e. for each level of agency, the red, blue and green columns added together equal 100%) .

The second chart shows how responses related to attitudes toward wealth accumulation vary among people with different feelings of agency. The survey question asking about attitudes toward wealth accumulation specifies a rating of 1for agreement that ‘people can only get rich at the expense of others’ and 10 for agreement that ‘wealth can grow so there’s enough for everyone’. Ratings 1-3 have been labelled ‘negative’, ratings 4-7 have been labelled ‘mixed’ and ratings 8-10 have been labelled positive.

The third chart shows how responses related to attitudes toward competition vary with agency. The survey question specifies a rating of 1 for agreement that ‘competition is good; it stimulates people to work hard and develop new ideas’ and of 10 for agreement that ‘competition is harmful; it brings the worst in people’. Ratings have been aggregated and labelled as for the first chart.

The pattern shown in all three charts is fairly similar with people who have strong feelings of agency tending to have more positive attitude toward success from hard work, wealth accumulation and competition. This result was much as I had expected but I had thought the attitudes shown by people with relatively low agency might be somewhat more negative than they appear to be.

What do the results mean? Previous research has suggested that feelings of agency are related to the amount of freedom that people actually experience in their lives. The results suggest that people who feel a lot of freedom tend to have more positive attitudes toward success from hard work, wealth accumulation and competition.

Previous research suggests that people who have strong feelings of agency are not particularly selfish in their attitudes. I wonder whether that is also true of people who have positive attitudes toward wealth accumulation.

Is Maslow's hierarchy of needs a pernicious doctrine?

2011-10-04T17:32:00.001+11:00

I recently heard a distinguished economist claim that Abraham Maslow’s hierarchy of needs is a ‘totally pernicious doctrine’. He expressed a strong objection to the idea that ‘first you have to satisfy the body and, only when you have done this can you satisfy the spirit’. I will refrain from naming the individual and providing a link to his remarks because I am not sure that the comment represents his considered view. He might have just been intending to provoke further thought about Maslow’s theory.

Maslow presented his hierarchy of needs as a theory of motivation in a paper written in 1943. He suggested that a person who is lacking in food, safety, love and esteem would probably hunger for food more strongly than anything else. He hypothesized that humans are motivated by a hierarchy of needs, which they seek to satisfy in the following order: physiological, safety, love, esteem and self-realization. He acknowledged that the order of need gratification might not be as rigid as this ranking implies and that it was not necessary for a particular need to be entirely satisfied before a higher need emerged.

It seems to me that the idea at the core of Maslow’s theory is that gratification of the most basic needs releases a person to focus on higher needs. This idea of natural progression to satisfaction of higher needs is the opposite of extreme asceticism which implies that higher needs can only be met through denial of desire. There may also be some tension between Maslow’s view and the Buddhist view that gratification of desires can be addictive, as explained by Lam Goembo Dorji in a recent paper.

In testing Maslow’s theory it seems to me that the central issue is the extent to which people actually move on to satisfy higher needs as their incomes rise. Maslow’s theory should be rejected if most people do not respond to rising incomes by moving on to satisfy higher needs. It ought not to be rejected just because a few relatively enlightened people are able to flourish even though they have relatively low incomes.

A recent study by Louis Tay and Ed Diener tests Maslow’s theory using data from the Gallup World Poll as indicators of the needs identified by Maslow. The authors found some support for Maslow’s theory in that people tend to achieve basic and safety needs before other needs. They also found that fulfilling the various needs has relatively independent effects on subjective well-being, so humans can derive happiness by simultaneously working on a number of needs regardless of the fulfillment of other needs. (The paper, entitled ‘Needs and Subjective Well-Being Around the World’, JPSP (2011) can be obtained here, and Bridget Grenvill-Cleave has written a good summary here.)

There are some other posts on this blog that are relevant to the priority that people give to various needs. In a recent post I discussed evidence presented by Christian Welzel and Ronald Inglehart that as the contribution of greater financial satisfaction to overall life satisfaction has become ‘saturated’ to a greater extent with higher levels of economic development, people tend to achieve higher life satisfaction to a greater extent through activities that enhance feelings of agency.

In the post entitled ‘Does the law of diminishing returns apply to a level of achievement?’ I used Australian survey data to explain life satisfaction in terms of levels of satisfaction with seven domains: standard of living, health, safety, relationships, community connectedness, future security and achievement. Best fit was obtained from a linear function, suggesting that the various domains have independent effects on life satisfaction. However, satisfaction ratings in the various domains are correlated - for example, there is a relatively high correlation between satisfaction ratings for relationships and achieving.

In a related study (reported here) I attempted to identify whether high satisfaction in any particular domains of life are more necessary than others to high satisfaction with life as a whole. The criterion used was the percentage of respondents with high satisfaction with life as a whole among those with low ratings on particular domains of quality of life. The relevant percentages were follows (ranked in order of importance of each domain): personal relationships 10.8%, achieving in life 11.8%, standard of living 12.8%, future security 15.6%, health 15.9%, community connectedness 19.0% and safety 20.3%. The results suggest that satisfaction with personal relationships and achieving are more necessary to high life satisfaction of Australians than is satisfaction with standard of living and future security.

A post entitled ‘Are the world’s poor motivated solely by survival needs?’ discusses survey evidence about the ways very poor people spend their incomes. Surprisingly, they tend to spend a substantial proportion of their income on entertainment, suggesting that they are not motivated entirely by survival needs. The post discusses why this might be so and also why some wealthy people stay fixated at a materialistic level. The way people respond to experiences depends importantly on what those experiences mean to them. It is possible for wealthy people to feel deprivation and for poor people to feel that living means a lot more than meeting physiological needs.

So, where do I end up? I like the idea that self-realization is a fundamental human need that people seek to satisfy if they are able, but I don’t think gratification of desires is a particularly helpful frame of mind - individuals are more likely to realize their potential if they seek equanimity rather than pleasure. Yet, it seems obvious that human flourishing is not possible unless basic physiological needs to be met. I am impressed by the evidence that there is a general tendency for people to move on to satisfy other needs as their basic physiological needs are met. At the same time, there is plenty of evidence that some people achieve high levels of satisfaction with life at relatively low incomes and that some wealthy people are not satisfied with their high income levels. The extent to which people perceive increased economic opportunity as an opportunity to satisfy higher needs may be strongly influenced by culture, values, frames and beliefs.

Maslow may have been too simplistic in suggesting that gratification of the most basic needs releases a person to focus on higher needs, but that doesn’t mean his theory is a pernicious doctrine.

Should advertising be allowed in schools?

2011-10-02T11:25:00.002+11:00

Nicola has sent me a message presenting the following views and providing links to a range of different web sites discussing the issues involved:

‘A school should be a simulating learning environment for our children. We trust our schools with our children to provide them with an opportunity to learn and grow. The school breaks this trust by allowing corporations to influence and manipulate their minds. As adults we have the ability to be critical of advertising, however, a school environment is one of trust, therefore, children are more likely to take the advertising at face value. Furthermore, the advertising appears to be endorsed by the school that heightens its power when compared to other contexts.

America has led the way on this form of advertising in schools. The present push by the major supermarkets to put advertising billboards on our school gates and in our schools in the form of voucher collectors is the first step. The use of TV screens with commercials and product placement in our classrooms is not far behind this. Is this the direction we want to take our education system and the welfare of our children?

There should be a blanket ban on advertising in schools as it exploits our children. In the interest of your children, please speak to your children's school management and lobby for the removal of banners and voucher collection.’

It seems to me that this is a matter that should be decided by parents’ organisations in individual schools. If parents think that some form of commercial sponsorship is an appropriate method of fund raising, why should I object?

However, there is probably no harm in expressing a personal view. In my view schools must be really desperate for ways to raise money to allow commercial organizations into schools to give prizes to kids for singing advertising jingles. What is the world coming to?

For further explanation of what Nicola is writing about, see this story in ‘The Australian’. There is a paper here discussing the methods of modern marketing being applied in schools.

Postsript:
I neglected to say that Nicola Moir is a Sydney artist. The emphasis of her work is on what she describes as 'the forgotton spaces we inhabit between work, home and leisure' - 'the spaces where we come together as a community'. Her web site is well worth visiting. Among other things it might prompt you to consider whether you really are 'a happy little vegemite'. (For the benefit of non-Australians, the vegemite song is probably the most successful advertising jingle ever aimed at children in Australia.)

Would we be more satisfied with life if we lived in the best of all possible worlds?

2011-09-30T17:21:00.001+10:00

How would we know if we lived in the best of all possible worlds? A possible world is not a perfect world. If we lived in the best possible world we would still be fallible humans. If you asked someone living in the best possible world how satisfied they are with their life it seems to me that they would be likely to look around at the lives that other people live and use that as the basis for their response. If Australia was the best of all possible worlds my guess is that average life satisfaction of Australians would not be much higher than their average life satisfaction has been over the last decade or so.

My point is not that life in Australia is close to the best possible, but that life satisfaction may not be a reliable indicator of whether our lives are getting better. If we lived in the best of all possible worlds, many of us would have greater opportunities than we have now and would take advantage of those opportunities to achieve better lives. However, since most of us would adapt fairly quickly to our new lives, average life satisfaction would not be much higher than it is now. We would readily acknowledge that our lives had improved, but our level of contentment would not be much greater.

Why do I think that? Well, take a look at the ABS web site showing Measures of Australia’s Progress. The picture presented there is of improvement in many aspects of well-being over the last decade, including health and education as well as income. The negative outcomes are in respect of environmental outcomes that tend not to be at the front or our minds when we think of our personal well-being. (In the best possible worlds our consciences might be more troubled by negative environmental impacts of our actions, but this would have led us to reduce such impacts.) On balance, the indicators suggest that the personal well-being of most Australians has improved substantially over the last decade.

Now, take a look at the chart below showing what has happened over the last decade to average life satisfaction and the personal well-being index produced by Australian Unity and the Australian Centre on Quality of Life. The life satisfaction rating is derived by asking respondents to give a rating from 0 to 10 in response to a single question: ‘Thinking about your own life and personal circumstances, how satisfied are you with your life as a whole?’ The personal well-being index is the average of satisfaction for a range of life domains including standard of living, health, achieving in life, personal relationships, feeling part of the community and future security.

Australians were apparently more satisfied with life than usual at the time of 2004 Olympics and less satisfied than usual during the onset of the global financial crisis, but there is not much change in either index over the decade as a whole. The same survey asks respondents how satisfied they are with the economic situation in Australia. Ratings of the economic situation fluctuate far more than the life satisfaction responses, but there is still not much evidence of an upward trend reflecting the growth in real income levels over the decade.

The chart also shows that ratings of the economic situation have fluctuated more or less in line with the consumer confidence index produced by Roy Morgan research. This consumer confidence index is constructed from answers to questions about current economic conditions and economic conditions over the next five years as well as family finances and whether or not this is a good time to buy major household items.

The following chart shows how responses to the question about economic conditions over the next five years have fluctuated in the recent past. Over the last year or so, a lot of us have tended to become more pessimistic about the economic outlook.

Fortunately, our satisfaction with our own lives does not fluctuate to the same extent as our assessments of the economic situation. Both types of measure have the same deficiency, however, as indicators of progress or regress. When we are asked to rate our own lives or the state of the economy we tend not to look back and reflect upon changes that have occurred unless we are asked explicitly to do so.

The Gallup World Poll asks respondents to rate their lives five years ago and five years ahead as well as their life today, all relative to the best possible life. The results provide an indication of whether survey respondents perceive that their lives are getting better. The average rating Australians give for their current life in 2011 is 7.4 and their rating of life in five years is 8.0 . In 2008, Australians rated their life five years previously at 6.8 . I don’t know why the data is so patchy, but it does suggest, nevertheless, that Australians perceive that their lives have improved over the last decade.

Which is the more appropriate policy objective: opportunity or contentment?

2011-09-21T21:03:00.005+10:00

Carol Graham’s new book, ‘The Pursuit of Happiness’, makes an important contribution to consideration of the relevance of happiness research to government policy because it considers explicitly which dimensions of happiness are most relevant as public policy objectives. Happiness researchers have previously argued in favour of particular definitions of happiness - for example positive feelings, emotional well-being, satisfaction with life, capability or opportunity – without much consideration of the relevance of their favoured definitions to public policy.

Early in the book, Carol suggests: ‘A plausible assumption is that most societies would be interested in maximizing the number of citizens who believed they were leading purposeful lives but less concerned about how often people had smiled yesterday. Yet even that statement reflects normative priors that might not apply to all cultures and societies, some of which might emphasize the importance of contentment in day-to-day living more’ (p.30).

Near the end, she comes to the conclusion that a policy that aims to guarantee contentment to all citizens, rather than the opportunity to pursue a fulfilling life, ‘might be unacceptable in most societies’ (p 122). Carol also acknowledges that measures of subjective well-being can contribute to better government policies by making policy process better informed, irrespective of whether any particular dimension of happiness is pursued explicitly as a national objective.

The public policy choice between pursuit of contentment and widespread opportunity is characterised in this book as a choice between Bentham and Aristotle, with Bentham in favour of maximizing the contentment (or pleasure) of the greatest number and Aristotle in favour of maximizing the number of people who have the opportunity to lead a meaningful life (i.e. to flourish). This might be a little unfair to Bentham, who held that utility includes anything that ‘tends to produce benefit, advantage, pleasure, good or happiness’, which would certainly encompass the opportunity to lead a meaningful life. Nevertheless, many Benthamites have tended to equate happiness with pleasure and even J S Mill, who sought to distinguish between the merits of higher and lower pleasures, saw both tranquillity (contentment) and excitement as the main constituents ‘of a satisfied life’.

The opportunity to lead a meaningful life implies agency, which Carol defines as ‘the capacity to make choices and act on them’ (p 41). She perceives individual agency to be limited by income, education and information constraints as well as institutional constraints, i.e. by all factors that limit individual opportunity.

So, doesn’t greater agency or opportunity lead to greater contentment? Not necessarily. Carol points out that people with limited wealth often report being very happy while people who are in the process of obtaining higher levels of wealth (frustrated achievers) often report feeling miserable. She suggests that the way people answer happiness questions in surveys is to a large extent determined by their agency. The process of acquiring agency may produce short term unhappiness because of uncertainty associated with the adjustment process (e.g. in relocation away from family and friends) and if expectations of a more fulfilling life do not materialize this could result in lasting unhappiness.

Doesn’t this make contentment a more appropriate objective than agency? If the peasants are happy with their lives as they are, why seek to improve the opportunities available to them? I think Carol provides a good answer to these questions. She points out that while adaptation to circumstances is usually positive from an individual psychological perspective, it can lead to collective tolerance for a bad equilibrium. For example, crime and corruption have less effect on subjective well-being in countries where crime and corruption have become an entrenched feature of society. This should not make it any less desirable to reduce crime and corruption in such places.

The numerous examples that Carol draws from her research experience to illustrate the points she is making help make this book a pleasure to read. Readers are told about happy peasants and frustrated achievers in Latin America; about survey respondents in Afghanistan who are apparently happier than the world average despite objective conditions that are markedly worse; about migrants who are markedly less happy than the average for the countries they have migrated to; and about obese people who are less happy than the non-obese, but much less unhappy when there are more obese people around them.

My only reservation about the book is that I am not persuaded that the unhappy growth paradox – lower average happiness in countries with relatively high rates of economic growth after controlling for per capita income levels – is largely attributable to unhappiness associated with the process of acquiring agency. As I have suggested before, I think the unhappy growth phenomenon might disappear if researchers could control for wealth rather than income levels. The appearance of unhappy growth might largely reflect the influence on well-being of wealth (reflected in quality of housing, financial assets, human capital, public infrastructure, social capital etc.) which may take several decades to accumulate.

However, that is a minor reservation. I have no hesitation in recommending this book to anyone who is interested in the role of government in the pursuit of happiness.

Postscript:
A recent conference presentation by Carol Graham on 'Happiness around the World: The Paradox of Happy Peasants and Miserable Millionaires' is available here.

Is the social fabric stronger when a high proportion of the population identify with helping the people nearby?

2011-09-09T20:47:00.001+10:00

In my last post I presented some evidence that people who do not identify strongly with ‘always behaving properly’ nevertheless tend to identify strongly with helping the people nearby if they feel a great deal of freedom and control of their own lives (i.e. if they have strong feelings of individual agency).

Does an identification with helping the people nearby have a positive effect on the social fabric or, to use an Australian expression, is it just about ‘looking after your mates’? In some contexts, helping the people nearby could even be corrupt behaviour. Fortunately, it is possible to test the relationship between identifying with helping the people nearby and attitudes toward corruption using data from the World Values Survey. This survey asks respondents to rate their view on whether it is ‘justifiable for a person to accept a bribe’ on a scale from 1 to 10, where a rating of 1 means that it is never justifiable and a rating of 10 means that it is always justifiable. (As before, I am basing my analysis on cross-tabulations for about 80,000 respondents in 57 countries from the 2005 Survey.)

The relationship between identifying with helping the people nearby and attitudes toward corruption is shown in the chart below. (The percentages shown in the chart add to 100 per cent along the horizontal axis.)

It is clear from the chart that people who identify with helping the people nearby have less tolerant attitudes toward corruption. Similar analyses show that these people are also less tolerant of social security and tax fraud, and fare evasion on public transport. It seems clear that the social fabic is stronger when a high proportion of the population identify with the importance of helping the people nearby.

Do you have to be a goody-goody to identify strongly with helping others?

2011-09-07T14:39:00.001+10:00

No! People who feel a great deal of freedom and control of their own lives identify strongly with helping others even if they don’t see themselves as goody-goodies. People with strong feelings of individual agency identify strongly with the proposition ‘it is important to help the people nearby’ even if they don’t identify at all with the proposition ‘it is important to always behave properly’.

Before I present a chart showing this, I should provide some background information. I ended my last post wondering whether people who feel little freedom in their own lives might tend to be more likely to engage in anti-social activities if they give high priority to having a good time and feel little control over their own lives. However, when I looked at World Values Survey data on people who identify strongly with the proposition ‘it is important to this person to have a good time’ I found that they tend to identify much more strongly than average with helping others, even when they feel little control over their own lives. (I am basing these observations on cross-tabulations for about 80,000 respondents in 57 countries from the 2005 Survey.)

So, I decided to see if this is also true of people who identify strongly with the proposition ‘it is important for this person to be rich’. It is. It is also true of people who identify strongly with ‘being very successful’, ‘thinking up new ideas and being creative’, ‘being adventurous and taking risks’, ‘looking after the environment’, ‘living in secure surroundings’, ‘tradition’ and ‘always behaving properly’. It seems that people who identify strongly with just about any proposition about the importance of a particular value in their own lives tend to identify strongly with helping others, even when they feel little control over their own lives.

It is hardly surprising that people who identify strongly with the proposition ‘it is important to this person to always behave properly’ would identify with helping others. What about those who see themselves as being a bit naughty – the people who say that proposition ‘is not like me, or not at all like me’? I gave the answer in the first paragraph. It is also shown in the chart below.

I’m not sure of the implications of the finding that people who do not see themselves as giving importance to behaving properly tend nevertheless to identify strongly with helping others if they have strong feelings of personal agency. Perhaps feelings of personal freedom and control of their lives help individuals to behave responsibly even when they prefer to see themselves as being fallible rather than virtuous. This deserves further study.

How much do we know about the relationship between freedom and human flourishing?

2011-09-03T17:39:00.002+10:00

I have been thinking about this subject for a long time. I have blogging about various aspects of it for more than 3 years and I have just written a conference paper entitled ‘Some Observations on the Relationship between Freedom and Well-Being’. Yet I still don’t feel as though I know enough about the relationship between freedom and individual flourishing.

My interest in this topic stemmed partly from the questioning by some influential people of the economist’s traditional assumption that adult individuals of sound mind are the best judges of their own interests. There seems to have been an increasing tendency to question whether people make good use of opportunities available to maintain or improve their well-being and that of their families. There seems to be increasing support for paternalistic restrictions on freedom in an effort to discourage behaviour that is harmful to health (e.g. smoking) and financial well-being (e.g. gambling).

A priori reasoning can take us some distance in establishing the importance of self-direction and autonomy to human flourishing. As discussed in the paper referred to above, a strong case can be made that humans are creatures that cannot fully flourish unless they are responsible for the way they live their lives. Respect for individual autonomy also provides the basis for social cooperation. It is difficult to help other people to flourish – or even to live in peace with them – if we do not respect their autonomy.

Empirical analysis of the relationships between various aspects of freedom and dimensions of well-being also suggest a positive relationship between freedom and well-being. At a subjective level, feelings of individual agency – feelings about the amount of freedom and control that people have over the way their lives turn out – are closely related to life satisfaction. There is evidence that feelings of individual agency are influenced by institutions relating to democracy, freedom of expression and economic freedom. There is also evidence of a positive relationship between economic freedom and various subjective and objective measures of well-being.

The paper also looks at evidence on the question of whether strong feelings of individual agency are associated with more selfish behaviour. It concludes that, if anything, the opposite seems to be the case.

So, we have strong grounds to argue that self-direction and autonomy are important and that people do tend, in general, to make good use of the opportunities available to improve their well-being and that of their families.

Why do we need to know more than that about the relationship between freedom and flourishing?

One important reason has to do with way many of us tend to respond to the fact that some people use the opportunities available to them in ways that are harmful to their own well-being or that of other people. We often have tendency to support policy responses that seek to reduce temptations of vulnerable people, by restricting freedom, rather than to consider why such people have become vulnerable and how they might be helped to resist temptations. (I use the words ‘us’ and ‘we’ in this context because of my previous support for policies that I thought would reduce availability of harmful drugs when my children were in their teens.) I think that we tend to resort too readily to paternalistic interventions that attempt to remove temptations because we don’t know enough about what makes people vulnerable to temptations or how their vulnerability is affected by the institutional environment.

I think we also need a better understanding of the causes of anti-social activities, such as those associated with binge drinking, if we are to avoid attempts to deal with such problems without further restricting the liberty of innocent people. It might be helpful to know, for example, to what extent people behave irresponsibly because of the feeling that nothing they do has much effect on the way their lives turn out, in combination with of the priority they give to having a good time. It might also be useful to know whether such feelings and attitudes are more prevalent in some countries than others and, if so, why.

Postscript 1

I am intending to add postscripts to keep track of findings of additional research on this topic.

I now reject the hypothesis implicit in the last paragraph above. When I looked (here) at World Values Survey data on people who identify strongly with the proposition ‘it is important to this person to have a good time’ I found that they tend to identify much more strongly than average with helping others, even when they feel little control over their own lives. It seems that people who identify strongly with just about any proposition about the importance of a particular value in their own lives tend to identify strongly with helping others, even when they feel little control over their own lives.

As noted above, strong feelings of individual agency tend not to be associated with selfish behaviour. Further research (reported in the post linked above) suggests that people who have strong feelings of individual agency tend to identify strongly with the proposition ‘it is important to help the people nearby’, even if they don’t identify at all with the proposition ‘it is important to always behave properly’.

Does identification with helping the people nearby have a positive effect on the social fabric? Findings reported in another post suggest that people who identify with helping the people nearby have less tolerant attitudes toward corruption, are also less tolerant of social security and tax fraud, and fare evasion on public transport.

Where to from here? The general question I want to explore further is whether feelings of agency interact with various beliefs and values in ways that might help to explain self-destructive and anti-social behaviours. For example, do people with low feelings of agency generally tend to have more cynical attitudes toward factors leading to wealth and success in life and is this associated with different attitudes toward helping others, corruption and desirable child qualities?

How does Bhutan beckon?

2011-08-30T16:12:00.007+10:00

‘Bold Bhutan Beckons’, by Tim Fischer and Tshering Tashi, was first published in 2009. I almost bought a copy then. I had just written a review article about Bhutan’s gross national happiness (GNH) objective and was naturally interested in Tim Fischer’s views on Bhutan – since he is a fellow Australian and former leader of the National Party. Anyhow, the moment passed and I didn’t think again of buying the book until a couple of weeks ago when I had it in my hand in a bookshop in Thimphu. As soon as I flipped through the pages I knew that I had to read it.

In his introduction, Tim Fischer mentions that when he and his friend Tshering Tashi (a businessman and writer who lives in Thimphu) were talking about joint authorship of this book, someone warned him that joint book writing was ‘possibly a guaranteed way to spoil a friendship’. That might have been good advice, but the way Tim and Tshering have written the book seems to have been designed to reduce the potential for conflict. Rather than attempting to write jointly, they have each made separate contributions to the book and have told readers who wrote each chapter.

One of the highlights of the book, in my view, is the discussion of Zhabdrung Ngawang Namgyal, whom Tshering describes as the founder and conscience of Bhutan. Tim tells the story of how two Jesuits visited Bhutan in 1627, when Zhabdrung was a young king. Zhabdrung offered them hospitality and apparently allowed them to attempt to convert local people to Christianity. Zhabdrung might have been confident that the Jesuit’s proselytising efforts would be unsuccessful, but he also claimed to be respectful of individual liberty in other contexts. Tshering notes that many times the king told his lamas that ‘though they are most submissive, everyone is his own master to do what he likes’ (p 25). It is not clear from the book, however, whether Zhabdrung’s acknowledgement that everyone is his own master extended to their use of what he described as ‘the evil, stinking, poisonous weed named tobacco’ (p 29).

Zhabdrung stressed the virtues of perseverance and self-discipline. He quoted his teacher who said: ‘If you do not work hard you will not find sweet food. If you do not know the taste of suffering, you will not know the taste of happiness’. Zhabdrung’s achievements include the building of seven dzongs (combining the functions of fortresses and monasteries) built in strategic locations in different parts of the country. The first was built in 1629 at Simtokha, about 5 km south of Thimphu (the capital city) on the road to Paro and Phuentsholing. The photo below was taken from the road from Thimphu to Punakha.

The Punakha dzong, shown in my last post, was also built by Zhabdrung.

Another highlight of the book is Tim Fischer’s discussion of road-building in Bhutan in the 1960s. While we were being driven along the relatively good road from the international airport at Paro to Thimphu, my fellow passengers were discussing the fact that Bhutan was virtually closed to the outside world before the major road construction effort that occurred about 50 years ago. The idea that road construction in Bhutan began only when I was in my final years at school resonated much more strongly a few days later, however, when I was being driven over the narrow, winding mountain road from Thimphu to Punakha. This road barely copes with the amount of traffic using it, but I was impressed with the regard to safety of most of the drivers and with the signaling system that drivers use to let following vehicles know that it is safe to pass. (The left indicator means that it is safe and the right indicator means that it is unsafe. Vehicles drive on the left hand side of the road.)

Since I have already distracted myself away from reviewing the book, this might be an appropriate opportunity to present some photos I took on the road from Thimphu to Punakha.

This is my guide, Nado Richen, who was most helpful. After my return to Australia, Nado emailed a fact sheet to me to ensure that I understood what he had been saying. Nado was concerned that his command of English was not strong enough to answer some of my questions.

Bhutan is very keen on use of hydro power - and not just for electricity generation. This photo shows a water-powered prayer wheel.

These are the Druk Wangyal Chortens -108 stupas at Dochula pass (3050m) a popular place, with panoramic views. Stupas are spiritual monuments offering observers a direct experience of inherent wakefulness and dignity.These stupas were built by the eldest Queen Mother, Her Majesty Ashi Dorji Wangmo Wangchuk, in honor of soldiers who fought in the 2003 low-intensity border conflict to expel Indian militants. The Indian militants had been threatening Bhutanese sovereignty by using camps in Bhutan as a base to pursue their revolutionary aims in India. Tshering Tashi wrote a chapter discussing the conflict in ‘Bold Bhutan Beckons’.

Prayer flags at a lake in the Royal Botanical Park at Lamperi.

This truck is typical of those passed on the road from Thimphu to Punakha. The prayer wheel in Nado’s car is shown in the foreground and is reflected in the windscreen.

Some cows on the road near Punakha.

Rice fields near Punakha.

Now, where was I before I interrupted myself? I was writing about Tim Fischer’s account of road building in Bhutan in the 1960s. Tim was helped in writing this story by his discussions with Hardy Pradhan, an Australian engineer who worked on the first roads in Bhutan. The roads were built with the help of Indian expertise but the labour involved was largely a national effort by Bhutanese people. All Bhutanese were apparently expected to work on the project for 33 days.

Another highlight of the book, for me, was Tshering’s account of his meeting with Tsham Penjor, whom he describes as the great hermit. I know little about hermits, but some aspects of the story did not surprise me. I had expected that any person who had spent most of his life in solitary meditation would have little attachment to material things. The part of the story that surprised me is that despite his solitary life, Tsham is apparently a warm, hospitable and happy person.

Tshering argues that the pursuit of materialism and the desire to be admired respected and noticed brings with it a great deal of uncertainty. He suggests that ‘it is in the simplicity of people like Tsham Penjor that the truth and greatness really live’. Through the example of his life Tsham ‘reminds us that the mountains have the power to liberate humans from this uncertainty’ (p 78).

Is that why Bhutan beckons? Is it the challenge to spend more time on our mountains – geographical or metaphorical - aiming to live in harmony with nature and our neighbours and to seek goodness and enlightenment? That seems to me to be an important part of the story. Tim Fischer has another important part of the story in his suggestion that Bhutan acts as a magnet because its culture, customs and traditions survive to this day in a careful blend with modernity (p 19). For me, the main attraction is that the Bhutanese people are taking charge of the blending process themselves, individually and collectively, with the aim of building a happier society.

Postscript 1:

In thanking me for this review, Tshering Tashi has reminded me that Bhutan may also be the last bastian for many endangered animals. He has written about this in the book. He has also written an article in Kuensel about the blue bear, which is believed to be extinct.

Postscript 2:

I neglected to mention that my main reason for visiting Bhutan was to attend a conference on 'Happiness and Economic Development'. Some of the conference presentations are now available on this site.

How should a libertarian view the pursuit of happiness in Bhutan?

2011-08-22T13:08:00.005+10:00

I was pondering this question last week on my first visit to Bhutan. Some readers may wonder why anyone who loves liberty would actually need to ponder this question. It is obvious that such a person could not support a law requiring citizens to wear national dress, particularly when this law means that ethnic minorities with a different cultural heritage are expected to wear the traditional attire of the majority of the population. Nor could anyone who loves liberty support a law specifying that any person found with more than the permissible quantity of tobacco products for personal consumption ‘shall be guilty of the offense for smuggling’.

My pondering has focused on the issue of whether such restrictions of liberty are central to Bhutan’s Gross National Happiness (GNH) objective. My conclusion is that I don’t think they are. While GNH seems to be mentioned whenever the government does anything in Bhutan, restrictions of liberty seem to me to be more appropriately attributed to the historical legacy of isolation from the rest of the world, the reasons that the Druk majority have had to fear that they might lose their cultural identity and political independence, and the history of paternalistic government that is greatly respected by a high proportion of the people (and which has generally deserved that respect).

It seems to me that attributing restrictions of liberty in Bhutan to GNH would be as silly as attributing the recent riots in Britain to its Westminster system of government, or the existence of a relatively high prison population in the US to the ideals expressed in its Declaration of Independence. Principles deserve to be considered on their merits, even though the claims to moral leadership of the countries that espouse those principles are often impaired to some extent by bad policies and policy outcomes.

The following remarks of the current king of Bhutan, his majesty Jigme Khesar Namgyel Wangchuck, seem relevant in this context:

‘GNH acts as our National Conscience guiding us towards making wise decisions for a better future. It ensures that no matter what our nation may seek to achieve, the human dimension, the individual’s place in the nation, is never forgotten. It is a constant reminder that we must strive for a caring leadership so that as the world and country changes, as our nation’s goals change, our foremost priority will always remain the happiness and wellbeing of our people – including the generations to come after us’.

The GNH concept originated in the early 1970s in a remark by the former king that ‘Gross National Happiness is more important than Gross National Product’. Systematic efforts have been made over the last decade or so to specify the objective clearly, to measure GNH and to incorporate relevant criteria in government decision-making.

The central idea behind Bhutan’s GNH objective is to integrate environmental conservation, promotion of cultural activities and good governance with economic growth and modernization. This idea has gained considerable international support. The UN General Assembly recently adopted by acclamation a resolution sponsored by Bhutan inviting countries ‘to pursue the elaboration of additional measures that better capture the importance of the pursuit of happiness and well-being in development with a view to guiding their public policies’. Bhutan has been invited to convene a panel discussion on the theme of happiness and well-being during the Assembly’s next session, which begins in September.

While offering its view of the pursuit of happiness to the rest of the world, the government of Bhutan does not claim to have resolved all the problems of economic development and social change. For example, public literature about GNH acknowledges that Bhutan faces problems associated with rural-urban migration, youth alienation and substance abuse.

One possible area of concern about pursuit of GNH is whether attempts to integrate environmental and cultural concerns with economic development will reduce economic freedom and constrain economic opportunities available to Bhutanese people. I’m not sure how restrictive the project approval processes might be, but it seems to involve a weighing up of the good and bad effects of individual projects. This approach seems to me to have potential to enable approval of a larger number of good projects than would the process in Australia of requiring projects to jump a series of environmental and/or social impact hurdles imposed by different levels of government. The inclusion of a good governance criterion should also help to ensure that projects are not held up by corrupt officials or narrowly focused interest groups.

Although the Heritage Foundation’s index suggests that Bhutan has a relatively low level of economic freedom (a ranking of 103 among the 179 countries ranked) it is not clear that its ranking is adversely affected by the pursuit of GNH. Bhutan’s economic freedom ranking is considerably higher than that of neighbouring countries such as India (124), China (135) and Nepal (146) whose governments do not have GNH as an explicit objective. I don’t see why pursuit of GNH in Bhutan would not be consistent with greater economic freedom than at present.

I thoroughly enjoyed my visit to Bhutan. I think it would be hard for anyone to visit the country without ending up with a great deal of respect for the peaceful people who inhabit this country. The people are so kind that the dogs even seem to feel safe sleeping on the roads. I don’t like the paternalistic restrictions on liberty in Bhutan but I think that there is a fair chance that the government will decide, before long, that such policies are actually inimical to individual flourishing and to GNH.

Do all well-being indicators tell similar stories at a regional level?

2011-08-04T17:14:00.004+10:00

I have previously noted that there is a tendency for many different well-being indicators to tell similar stories in international comparisons. The most obvious reason for this is that well-being is related to socio-economic circumstances. People who live in countries with relatively high average incomes could be expected to have good housing, better health outcomes, greater life satisfaction etc.

It would seem reasonable to expect a similar pattern at a regional level within countries. Regions that have a high rating on an indicator, such as subjective well-being, might also be expected to have a fairly high rating on a range of factors that are known to be related to well-being.

There is an excellent facility in Victoria (Australia) to test whether this is the case. The site, known as Community Indicators Victoria, enables visitors to look at relationships between a large number of variables across local government areas (LGAs). I used the double data map facility to examine the relationship between subjective well-being (SWB) and a range of variables that I thought might reasonably be expected to be correlated with SWB. The SWB measure used is the Australian Unity Wellbeing Index combines satisfaction with life as a whole and satisfaction with various domains of life (standard of living, health, achievements in life, community connection, personal relationships, safety and future security).

The relationship with some relevant variables was strongly positive, as I had expected. The LGAs with higher average SWB also tend to have higher ratings in terms of: satisfaction with being part of the community, social support (ability to get help from friends), citizen engagement (e.g. attending town meetings, writing to politicians), safety (e.g. feeling safe walking in the local area at night) and volunteering.

However, the relationship with some other relevant variables was negative. These included household income (Census data), food security, satisfaction with work-life balance and acceptance of diverse cultures.

The explanation seems to lie mainly in differences between rural LGAs and those in Melbourne or close to it. The LGAs with highest average SWB tend to be rural. There seems to be an association between high average SWB and the relatively strong community networks in the rural LGAs. The variables for which a negative relationship was observed, such as household income, tend to have higher values in Melbourne and in LGAs close to Melbourne.

When I was growing up in country Victoria the people where I lived used to say that Melbourne might be a nice place to visit, but they wouldn’t want to live there. They were smiling but they weren't joking. People who live in rural area seem to be highly satisfied with their lifestyles. Perhaps an ideal lifestyle can only be obtained by earning a big-city income and living in the country.

A report prepared a few years ago by Bob Cummins et al, looking at SWB by statistical sub-division (SSD) over Australia as a whole, indicates that the SSDs with the highest levels of subjective wellbeing were all rural and those with the lowest subjective wellbeing were all inner-city. The authors noted that subjective wellbeing is generally lower in cities with more than 40,000 inhabitants and that the most important domain driving this is connection to community.

Is the incidence of depression higher where a high proportion of the population are 'suffering'?

2011-07-27T15:42:00.003+10:00

Before being willing to guess the answer to that question I expect most readers would want to know how I define suffering. For the purposes of this exercise, I am using the definition of suffering adopted by the Gallup World Poll. Gallup classifies respondents as "thriving," "struggling," or "suffering," according to how they rate their current and future lives on a ladder scale, based on the Cantril Self-Anchoring Striving Scale, where the bottom rating is ‘the worst possible life’ and the top rating is ‘the best possible life’. Respondents are classified as suffering if they have poor ratings of their current life situation (4/10 and below) and negative views of the next five years (4/10 and below). They are more likely to report lacking the basics of food and shelter, more likely to have physical pain, a lot of stress, worry, sadness, and anger. They have less access to health insurance and care, and more than double the disease burden, in comparison to "thriving" respondents.

So, do you think the incidence of depression is likely to be higher in countries where a high proportion of people are suffering? By now, you are probably thinking that must be a trick question. Given the way Gallup defines suffering, surely it must be reasonable to expect the incidence of depression to be higher in countries with relatively high levels of suffering.

However, that doesn’t seem to be so when the Gallup data are compared with the results of a recent study of the incidence of depression in 18 countries. The study, by Evelyn Bromet (and 21 co-authors) recently published in BMC Medicine involved face to face interviews of over 89,000 adults using the WHO’s Composite International Diagnostic Interview. I don’t know what that means exactly, but it sounds impressive. This looks like a reliable study.

The authors report that the incidence of major depressive episodes (MDE) was greater on average in the higher income countries than in the low-to- middle income countries included in their study. That is what attracted my attention initially and the reason why I thought it might be interesting to plot the incidence of MDE against Gallup estimates of the percentage of populations who are suffering, as shown below.

The chart doesn’t seem to show any evidence of a positive relationship between prevalence of MDE in the last 12 months and the percentage suffering. Similarly, a graph plotting lifetime prevalence of MDE against the percentage suffering showed no obvious positive relationship.

The data depicted in the chart suggest there is no simple relationship between income levels and prevalence of MDE. For example, the prevalence of MDE seems to be relatively high in the United States and relatively low in Japan, Germany and Italy.

The findings of the study reveal several things about depression that I was not previously aware of. The incidence of MDE among women is, on average, about twice that for men. The average age of onset is the mid-20’s. The strongest demographic correlate in high-income countries was being separated from a partner, whereas in low-to-middle income countries it was being divorced or widowed.

Depression is obviously related to emotional well-being, but the links seem to be complex. For example, I don’t know how to relate data suggesting that only 2 percent of the population in Brazil are suffering with data suggesting that about 10 percent had a major depressive episode in the last 12 months. Over the last few years I have gained some understanding of correlates of well-being, but that doesn't seem to help much in understanding the incidence of depression.

Postscript 1
Cameron Lau of International Business Times talks about the depression study here. However, seems to have his facts twisted when he claims that depression rates in rich countries far outpace those in poor countries.

Postscript 2
I have just remembered a recent study by John Helliwell and Shun Wang that sheds considerable light on the incidence of depression in different countries. These authors have been able to explain 58% of the variance of 117 average suicide rates drawn from different years in 50 countries around the world using only four key variables: social trust, membership in community organizations, strength of religious belief, and the divorce rate. They comment: ‘The first three variables act to reduce suicide, while higher divorce rates are associated with higher suicide rates. The effects of social trust are large and statistically significant. Moving 10% of the population from generally untrusting to generally trusting, a shift of … less than one standard deviation for the sample data, would be predicted to lead to a … drop in the suicide rate, more than 10% of its average value’ (‘Trust and Wellbeing’, IJW, 2011, p. 50).

Data from World Values Surveys for 2005-6 indicate that the percentage of the population who think that most people try to take advantage of them (ratings of 1 to 4 on a ten point scale) is much higher in Brazil and the Ukraine (shown to have a high incidence of depression in the above chart) than in Japan, Germany and Italy (which have a relatively low incidence of depression).

However, lack of trust does not seem to explain the relatively high incidence of depression in the United States, where the percentage of the population who think that most people try to take advantage of them is about the same as in Japan, Italy and Germany.

Do Australian political leaders lack vision?

2011-07-22T14:33:00.002+10:00

I ended my last post asking why the major political parties in Australia seem to be finding it more difficult to promote sensible policies. One possible explanation I hear quite frequently is that our political leaders lack vision. The argument seems to be that the policies of the major parties are too easily blown around by powerful interest groups because the leaders are no longer anchored to a set of values that their parties stand for.

The argument is expressed most often about the prime minister. I often hear people ask: Who is the true Julia? What does she really believe in? What does stand for? (A recent example is in the remarks by Paul Gardner here.)

I am not about to become an apologist for the prime minister, but it seems to me that those questions are unfair. Julia Gillard tells an authentic story about her origins, the use she made of the educational opportunities available to her and the values she holds relating to opportunity and responsibility. Why can’t more people accept that she means what she says when she argues that ‘Labor's modern mission’ is ‘to spread opportunity with a matching sense of responsibility’?

One of Gillard’s problems is that her espousal of opportunity and responsibility seems vague and out of kilter with the leftist views she is known to have held in the past. Some people might feel that she is using the language of opportunity and security as a cover for statism and wealth redistribution.

The leader of the opposition, Tony Abbott, has a somewhat different problem stemming from his background. Abbott makes no secret of the fact that in his youth he was strongly influenced by Bob Santamaria, a catholic political ideologue, who was a particularly divisive figure in Australian politics. The problem that poses for Abbott is that some people think the values he has espoused are a cover for paternalistic conservatism.

So, what values has Abbott espoused? In his book, ‘Battlelines’, Abbott poses the question: “How can Australians, individually and collectively come closer to being their ‘best selves’ and what can the Liberal Party do to bring this about?” (p79). That question seems to me to imply a strong set of values relating to individual aspirations. The doubts that some people have about Abbott stem from the possibility that he may be inclined to impose a social conservative’s view of what it means to be ‘one’s best self’ rather than respecting the rights of every individual to live according to their own views of what it means to be ‘one’s best self’.

It seems to me that the claim that our political leaders lack vision is garbage. The values that Gillard and Abbott currently espouse deserve to be recognized and considered on their merits, even if there are be grounds for suspicion that both are still influenced by their respective ideological histories.

There should be more focus on the similarities and differences between the values that Gillard and Abbott espouse . It seems to me that Gillard’s ‘opportunity and responsibility’ is closely allied to allowing and helping people to come closer to being their ‘best selves’. The difference is that Gillard puts more emphasis on spreading opportunity while Abbott would probably put more emphasis on encouraging greater productivity and individual excellence. There is still potential for the major parties to compete for votes on the basis of their emphasis of different values even though the old political divide based on attitudes toward the role of the state have greatly diminished.

So, if lack of vision is not the problem, what is? The prime minister has failed to ensure that ‘opportunity and responsibility’ are reflected in policy development outside of education and social welfare. For example, the national broadband network seems to be as much about reducing opportunity for people in the big cities, by restricting competition, as it is about expanding opportunities for people in regional areas. Health policy seems to be more about attempting to reduce risk factors through greater government regulation, rather than encouraging individuals to take greater responsibility for their own health.

The leader of the opposition has adopted a small target strategy. Rather than promoting new policies to encourage greater productivity, he continues to recite the mantra he took to the last election about ending the waste, repaying debt, stopping the new taxes and stopping the boats.

What are the incentives for politicians to adopt small target strategies? What role does the media play in this? Why don’t journalists do more to hold political leaders to account for lack of consistency between their high ideals and the policies they adopt? Is there anything that ordinary people can do to raise the level of political debate in this country?

Postscript:
Jim Belshaw - an historian, economist, management consultant and blogger - has suggested in a comment below that there is a lack of good policy ideas and that people like me (and himself) have something to answer for in that regard. Jim has also posted a more extensive comment on his blog.

Should politicians be required to meet competency standards?

2011-07-13T10:15:00.005+10:00

‘Until philosophers are kings, or the kings and princes of this world have the spirit and power of philosophy, and political greatness and wisdom meet in one, and those commoner natures who pursue either to the exclusion of the other are compelled to stand aside, cities will never have rest from their evils’ – Plato, ‘The Republic’.

Plato proposed that the philosophers and warriors who are guardians of his ideal state should live in poverty. I can see some merit in that idea. I find it difficult, however, to see much merit in the breeding program that Plato suggested for producing guardians. Plato suggested that individuals should be deceived into thinking that they were participating in a lottery for the selection of their partners, but the lottery would be rigged by a breeding committee in an attempt to produce the best offspring.

If those are the serious proposals of a great philosopher, then it seems to me we might have reason to be concerned about the quality of public policy that philosopher kings might seek to implement. The great philosopher sets out to devise a system that would ensure that we are not governed by numpties and ends up, unwittingly, demonstrating what life might be like if we were governed by numpties. (I am indebted to Shona for introducing me to the word, ‘numpty’. According to one online dictionary, a numpty is a person ‘who, sometimes unwittingly, by speech or action demonstrates a lack of knowledge or misconception of a particular subject or situation to the amusement of others’. Others dictionaries that are less inclined to mince words suggest that a ‘numpty’ is a fool. Either way, it is probably a good idea for Australians to know what a numpty is before visiting the UK.)

There seems to me to be a lot more merit in the suggestion that politicians should be required to meet minimum competency standards than in the idea of breeding philosopher kings. This suggestion has arisen as a result of a discussion I have been having with Shona about political institutions. (Our discussion of politics began in a recent post.)

As a discussion starter, Shona suggests that politicians should be required to have a Master of Politics – something like an MBA for politicians. The degree would include practical work and be politically unbiased. It would cover a range of topics including political science, debating and language skills, law, economics and presentation. Shona noted that there could be a problem in ensuring that all politicians earn their MP degrees from reputable academic institutions. It would be necessary to find a way to stop some of them from just purchasing a degree on the internet.

When asked why she included presentation in her proposed course, Shona explained as follows:

‘Interestingly, I have just read and reviewed a large number of technical reports as part of my work. What infuriates me in doing so is the poor presentation, continual mistakes and many inconsistencies. Remind you of anything? I get angry with myself as a woman, looking at Julia Gillard and being distracted by a jacket too tight, poor make-up or dodgy hair, as opposed to focusing on what she has to say. When men do this it makes me very very angry. But I also notice the nose hairs, bad mannerisms and appalling body language of her male counterparts – so I’m not just judging the women. Presentation matters. Bad presentation distracts the reader/listener from the content/message. People would be more inclined to listen to what politicians have to say if they shine their shoes and clip their nose hair.’

In order to provide an example of how Australian politicians could present themselves in order to distract people from what they are saying it seems appropriate at this point to link to an interview of Sir Les Patterson.

The concern I have with the development of some kind of formal qualification for politicians is that it might tend to reinforce problems stemming from the similar backgrounds of many politicians. These days many seem to come from political families, study law at university and become party apparatchiks before standing for election. Mark Latham raised a related question in a recent article: ‘how can the Labor Party, having professionalised its ranks in the 1980s now look so unprofessional in office?’(‘A party without a point’, AFR, 30 June).

By coincidence, I am currently reading Vernon Smith’s book, ‘Rationality in Economics’, which has a useful discussion about wisdom of crowds and the characteristics of groups that enable good information aggregation. Smith (citing Suroweicki) suggests that four characteristics of groups enable good information aggregation outcomes: diversity, independence, decentralization and an aggregation principle to process private knowledge and yield group outcomes.

Does that mean that candidates for election should all do different work placements for a year – for example, as police, teachers, child care workers, hospital staff or garbage collectors? I am not confident that would produce better outcomes.

Mark Latham suggests, in the article mentioned above, that the Labor Party’s problems stem from a collapse of its policy-making culture. A particular problem for Labor has been the narrowing of the political divide following the end of the Cold War. Another contributing factor he mentions – the recent tendency for reformist ideas to be seen as an electoral liability – has inflicted both sides of politics.

So, that leaves me wondering whether competency of politicians is a fundamental problem in Australia. The basics of the system seem to me to be OK. Voters choose on the basis of criteria that are important to them. Political parties have strong incentives to find candidates who are acceptable to voters. The system should be able to weed out politicians who do not meet minimum competency standards.

Yet it would be hard to claim that in our political system everything is for the best in the best of all possible worlds. What is the problem with Australian politics? Why are the major parties finding it more difficult to promote sensible policies?

Postscript:
The web page I have linked to claims that the interviewer of Sir Les Patterson was Clive James. The interviewer was certainly not Clive James, whose web page can be found here.
Shona tells me that the interviewer was Clive Anderson. He is indentified as Clive Anderson in the description of the relevant video here.

Is the 'great big new carbon tax' a good idea?

2011-07-11T15:01:00.004+10:00

I am using that emotive description of the new tax because I have previously suggested on this blog that a great big new carbon tax might not be a bad idea if it replaced other taxes that are having adverse effects on economic incentives. So, how good is the carbon tax package announced by the prime minister yesterday?

The first point that needs to be recognized in assessing the package is that it only makes sense if it is viewed as a signalling exercise. By itself this package will have a small impact on carbon dioxide emissions in Australia, a tiny impact on the world-wide emissions and an almost negligible impact on the stock of global emissions and global climate. Its impact depends almost entirely on the extent to which it may help to encourage people in other countries to take similar action to reduce their carbon dioxide emissions. If there is sufficient action by other countries more investors may come to expect that development of more efficient alternative technologies is likely to become a profitable venture.

The incentives that the tax provides for development of more efficient alternative technologies are the critical factor in whole exercise. If the world community ever gets serious about making substantial reductions in global emissions, the economic cost will be massive unless low-cost technologies are developed for energy generation and/ or removal of carbon dioxide from the atmosphere. Unfortunately, the proposed tax is unlikely to induce many people to rush into investing in development of new technology.

The tax cannot credibly be claimed to be anything other than a modest step by a small country. The longer term promises about the extent of reductions in emissions that are aimed for have little credibility. At best, the proposed carbon tax provides a weak signal of Australia’s willingness to participate in global action to reduce greenhouse gas emissions. The signal would be stronger if there was bipartisan support for the tax – but even if it is introduced and remains in place it will not amount to much in a global context.

Why don’t we hear the government arguing that ordinary people should be prepared suffer some pain in order to save the world from a climate disaster? The government is not talking about pain. It seems to have reasoned that since it will be obvious to almost everyone that the contribution of the tax to saving the world will be extremely modest and contingent on similar action by other countries, the tax can only be justified to Labor’s traditional voters if they suffer no pain. The package is being sold to the government’s traditional supporters as a redistribution measure that will actually improve their lot at the expense of the big polluters. And it is all being done in the name of ‘tax reform’!

Could anyone object to a new tax being used to fund reforms that will make the overall tax system more efficient? I imagine that such a proposal would have widespread support. The question that must be asked, however, is whether the proposed increase in the tax-free threshold should be viewed as a reform.

My concern is that the proposed tax relief will do very little to improve the work incentives faced by people with low incomes because it will leave effective marginal tax rates largely unchanged. The government has missed an opportunity to undertake some meaningful tax reform that might raise productivity. If this carbon tax package can be sold as economic reform, then the meaning of economic reform has changed beyond recognition and new words will have to be found to describe policy actions that will raise productivity.

Postscript:
In proposing to raise the tax threshold the government can claim to have followed a recommendation of the Henry review.
However, there is a strong case that greater tapering of welfare benefits would be a better way to tackle poverty traps.The relative merits of increases in the tax free threshold and greater tapering of welfare benefits as means of reducing poverty traps was discussed by David Ingles in a paper for the Australia Institute last year. Ingles suggested: 'In general, the recommendations of the Henry Tax Review are a slight improvement on the current situation but they do not address really fundamental issues and lack a coherent underlying rationale'.
In my view, Ingless goes too far in suggesting that the recommendations of the Henry review lack a coherent underlying rationale, but I can't see a coherent rationale in the way the government is cherry picking the recommendations of that review.

Why not think up a new political system?

2011-07-08T15:34:00.000+10:00

Shona has a suggestion for a new project for me. Regular readers of this blog will remember Shona as the person who wrote some guest posts about volunteering. Shona suggests that I should invent a new political system.

This is what Shona wrote:

I just had my meeting with our local MP. Actually, Bruce was a ‘no show’ so he asked his minion to talk to me. I wouldn’t have minded talking to the minion if that is what Bruce had asked me to do originally. I was surprised that Bruce had asked me to talk, although I did write a very long email to him a few months ago. The appointment was set up 5 or 6 weeks ago and clearly his schedule has been overrun with his new responsibilities.

Bruce’s new responsibilities involve looking at social policy. His focus is on social issues that have become institutionalized (with groups representing them) and not the broader picture. That is a big mistake in my opinion.

In my discussion with said minion, I suggested that it didn’t matter what party was in power, we have people who don’t know anything about a subject leading policy. And there is no long term strategic thinking.

It makes me wonder whether this political system we have ever satisfies anyone. Are there any good examples of political systems anywhere in the world? Our political system is based on the British system which is hundreds of years old. If we were to start from scratch, what sort of system would we establish? It also strikes me as very bizarre that a head of a government agency has to be qualified to do that job, but a politician who directs and takes responsibility for the agency doesn’t have to have any qualifications! Shouldn’t there be some sort of competency system for politicians?

I am appalled by current politics. I don’t want to be forced to choose between existing political parties or leaders. Maybe you could invent a new political system from scratch for discussion – a system to perpetuate our happiness, and then perhaps compare it with what we have now. You could write thoughts on everything from competency criteria for politicians to voting systems. We could come up for a great name for it - the Winton System rather than the Westminster?

My immediate response was to start thinking up reasons why it is not a good idea to start from scratch in thinking about what kind of political system we should have. I don’t think it is possible for anyone (not even me) to understand how some political system that they thought up from scratch would work in practice. It is difficult to predict how politicians, judges, the media, interest groups and the public might respond to the incentives we might seek to incorporate in a new system until we actually see how they respond. Many people may tend to be less self-interested in their role as citizens than in normal market behaviour, but few are angelic. It is probably much easier to predict how people would respond to changes to a system in which norms of behaviour have already been established.

The suggestion of looking around the world to borrow ideas that work is sensible. I understand that is what the Americans did when they had the opportunity to start from scratch to invent a new political system. Australians did the same thing in developing a new constitution at the time of federation.

My starting point in thinking about political reform is to acknowledge that the Westminster system has one very good feature – it usually enables governments to be held accountable for their actions and to be voted out of office if they become unpopular. I think some of the argy-bargy that many people dislike about politics is an inevitable result of the role of the opposition and media in holding governments accountable. But the system does not reward politicians who are seen to offer unfair criticism. Politicians run the risk of losing votes if they are seen to be excessively negative or unnecessarily destructive

Added to the normal argy-bargy, some of the bad odour associated with federal politics in Australia at the moment seems to me to stem from the unusual situation in which we find ourselves. It is difficult for voters to hold the government accountable for the policies it is adopting because there was no clear winner after the last election. That means that the policies that the government has been implementing are the result of negotiations with minor parties and independents, rather than policies that it took to the people at the last election, or even policies that it can honestly claim to be in the interests of the community as a whole.

My next point is that in thinking about political reform we need to recognize that politics has inherent limitations as a way of getting things done. A lot of the disappointment about outcomes in a wide range of areas seems to me to stem from attempts to achieve things through the political process that would be better left to the private sector or voluntary co-operation. Why take money from people in order to provide them with services when they could obtain better value for money by buying them privately? The only answer that makes any sense is to make the distribution of services fairer – but governments do not need to be involved in actual provision of services in order to do that. As far as I can see there is no more reason to think that governments would be good at running schools or hospitals than farms, shopping malls or chook raffles.

A major problem inherent in politics as a way of getting anything done is that it involves giving some people the power to push other people around. People don’t mind when the pushing is obviously justified. There are not many people who mind being required to obey laws to respect lives and property of others, or being required to pay taxes to defend the country against potential foreign aggression. Politics becomes particularly objectionable when people get pushed around in order to provide benefits for some group that happens to be politically powerful.

In order to enjoy politics you have to either enjoy pushing other people around or enjoy pushing back. I think our main priority should be to contain politics to those aspects of life where it is actually necessary – so the pushing and shoving doesn’t intrude into aspects of life where it is unnecessary.

So, rather than start with a blank piece of paper I think it is probably better to look at the political system we have and to consider how it could be improved. The competency of politicians might be a good question to consider first. Should politicians be required to meet competency standards?

Does economic growth help people to thrive?

2011-07-06T17:16:00.001+10:00

Yes! The proportion of people who are thriving tends to be higher in countries that have experienced greatest economic growth over the longer term. It may take several decades, however, for economic growth to be fully reflected in subjective measures of well-being. The proportion of people who are suffering also tends to be lower in countries that have experienced greatest economic growth, but there are quite a few countries that do not fit that pattern.

These observations are based on the definitions of ‘thriving’ and ‘suffering’ used in the Gallup World Poll. Gallup classifies respondents as "thriving," "struggling," or "suffering," according to how they rate their current and future lives on a ladder scale, based on the Cantril Self-Anchoring Striving Scale, where the bottom rating is ‘the worst possible life’ and the top rating is ‘the best possible life’. Further information on the survey and classification method is available here.

The following charts show the percentages of people who are thriving or suffering in 122 countries relative to per capita GDP levels in those countries. It is clear that the percentages thriving tend to be higher and the percentages suffering to be lower, in countries with relatively high per capita incomes i.e. those which have experienced greatest economic growth in the past.

The countries that do not fit the general pattern are interesting. Several former communist bloc countries are outliers in terms of lower percentages of the population thriving and a higher percentages suffering than would be expected on the basis of per capita income levels. Some African countries have much better outcomes and some much worse than would be expected on the basis of income levels. The outcomes that are worse than expected can be explained by factors such as civil unrest. Better than expected outcomes for African and Latin American countries in studies such as this are often attributed to national characteristics, such as a positive outlook on life (but that is not necessarily irrelevant to emotional well-being). The lower than expected percentages of people thriving in China, Singapore, Hong Kong and Taiwan might also be attributable to some extent to a more reserved outlook on life by Chinese people.

Another factor relevant to considering China, Singapore etc. is the rapid economic growth of these countries. As discussed in my last post, to the extent that well-being is affected by wealth (reflected in quality of housing, financial assets, human capital, public infrastructure, social capital etc.) as well as current income, countries with relatively high growth rates could be expected to have lower levels of well-being than other countries with similar per capita incomes. Regression analysis, comparable to that reported in my last post, suggests that growth prior to 1970 makes a substantially greater contribution to the percentage of people thriving than does growth in the periods 1970 to 1990 and 1990 to 2009. The results provide support for the view that is that it takes time for economic growth to be translated into forms of wealth that enhance well-being, rather than for the ‘unhappy growth’ hypothesis which I have discussed previously. The unhappy growth hypothesis implies that the estimated coefficients on growth in the most recent period could be expected to be negative, but I found the estimated coefficients on growth to be positive in respect of all periods. (The estimated coefficient for 1990 to 2009 is not significantly greater than zero at the 95% significance level, but the standard error is smaller than the estimate. Anyone who would like to see the results is welcome to email me.)

It would be appropriate to round off this discussion with a profound statement stressing the importance of economic growth to reducing human suffering and allowing more people to thrive, while acknowledging that wealth does not guarantee that anyone will thrive. However, I’m not in the right mood for writing profound statements.

How long does it take for GDP growth to be reflected in higher well-being?

2011-07-04T15:25:00.003+10:00

In a paper written while he was at the World Bank, William Easterly found that changes in quality of life are surprisingly uneven as per capita income grows, despite the fact that a remarkable diversity of indicators shows quality of life across nations to be positively associated with per capita income. This finding might deserve to be called Easterly’s puzzle. (Bill Easterly is probably better known for his observation that foreign aid frequently fails to promote economic growth – but I don’t think that qualifies as a puzzle.)

One possible explanation, discussed briefly by Easterly, is that there may be ‘long and variable lags’ in the relationship between quality of life and economic growth. A related possibility, that is supported by some simple analysis I have undertaken for OECD countries, is that well-being is affected by wealth (reflected in quality of housing, financial assets, human capital, public infrastructure, social capital etc.) as well as current income. In this post I want to explore this possibility for a wider range of countries using the Legatum prosperity index. As noted in my last post, the Legatum prosperity index is highly correlated with the OECD’s well-being index.

To the extent that well-being is affected by wealth rather than current income, countries which have experienced rapid economic growth in recent decades could be expected to have lower well-being levels than those with similar income levels which have a longer history of relatively high per capita incomes. The following table provides results of regressions in which the Legatum prosperity index and various components of this index are explained by the log of per capita GDP in 1970, and the change in log per capita GDP from 1970 to 1990 and from 1990 to 2009. If the component of current income reflecting relatively recent growth has a similar coefficient to that reflecting income in 1970, it would be reasonable to conclude that capital stocks are not relevant to current well-being. (There are 92 observations in the regressions; 18 former Soviet block countries had to be omitted because of lack of lack of comparable per capita income data. Per capita GDP data is from Penn World Tables – the rgdpl measure.)

The results are consistent with the view that well-being is affected by wealth as well as current income. For the index as a whole, the estimated coefficient on the variable reflecting relatively recent growth is substantially lower than that on the variables reflecting past growth experience. The results for some components of the index also support that interpretation.

Economy: The estimated coefficient on relatively recent growth is actually higher than that on the variables reflecting previous growth experience. That result is to be expected because the economy variable is derived from a range of indicators of recent economic performance.

Entrepreneurship and opportunity: The low estimated coefficient on relatively recent growth is to be expected because an entrepreneurial culture takes time to develop. I usually think of causation running in the opposite direction – from an entrepreneurial culture to economic growth – but success often breeds success.

Governance: It may not appear to make a lot of sense to view low levels of corruption as a consequence of economic growth, rather than vice versa, but some of the indicators covered (e.g. political rights and regime stability) could reflect a build-up of institutional capital that has been fostered by economic success.

Education: As expected, the estimated coefficient on relatively recent growth is lower than on previous growth experience, reflecting the time it takes for improved education of young people to be reflected in the stock of human capital. Some of the indicators covered in the education variable reflect current enrolments rather than education levels of the population.

Health: Reasons for the low estimated coefficient on relatively recent growth would include investment required to improve sanitation and water quality, and the time required for training of health professionals.

Safety and security: As expected, countries with a long history of relatively high per capita incomes tend to have less violence. Low violence is conducive to economic activity and economic opportunities reduce the incentive to engage in criminal activities. The relatively low estimated coefficient on the recent growth variable suggests that economic growth has a greater positive impact on safety and security when it is sustained over a couple of decades.

Personal Freedom: Civil liberties, satisfaction with freedom and tolerant attitudes are strongly associated with a history of relatively high per capita incomes. The results do not shed much light on the effects of more recent growth experience.

Social Capital: Again, relevant indicators such as trust and perceptions of social support are associated with a history of relatively high per capita incomes, with greater ambiguity in respect of recent growth experience.

The regression results also indicate that the relevance of per capita income to explanation of the various components of the index varies considerably. Income history seems to be much more relevant to education and health outcomes than to personal freedom and social capital. Performance in relation to factors such as social capital helps to explain why some countries (e.g. New Zealand) have higher overall index scores while other countries (e.g. Greece) have lower overall index scores than would be predicted on the basis of income history.

Finally, to answer the original question, the results reported here suggest that it can take two or three decades for GDP growth to be fully reflected in higher well-being levels.

How close is the correlation between the Legatum 'prosperity' index and the OECD's 'better life' index?

2011-07-03T10:53:00.000+10:00

The Legatum prosperity index provides an assessment of wealth and well-being in 110 countries. The authors suggest that it ‘produces rankings based upon the very foundations of prosperity’. (I am allergic to that kind of spin, but I am quoting the words here as penance for the unwarranted doubts I expressed on this blog in November 2009 about how much substance might lie behind this index. I eventually found the technical appendix I was looking for and satisfied myself that there is substance behind the ‘incredibly smooth’ presentation). The indicators incorporated in the study are factors that are known to be determinants of wealth and life satisfaction.

I have discussed the OECD’s better life index in several posts (most recently here).

There is some difference between the factors incorporated in the Legatum and OECD indexes. The factors included in the Legatum index are: economy, entrepreneurship and opportunity, governance, education, health, safety and security, personal freedom and social capital. The factors included in the OECD index are: housing, income, jobs, community, education, environment, governance, health, life satisfaction, safety and work-life balance.

The two indexes are highly correlated. The simple correlation coefficient relating the averages of the factors included in the two indexes for OECD countries (excluding Luxembourg) is 0.95. (The Legatum index is not available for Luxembourg.) The correlation between the Legatum index and my modified version of the OECD index is 0.97.

The similarity of the two indexes is also apparent when they are graphed against per capita GDP. The chart below showing the Legatum prosperity index can be compared to a similar chart showing the modified OECD well-being index in the preceding post.

New Zealand and Greece are outliers in both charts. The Legatum index has New Zealand ahead of Greece on all criteria, with the greatest difference in social capital, governance and entrepreneurship and opportunity. The OECD index has New Zealand substantially ahead in terms of community, jobs, life satisfaction and housing.

Although the OECD and Legatum indexes appear to be quite different, they tell a similar story about well-being in OECD countries. An important advantage of the Legatum index is that it is available for a much larger number of countries.

How closely is well-being related to per capita GDP?

2011-06-27T10:01:00.000+10:00

The relationship between a composite well-being index and per capita GDP in OECD countries is shown in the chart below. The well-being index has been derived by modifying and combining OECD indicators as described in previous posts (here and here). As might be expected, the chart suggests that well-being is generally higher in countries with high per capita GDP. For most countries, including the United States and Australia, there is not much difference between the well-being index and the picture of well-being presented by per capita GDP. There are some countries, however, in which well-being seems to be higher than would be expected (most notably New Zealand) and some in which well-being seems to be lower than would be expected (e.g. Luxembourg, Greece and Korea). In this post I want to explore whether some of those apparent anomalies may be attributable to the past income history or the countries concerned.

Note to the chart: Per capita GDP data is from Penn World Tables (rgdpl). The per capita income data is presented in log form because previous studies have suggested that this is appropriate in considering the relationship between well-being and income (for example, Stevenson and Wolfers, 2008).

Why might past income matter for current well-being? Past income is relevant because well-being is affected by wealth as well as current income. Some components of wealth are incorporated in the well-being index (e.g. the quality of housing) and others e.g. public infrastructure could affect several well-being indicators. Wealth may also provide peace of mind to individuals as a cushion against loss of income - for example as a result of ill health or unemployment. A study by Bruce Headey and Mark Wooden has shown, using Australian data, that wealth is at least as important to subjective well-being as is income (IZA Discussion Paper 1032, Feb. 2004).

In order to assess the extent to which past incomes matter I have used regression analysis to explain the well-being index in terms of two components of current per capita incomes: per capita incomes in 1970 and the growth in per capita income from 1970 to 2009. If income history is irrelevant to current well-being the estimated coefficients on the two components of income would be expected to be similar. In fact, the estimated coefficient on per capita income in 1970 is much higher (more than 1.8 times) the estimated coefficient on the growth component. (The standard errors of the estimated coefficients are fairly low and the difference between them is statistically significant at the 95% level. The regression explains about 76% of the variation in the well-being index. Anyone who wants further information on the regression results is welcome to contact me.)

The regression results have been used to decompose the well-being index in order to prepare the following chart.

The story that a comparison of the two charts tells me is that a past history of relatively high incomes helps to explain why New Zealanders score relatively highly on the well-being index. A past history of relatively low incomes also helps explain why Korea has a relatively low well-being score. However, the size of the relevant residuals suggests that past history doesn’t help explain the disparity between well-being and per capita GDP levels for Luxembourg and Greece.

The general picture that emerges is that the well-being index and per capita GDP generally convey similar information about relative well-being levels in OECD countries. In some of the countries where this is not so, the disparity can be attributed largely to income history. There do not appear to be any OECD countries with high levels of well-being that do not have either high current per capita GDP levels or a history of relatively high per capita GDP levels about 40 years ago. This suggests to me that over the longer term there can be no escaping the links between wealth creation and progress in improvement of well-being.

Perhaps we seek wealth to enjoy autonomy?

2011-06-22T11:17:00.002+10:00

‘The question was whether it is more important to provide individuals with money or with autonomy. Our results suggest that providing individuals in nations with autonomy has overall a larger and more consistent effect on well-being than money. Money leads to autonomy (Welzel et al., 2003; Welzel & Inglehart, 2010), but it does not add to well-being or happiness.’

That is from the concluding paragraph of an article by Ronald Fischer and Diana Boer, ‘What is more important for national well-being: Money or autonomy?’, recently published in the Journal of Personality and Social Psychology.

The question of whether it is more important to provide individuals with money or autonomy strikes me as odd. Who has the power to choose whether individuals should be provided with money or autonomy? Governments don’t normally have that power.

I suppose it is possible to imagine a powerful paternalistic ruler contemplating whether to give his serfs a monetary bonus or to give them autonomy. It is clear from their article that when the authors refer to autonomy they are talking about a situation where individuals ‘can make their own choices in life’ rather than, for example, just choose what hobbies to pursue in their spare time. If our paternalistic ruler is contemplating giving his serfs the power to make their own choices in life, what he has in mind must involve economic freedom and opportunities for wealth creation.

When individuals have the opportunity to do so, they tend to use their own labour, skills and property for purposes that they value. Those purposes include cooperating with others for mutual advantage e.g. through specialization and exchange, and developing better products and more efficient technologies. Recognition of individual autonomy thus underpins the specialization, exchange and innovation that are integral to wealth creation.

The quoted passage refers to an article by Welzel and Inglehart in support of the proposition that ‘money leads to autonomy’. As discussed in my last post, one of the points made in that article is that in countries with higher levels of economic development (i.e. countries with higher self-expression values) people tend to achieve higher life satisfaction to a greater extent through activities that enhance autonomy (feelings of agency). Economic freedom leads to wealth and wealth leads to greater enjoyment of autonomy through pursuit of objectives further up the hierarchy of needs than survival and financial security.

The finding by Fischer and Boer that ‘money does not add to well-being’ doesn’t actually mean that income or wealth makes no contribution to well-being. It seems to me that what the finding means is that the contribution of income to well-being is encompassed in the contribution of income to individualism (self-expression values).

The authors’ research involved constructing indexes to compare negative psychological well-being, anxiety and burnout in different countries by combining the results of a large number of studies throughout the world. Statistical analysis was then undertaken to determine the extent to which these indexes could be explained by income levels or an indicator of individualism. When income and individualism were included separately in some of the analyses both of these variables were statistically significant, but when they were included together income became statistically insignificant. This suggests that the effects of income on well-being tend to be incorporated in the individualism (self-expression) variable.

I doubt whether that result would surprise many economists. First, it is well known that as incomes rise people tend to place a higher value on leisure (the income elasticity of demand for leisure is positive). Second as leisure increases, an increasing proportion of income tends to be spent on goods that are complementary to leisure (e.g. holiday packages). Third, goods that account for an increasing proportion of spending (goods with high income elasticity of demand) tend to be more strongly related to individual self-expression than to survival. Finally, increased wealth is valued for the options it provides as well as for the goods that are purchased with it. There are precautionary motives for accumulation of wealth e.g. as insurance against unemployment or ill health. People also value the option to be able to take advantage of opportunities (e.g. the holiday adventure of a lifetime) that may arise in future.

As I see it, the greater happiness of people in high-income countries can probably be attributed to greater satisfaction of fundamental human needs related to autonomy, relatedness and competence in those countries. When individual agency has been recognized, people have tended to use their autonomy for good purposes, establish better relations with others, become more competent and create wealth. The wealth is important only to the extent that it helps individuals to pursue purposes that they value – and to enjoy autonomy, good relations with others and a sense of achievement.

Is economic development and increased 'inner freedom' leading to greater selfishness?

2011-06-19T15:27:00.006+10:00

‘As an evolutionary shaped capacity, agency is a particularly ‘human’ capacity. It is indeed a defining characteristic of our species … . ‘Human’ development is hence any development that promotes the most human trait—agency … . In the life course of individuals, human development is the maturation of a person’s agentic traits. Applying the same logic to the trajectory of societies, all changes that bring a larger number of people in the situation to more fully realize their agentic traits, is to be characterized as ‘human’ development’: Christian Welzel and Ronald Inglehart, ‘Agency, Values and Well-Being: A human development model’, Soc. Indic. Res. (2010).

Some explanation is required to relate that quote to the question I wish to discuss. ‘Inner freedom’ refers to feelings of individual agency. Individual agency involves the capacity of an individual to act purposefully to his or her own advantage. Individuals have feelings of agency when they feel that what they do has an effect on how their lives turn out. The quoted passage is suggesting that the level of human development is greatest in societies where a high proportion of the population feel that what they do as individuals has a substantial effect on how their lives turn out. That seems to me to be a very important point, but some people claim that there is a dark side to this freedom – namely greater selfishness.

What do we mean by selfishness? Noble behaviour that an individual perceives to be a constitutive part of his or her own interests (acting in accordance with perceived identity) is sometime referred to as selfishness (e.g. by Ayn Rand). I think that what the critics of freedom have in mind when they talk about selfishness is atomistic individualism - a situation in which individuals make choices without regard to social norms or to the effects of their behaviour on anyone else. I accept that definition for the purposes of this post.

What is the basis for the view that feelings of individual agency tend to spread and become more widespread with economic development? Welzel and Inglehart provide substantial evidence in support of this view in the article cited above. They establish that:

• Self-expression values are stronger in countries with higher levels of economic development (and cognitive mobilization). Self-expression values encompass gender equality, tolerant attitudes toward abortion, homosexuality and divorce; an emphasis on autonomy and imagination in education rather than obedience and faith; and attitudes favouring democracy and freedom of speech. It is more appropriate to attribute this increase in self-expression values to economic development than to westernization.

• As the contribution of greater financial satisfaction to overall life satisfaction has become ‘saturated’ to a greater extent in countries with higher self-expression values, people in those countries tend to achieve higher life satisfaction to a greater extent through activities that enhance feelings of agency. In the authors’ words, there is an increase in the ‘relative strength of agentic life strategy’.

• Average life satisfaction levels tend to be higher in countries in which the relative strength of agentic life strategy is high.

It is worth noting at this point that in countries in which a relatively high proportion of the population have strong feelings of agency, proportion of people who are satisfied with freedom also tends to be relatively high. Such countries also tend to have higher levels of economic freedom as well as more civil liberties. I discussed the links between different indicators of freedom in an earlier post.

The question I posed in the heading of this post stems from the concerns expressed by some critics that individual freedom has a dark side. According to this view, excessive individualism results in a diminished sense of community, a loss of higher purpose and increased risk of mental illness.

In the course of their analysis Welzel and Inglehart found that agency feelings and communion (a composite index combining people’s emphasis on family and friends as important life domains) are not competitive factors. In fact, their results suggest that these factors amplify each other’s impact on life satisfaction.

When I read that I decided to have a look at the data on the web site of the World Values Study in order to get a feel for the data. (This web site has an excellent facility for instant cross-tabulation of data.) I focused on surveys for 2005-07 and on combined data for a group of countries with high self-expression values: Australia, Canada, Finland, France, Germany, Great Britain, Netherlands, New Zealand, Norway, Sweden, Switzerland and United States. The data show that people with high feelings of agency do tend to place higher importance on family and friends. When I looked further, I found that people with high levels of agency also tend to place higher emphasis on unselfishness as an important quality for children to learn.

In addition, people with high feelings of agency are also more likely to identify with the statement: ‘It is important to help the people nearby’. The pattern of responses is shown in the chart below. (The chart has been constructed so that observations add to 100% on the depth axis.)

Some readers might respond by suggesting that the pressures of life in countries with high self-expression values tend to result in higher incidence of mental illness. That proposition is easier to assert than to test with available information enabling international comparisons of the incidence of mental illness. However, a recent study by Ronald Fischer and Diana Boer has brought together the results of relevant studies in many different countries (‘What is more important for national well-being: Money or autonomy?’, JPSP (2011). The results suggest that the incidence of negative psychological well-being tends to be lower in countries with high levels of ‘individualism’ i.e. countries where people tend to have high self-expression values and greater feelings of agency. The exceptions to the general pattern seem to be a few countries which apparently have relatively good mental health outcomes despite low ‘individualism’ scores (e.g. Nigeria, Pakistan and Indonesia). I will write more about this study in a subsequent post.

How could the OECD's well-being indicators be improved?

2011-06-15T15:54:00.000+10:00

This is the third post in a series on the OECD’s better life index. In the first post I played with the index to see how different weighting systems might affect the ranking of OECD countries. My conclusion was that different weights have some effect, but Australia comes out fairly well whatever weights you use. In my second post I derived a weighting system which gives higher weight to indicators that are highly correlated with each other. The countries ranked most highly on this basis tended to have a higher probability of exceptionally good performance on most of the indicators and lowly ranked countries tended to have a higher probability of exceptionally poor performance. My conclusion was that well-being indicators tend to tell similar stories.

In this post I consider how the OECD’s well-being indicators could be improved and how much difference the improvements I suggest make to the outcomes derived using the same methodology as in my second post.

In considering how the OECD’s well-being indicators could be improved I think it is important to try to specify what the indicators should be trying to measure. I think the main reason why such indicators are of interest is to provide information about the probability that the ‘average person’ (some person chosen at random) in different countries might have relatively high or relatively low levels of well-being. All the factors that affect individual human well-being – economic and psychological, basic needs and higher needs, individual goods and collective goods, objective factors and subjective factors – are potentially relevant.

People are interested in international comparisons of well-being for a variety of reasons, not just to monitor the effectiveness of government policies. In fact, well-being indicators are not necessarily closely related to government policies. For example, health indicators may be more closely related to cultural influences affecting smoking, alcohol consumption, obesity, exercise etc. than to public health policies. The impact of well-being comparisons on decisions of individuals and community groups might actually be more important than their impact on decisions made by governments.

However, that is no excuse for the OECD to exclude from its well-being indicators one of the most important factors affecting individual well-being that is subject to the influence of government – namely, individual freedom. The importance of perceptions of freedom to well-being has been established in several studies, including those by Paolo Verme (using a large data set drawn from the World and European Values Surveys, ‘Happiness, Freedom and Control’, 2007) and John Helliwell, Christopher Barrington-Leigh, Anthony Harris and Haifang Huang ‘International Evidence on the Social Context of Well-being’, Working paper 14720, NBER, 2009). There is data available from the Gallup World Poll on the variable used by Helliwell et al, the proportion of the population who are satisfied with their freedom to choose what they do with their lives.

The OECD includes a measure of governance, another factor that is strongly subject to the influence of government. However, the OECD’s indicator reflects only two factors: voter turnout at elections and consultation on rule making. Important factors omitted include corruption and the quality of public administration. I have modified the OECD’s governance indicator by incorporating the World Bank’s governance indicators (with relative weights determined by average correlation with other OECD indicators).

The OECD’s measure of the effect of the environment on well-being includes only one indicator – a measure of air pollution by tiny particulate matter small enough to be inhaled into the deepest part of the lung (PM10). I have modified the OECD’s indicator by incorporating subjective data on ‘satisfaction with efforts to preserve the environment’ from the Gallup World Poll (again with relative weights determined by average correlation with other OECD indicators).

So, how much do these modifications change the overall well-being index? Not much. If you focus on rankings you might get the impression that the change is substantial. For the most part, however, as shown in the chart below, there is little change in well-being levels.

Was the exercise of modifying the indicators worth doing? I think so. I got some satisfaction from confirmation that the freedom indicator is highly correlated with housing, community, life satisfaction and income. It was also pleasing that the modifications to the governance and environment indicators made them more highly correlated with the other indicators. The exercise makes me a little more confident that it is appropriate to view well-being as analogous to a syndrome, with various indicators corresponding to symptoms.

The table with information for each of the modified indexes is shown below. As in the table in my second post, the various indicators are ranked from left to right in terms of the extent that each is correlated with the other well-being indicators. Exceptionally good performance (highlighted in green) is more than one standard deviation above the mean and exceptionally poor performance (highlighted in pink) is more than one standard deviation below the mean.

Hint: Click on the table for a clearer image.

Do well-being indicators all tend to tell similar stories about OECD countries?

2011-06-11T16:05:00.002+10:00

In my last post about the OECD’s ‘better life index’ I suggested that although all well-being indicators tend to tell similar stories when wealthy countries are compared with poor countries, they may tell different stories when wealthy countries are compared to each other. If we think of the OECD as a rich nations club we might expect a great deal of variation in the stories conveyed by different well-being indicators. For example, some countries might be expected to put emphasis on health and leisure, and others to put emphasis on income and housing. However, the view of the OECD as a rich nations club is actually difficult to sustain - there is a substantial amount of variation in wealth among the countries that are now members of the OECD. So, do all well-being indicators tend to tell similar stories in OECD countries too?

My first step in looking at this question was to look at the correlation between the various ‘better life’ indicators in the OECD. In the following table the various indicators are ranked from left to right in terms of the extent to which each is correlated with the other well-being indicators. The correlation between housing, community, life satisfaction and income tends to be higher than for the other indicators.

The ranking of countries in the table reflects the performance of each country in terms of a weighted average of indicators, with weights being derived from the average correlation of each indicator with the other indicators. (Anyone requiring further explanation of the methodology is welcome to contact me.)

Does the weighting system used to rank countries in the table have any greater validity than the range of weighting systems that I looked at in my last post? I’m not making strong claims. My attempt to derive weights without making explicit value judgements might have some merit if we view well-being as analogous to a syndrome with various indicators corresponding to symptoms. If an indicator is not highly correlated with the other indicators it may not be an important component of the well-being syndrome. Alternatively, it is possible that indicators that are not correlated with other indicators might not be well constructed. For example, the OECD’s governance indicator seems somewhat lacking by comparison with the World Bank’s governance indicators. The OECD’s governance indicator does not seem to include measures of levels of corruption or quality of public administration.

After ranking countries, the next step was to highlight countries that have exceptionally good or exceptionally poor performance in terms of particular well-being indicators. For the purposes of the table, exceptionally good performance (highlighted in green) is more than one standard deviation above the mean and exceptionally poor performance (highlighted in pink) is more than one standard deviation below the mean.

Hint: Click on the table for a clearer picture.

It is clear that the countries ranked highly in the table tend to have a higher probability of exceptionally good performance on most of the indicators and that countries that are ranked towards the bottom tend to have a higher probability of exceptionally poor performance. Well-being indicators do tend to tell similar stories in OECD countries.

One of the stories that the table doesn’t tell us directly is the difference in past history of the countries with relatively high and relatively low well-being ranking. The incomes of some of the countries with relatively high rankings are not particularly high, but good housing is presumably indicative of their past history of relatively high incomes. This seems to highlight the importance of the distinction between stocks and flows. Current well-being seems to be more closely related to stocks – wealth, human capital, social capital and environmental capital – than to income flows. However, we should not neglect the important role that income (economic growth) plays in the accumulation of wealth and human capital and the important role that stocks of social capital (particularly interpersonal trust) along with institutional capital (economic freedom) play in promoting conditions for ongoing economic and social progress.

Who should read 'The Case for Rational Optimism'?

2011-06-03T17:12:00.003+10:00

After I finished reading ‘The Case for Rational Optimism’ by Frank S Robinson, my first thought was that I would not have any problem recommending this book. The next thought was: Who would I recommend should read it? The answer will emerge after I describe the book.

The first point I should make is that Frank Robinson’s book should not be confused with ‘The Rational Optimist’ by Matt Ridley. It is not difficult to confuse the two books because they cover some similar ground and contain similar views.

One of the distinguishing characteristics of Robinson’s book is the breadth of topics it covers. These include: human nature and virtue, the good life, happiness, free will, science and technology, freedom from fear, sex, individualism, the problem of government, America, capitalism, globalization, war and peace, and global warming. That list should be long enough.

Each topic is covered in a chapter of about 10-12 pages and each chapter is more or less self-contained. That seems to me to be both a strength and a weakness. It is a strength because it is possible to read a chapter or two in one sitting and then put the book aside for a few days without fear of losing the thread. It is a weakness because it may be easy to put the book aside for longer than a few days (as I did). While reading it I didn’t get the feeling that the book was building towards a strong conclusion. It is the kind of book I would normally tend to dip into rather than read from cover to cover.

The most valuable characteristic of Robinson’s book is its heavy reliance on leading thinkers in a wide range of areas. I consider myself to have read fairly widely, but Frank Robinson seems to have read every book in the library. And he is adept at explaining and discussing the views expressed in the many books he has read.

Robinson’s politics could probably be described as conservative-libertarian. His views on foreign policy are conservative. His libertarian views are evident in his support for free markets and an attitude of live and let live. He even supports gay marriage. I would have liked to have had the benefit of Robinson’s views on the war on drugs, but unfortunately that is one topic that he does not seem to have covered in this book.

Whatever topic Frank Robinson discusses, he always seems to be able to find a rational case for optimism. In reading the chapter discussing the problems of government, however, I thought for a moment that his optimism might be about to waver. He discusses the problems of holding government accountable, information problems, the law of unintended consequences, bureaucratization, special interest politics and the trend toward bigger and bossier government. Yet he manages to end the chapter on an optimistic note by pointing out that, despite its imperfections, democracy ensures that nothing important can be done against the will of ‘we the people’.

The next chapter, ‘America the Beautiful’, is the one I liked most. Since I am not an American and am actually strongly opposed to American exceptionalism, I have some difficulty explaining my positive response. I found it refreshing to see crazy anti-American views being challenged in a thoughtful manner. But that is only part of the story. Robinson makes it clear that he thinks America is ‘the most noble, most idealistic, most generous nation ever’. That message is not everyone’s cup of tea – and I’m not entirely persuaded that it is actually correct. My normal response to such views is to stop listening, or reading. However, I found Robinson’s non-chauvinistic presentation interesting and persuasive. I don’t think I have seen a stronger case made anywhere else that America still stands for high ideals.

When I reached the end of the book I found that my feeling that it was not building towards a strong conclusion was not entirely accurate. This passage close to the end seems to me to capture the theme of the book:

‘Progress is not some mystical force pushing us forward. What does drive it is our own efforts in gaining knowledge. That is not cyclical or random, but cumulative: it builds upon itself. It is no coincidence that modernity has seen explosive growth in human understanding, and at the same time huge improvements in the human condition. War and violence have been receding while freedom and human rights are spreading. Society grows not only richer, but more open, tolerant, humane, and fair.’ (p.313).

In my view the people who have most to gain from reading the book will be open to the possibility that such views are accurate, but not yet persuaded that they are accurate. They will be open to the possibility that it is still rational to be optimistic and interested to see whether it is possible to make a strong case in favour of optimism.

Postscript:

Frank Robinson has given me his permission to post this response:

'Winton! Thanks!!

I am really extremely gratified that you read my book and took the trouble to post a generally favorable review.

Regarding your question about the "war on drugs," I had a chapter about that in a previous book (Life, Liberty, and Happiness) that was a precursor of sorts to Optimism, which does actually borrow a lot from it. As you might guess, I think the war on drugs is a totally misguided disaster.

That previous book also had a much more extensive critique of government and statism, which was boiled down into the single chapter of Optimism because I didn't think the topic could be avoided. I'm not sure my optimistic conclusion to that chapter was strong enough. But it was not insincere. I can get pretty cynical about democratic politics. But, heck, look at the alternative -- which humanity had to endure through most of history! I do get misty-eyed when I go to vote.

I particularly appreciate your prefacing your review with a quote from J.S. Mill -- my favorite philosopher. And a right-on quote it is.'

Will NZ Treasury's living standards framework achieve its goals?

2011-06-01T15:03:00.001+10:00

Last week the New Zealand Treasury released a paper providing a ‘living standards framework’. Treasury describes it as ‘a descriptive framework of the factors that it considers are essential to national well-being’.

In launching the framework the Treasury Secretary, John Whitehead, certainly did not try to hide the fact that an important objective of the exercise, as he sees it, is to bring about a shift in the way NZ Treasury is perceived externally. He said:

‘Misperceptions of the role Treasury has played since the 1980s have limited our ability to be persuasive when talking about what matters most for living standards. Some have never got beyond believing that we are the root of all New Zealand’s economic evils. Others see us as little more than the defenders of fiscal virtue …’.

I find that baffling. In the 1980s the NZ Treasury played an important role in saving that country from economic ruin. Why is that not more widely understood and appreciated in New Zealand? That is something about New Zealand that may be beyond my understanding. So I think I should confine myself here to looking at the living standards framework in its own terms.

Treasury states what the framework is intended for as follows:

‘The Framework is intended to help Treasury consistently provide Ministers robust, theoretically-grounded and evidenced-based advice that aims to improve the lives of all New Zealanders.’

Yeah, OK, but what is the intended purpose of the framework? Treasury sets the general context by stating its overall goal as being to work for higher living standards for all New Zealanders. Seen in that context the purpose of the framework must be to monitor progress toward higher living standards of New Zealanders. However, I can’t find the purpose stated in such terms in the document. In fact, as I discuss a little later, the concept of progress doesn’t get much attention in the document.

What factors should Treasury look at in monitoring progress toward higher living standards of New Zealanders? The answer given by the framework is to look at a broad range of material and non-material determinants of living standards, including: conventional measures of income and wealth; freedoms, rights and capabilities; and self-assessed subjective measures of wellbeing (as a cross-check). The other two factors to be looked at are: the distribution of living standards across different groups in society; and the sustainability of living standards over time.

It seems to me that the use of sustainability as a major heading puts a rather negative focus on the whole exercise – assuming that I am correct in suggesting that the intended purpose is to monitor progress toward higher living standards. An analyst who is asked to assess whether current living standards are sustainable will consider some important issues, but is unlikely to give much attention to the question of whether living standards are improving to the same extent of those in comparable countries and if not, why not. I can understand that a lot of people in New Zealand would respond favourably to the word ‘sustainability’, but it should be possible to accommodate their legitimate interests within a discussion of factors affecting progress toward higher living standards.

The Treasury’s emphasis on sustainability rather than progress is relevant to concerns I raised in my last post, which was about the OECD’s ‘better life index’. In that post I expressed concern that if well-being indicators suggest that people in a country like New Zealand tend to enjoy living standards substantially higher than other countries with comparable per capita GDP levels, there may be a tendency for the government concerned to become complacent about establishing conditions more favourable to further improvement of living standards. The Treasury’s living standards framework does not dispel that concern.

I don’t have any great concerns about the other factors that the Treasury is planning to monitor. However, there are a couple of omissions that seem to me to be significant. First, in considering subjective well-being, in my view attention should be given to perceived improvements in life over the last five years, which can be calculated from Gallup World Poll data. The concept is discussed briefly in an earlier post on this blog. During the first decade of this century the perception of improvement in life of both New Zealanders and Australians seems to have been somewhat greater than was usual for people in other countries with comparable economic growth rates.

Second, it would be hard to find a better indicator of relative living standards as perceived by New Zealanders and Australians than net emigration to Australia. Net emigration to Australia seems to me to be a highly reliable indicator because the preferences that people show about where they live must be heavily based on their assessments of living standards. Figure 1.2 in the second report of the 2025 Taskforce (p. 16) shows net emigration to Australia has increased broadly in line with the growing income gap between the two countries since the 1970s.

Before finishing I want to comment on the capital stocks and flows approach adopted in the paper. It seems to me that this approach provides an extremely useful framework for considering relevant issues. My overall view is that, despite some shortcomings, NZ Treasury’s living standards framework is generally OK and most of the background material is informative and well-written.

Postscript:
John Whitehead has given his permission for me to publish the following response:

‘I appreciated your article. For the record, I wasn’t saying that many of the attitudes about what we (I definitely include myself) did I the 1980s were necessary correct, just that they existed. (In fact I made the point in a television interview the same week that I thought the steps we took were broadly the right ones, although we certainly learned from both errors and successes on the way through. ) My point – missed in a lot of commentary – is that Treasury has for a long time taken a broader view of living standards than we are usually credited with: the stocks and flows framework etc was an attempt to describe this more explicitly. The media of course has largely ignored this point, claiming instead that it is some kind of (dramatic) shift.’

I had intended to publish that response without comment, but I want to note for the record that on the basis of my own personal experience I support John’s claim that NZ Treasury has for a long time taken a broad view of living standards. When I worked there as an advisor in the early 1990s one of the issues I was asked to work on was factors affecting social cohesion, including widespread opportunity, security and respect for institutions. That work led, indirectly, to my interest in some of the topics that I pursue on this blog.

Does the OECD's 'better life index' sound like fun?

2011-05-31T11:52:00.002+10:00

I am not sure the OECD’s better life index is meant to be fun. But I have had some fun playing with it. The index is interactive. The fun comes from giving different weight to 11 different criteria (or topics as they are described by the OECD) and then observing how this affects rankings of well-being of OECD countries.

The criteria used in the index are: housing, income, jobs, community (individuals’ perceptions of the quality of their support networks), education, environment (air pollution by tiny particulate matter), governance (voting and transparency), health, life satisfaction, safety (assaults and homicide) and work-life balance (working mothers, total hours worked and leisure).

Under the default setting, with all criteria being given equal weight, the countries that come out on top are Australia, New Zealand, Canada and Sweden. If you suppress all criteria other than income, Luxembourg is a long way ahead of the field, followed by the United States and Switzerland. The income measure used in the study (reflecting household financial income and wealth) has Australia in 14th place and New Zealand in 25th place.

The substantial difference between the outcomes of these weighting systems is interesting. In a previous post I observed that all well-being indicators tend to tell similar stories about well-being levels in different countries. The two observations are actually consistent. My research covered a larger number of countries, including many poor countries as well as the wealthy democracies of the OECD. Well-being indicators tend to tell a similar story when wealthy countries are compared with poor countries, but can tell different stories when wealthy countries are compared to each other.

Equal weighting of a range of indicators and a focus on income alone seems to me to be equally arbitrary approaches to well-being comparisons. Well-being is obviously affected by factors other than income, but it would be difficult to argue that all relevant factors are equally important. Value judgements have to be made to determine appropriate weights. An appropriate weighting system might be derived by conducting surveys to obtain weights reflecting the values of people in different countries. Alternatively, surveys could be used to obtain weights reflecting the values of people with different political views in particular countries, or across the whole of the OECD.

In the absence of such survey evidence, I have looked at the rankings for three somewhat extreme political groups drawn from my own imagination: Scrooges, Socioholics and Warm Fuzzies. As I imagine them, all three groups perceive governance and safety as being important to well-being. The Scrooges add income as the only additional factor. The Socioholics add housing, jobs, education and health in addition to income. The Warm Fuzzies exclude income and all the additional factors added by the Socioholics, but replace those factors with community, environment, life satisfaction and work-life balance.

So, which countries come out on top of the welfare rankings according to the values of these three political groups?

Scrooges: The countries that come out on top are Australia, Luxembourg and the United States. New Zealand is placed about 8th, behind Sweden, Austria, Canada and UK.

Socioholics: Australia and Canada come out on top, followed by New Zealand and the United States.

Warm Fuzzies: Australia, Denmark and Sweden are on top, followed by New Zealand, Canada and Norway.

What do I get out of this? My main observation is that Australia seems to come out fairly well, whatever coloured political lenses you use. The well-being of New Zealanders also looks fairly good, particularly if you adopt either a Socioholic or Warm Fuzzy perspective.

Having had some fun, the more serious question that comes to mind is whether a focus on the OECD’s well-being indicators (and other similar constructions) is likely to distract political attention away from much-needed economic reforms to improve the economic strength of some economies. For example, if well-being indicators suggest that people in some lovely country (New Zealand comes to mind) tend to enjoy living standards substantially higher than other countries with comparable per capita GDP levels, there may be a tendency for the government of that country to become complacent about establishing conditions more favourable to further improvement of living standards.

Postscript

Roger Kerr, executive director of the New Zealand Business Roundtable, has commented on the OECD's well-being index here (with a reference to this blog).

My subsequent posts on the OECD's well-being index are:
Do well-being indicators all tend to tell similar stories about OECD countries?
and
How could the OECD's well-being indicators be improved?

I would also like to draw attention to posts by David Giles on his 'Econometrics Beat' blog: here and here.

Has preventative health care become code for paternalism?

2011-05-29T11:06:00.001+10:00

‘The Taskforce says that prevention is everyone’s business – and we call on the state, territory and local governments, on non-government and peak organisations, health professionals and practitioners, communities, families and on individuals to contribute towards making Australia the healthiest country by 2020.’ (Extract from ‘Taking Preventative Action’, the federal government’s response to the Report of the National Preventative Health Taskforce).

I find the sentiments in the quoted passage objectionable for two reasons. First, preventative health care is not ‘everyone’s business’. Individual adults have primary responsibility for their own preventative health care because no-one is better able to exercise that responsibility than they are. Individuals who are persuaded that preventative health care is a collective responsibility could be expected to look increasingly to the various levels of government, non-government organisations, health professionals and practitioners, communities and families – everyone except themselves - to accept responsibility for what they eat, drink and inhale.

Second, the goal of making Australia the healthiest country by 2020 is being put forward as though it is self-evidently desirable collective good that should be pursued by any and every means available to everyone. The goal is not self-evidently desirable. Individual health is not a collective good. And the end does not justify the means that are being proposed to pursue it.

If you delve behind the spin about making Australia the healthiest country my 2020, the underlying goal seems to be to raise average life expectancy in Australia to the highest level in the world by reducing the incidence of chronic disease. What does this entail? It would be hard to object to the goal of enabling individual Australians to reduce their risk of chronic disease. The problem is that the government’s strategy is more about achieving national goals than providing better opportunities for individuals - more about behaviour modification than about ‘enabling’ individuals to reduce their health risks.

The government claims that analysis of ‘the drivers of preventable chronic disease demonstrates that a small number of modifiable risk factors are responsible for the greatest share of the burden’. The behavioural risk factors led by obesity, tobacco and alcohol apparently account for nearly one-third of Australia’s total burden of disease and injury. The chronic conditions for which some of these factors are implicated include heart disease, stroke, kidney disease, arthritis, osteoporosis, lung cancer, colorectal cancer, depression and oral health problems.

Since these risk factors stem from individual lifestyles it is obviously desirable for individuals to be aware of them. There may be a role for governments in provision of this information. Perhaps governments should also be involved in helping people in various ways to live more healthy lifestyles. It is questionable how far governments should go down this path, but it is difficult to object to modest efforts by governments to improve opportunities for people to live healthier lifestyles.

However, rather than helping people to help themselves the federal government has chosen the path of Skinnerian behaviour modification. It has chosen to drive changes in behaviour through what it describes as the ‘world’s strongest tobacco crackdown’. (This is one instance when I hope the government doesn’t actually mean what it says – some people in Bhutan have apparently been jailed recently for possession of more than small amounts of tobacco products.) The government’s strategy also involves ‘changing the culture of binge drinking’ and ‘tackling obesity’, but in this post I will focus on smoking.

Some of the tactics being used in the tobacco crackdown involve information and persuasion but there is also an element of punishment involved. The tobacco excise has been increased to over $10 for a packet of 30 cigarettes and legislation is proposed to require cigarettes to be sold in plain packaging. It seems to me that this amounts to persecution of smokers and their families. It will reduce the amount of household budgets available to be spent on other products and encourage some to avoid excise by obtaining tobacco from illegal sources.

As a former smoker, I am probably more strongly against smoking than most people who have never smoked. I encourage other people to quit smoking and discourage young people from taking up the habit. But having given up smoking several times, I know how hard this can be. Governments have no basis on which to judge that people are not in their right mind if they consider that the pleasures they might obtain from additional years of life are not worth the pain of giving up smoking.

In my view this question of whether smokers are capable of judging what is in their own best interests is at the crux of the matter. The politicians and bureaucrats who seek to modify the behaviour of smokers may see themselves as enhancing the capability of these people to have lives that they ‘have reason to value’, in accordance with well-being criteria proposed by Amartya Sen. If so, their attitudes highlight a major problem with Sen’s approach. Governments have no business deciding what kinds of lives individuals have reason to value.

Is Australia's mateship ethic being lost in the big cities?

2011-05-26T15:19:00.004+10:00

This question was raised by Shona in a guest post about volunteering in the eastern suburbs of Sydney. I don’t feel qualified to provide an authoritative answer, but that feeling does not always prevent me from providing comments on other matters outside my area of expertise. Perhaps someone will tell me if my comments are wide of the mark.

Mateship was identified by Russel Ward as an important component of the ‘Australian identity’ – the ideas about themselves that Australians tend to identify with - in his book, ‘The Australian Legend’, first published in 1958. Ward suggested that this mateship ethic stemmed mainly from the loneliness of life in the Australian inland. In his later book, ‘Australia’, Ward explained mateship in these terms:

‘In reaction to their loneliness, to the sundering distances and to the harshness of nature, men tended to help and trust each other. This is not to claim of course that Australians are in fact notably more altruistic than other people, but merely that they tend to value collective aid and mutual aid more highly than do, for example, Americans; just as they value less highly rugged individualism’ (1967: 9).

I am not entirely comfortable with those comparisons with America. I agree that Australians probably do tend to place less value on rugged individualism than do Americans. For example, surveys show that the percentage of Australians who consider it to be important to encourage children to develop qualities of both independence and determination is lower than in the US. However, Ward himself claimed that ‘fierce independence’ was a component of Australian identity. Ward also observed in ‘Australia’ that in the third quarter of the 19th century Australian political sentiment was ‘strongly individualistic and not markedly either collectivist or nationalist’ (p 79).

Has the propensity of Australians to form voluntary associations for mutual benefit been any greater than that of Americans? I doubt it. Remember the observations of Alexis de Tocqueville in ‘Democracy in America’ (published in 1835) :

‘Americans of all ages, all conditions, and all dispositions constantly form associations. They have not only commercial and manufacturing companies, in which all take part, but associations of a thousand other kinds, religious, moral, serious, futile, general or restricted, enormous or diminutive. The Americans make associations to give entertainments, to found seminaries, to build inns, to construct churches, to diffuse books, to send missionaries to the antipodes; in this manner they found hospitals, prisons, and schools’ (II, 2, V).

Ward seems to be on firmer ground in suggesting that the early dominance of large-scale grazing properties in the Australia farm sector (in contrast to the dominance of smaller-holder agriculture in the US frontier until about 1870) led to a situation where much of the work was done by people – shearers, drovers etc. – who did not perceive their interests to be closely aligned with those of property owners (p. 60). This can be linked to the subsequent development of trade unions, major strikes, the rise of the Australian Labor Party and the advance of state collectivism – which tended to displace voluntary associations for mutual benefit.

It is worth noting at this point that mateship has a downside as well as an upside. The downside of mateship is that it can mean ‘looking after your mates’ at the expense of other people. For a long time this aspect of mateship supported racial discrimination, compulsory unionism and abuse of trade union power, high trade barriers protecting some industries at the expense of others, discrimination against women and various forms of corruption. Some aspects of this negative form of mateship are still evident in the activities of some interest groups, as well as some politicians, unionists, businessmen and public servants in the big cities as well as the rest of the country.

At last I think I am now ready to focus on the positive side of the mateship ethic and the specific question of whether it has been lost in the big cities. Volunteering is more common among those living in parts of the states outside the capital cities (38% of those surveyed by the ABS in 2006 versus 32% for the capital cities). When I look more closely, however, the difference is most marked in Victoria and New South Wales and non-existent in Queensland - the state with the highest average rate of volunteering (38%). In both Sydney and Melbourne, 30%, of those surveyed were engaged in volunteering, but in the rest of the two states the proportion was 41% in Victoria and 37% in New South Wales.

There are strong reasons based on self-interest to expect rates of volunteering to be higher in small rural communities than in major capital cities. In a small rural communities people are exposed to greater risk of natural disasters such as bush fires and floods and depend to a larger extent on voluntary help from each other to avoid harm to their families when disaster threatens. In most small communities people who had a reputation for free-riding (sponging on their mates) would probably not be denied help in the event of disaster, but few people would be prepared to take that chance.

Would people in Sydney and Melbourne show a strong spirit of mateship if these cities were threatened by a major disaster? I’m not sure. When a substantial part of Queensland was flooded earlier this year, it was obvious that many people in the rural areas showed great acts of kindness to each other. As the flood waters approached Brisbane I wondered whether this community spirit would be replaced by an attitude of just helping family and close friends. Such concerns were unwarranted. After the flooding many people in Brisbane volunteered spontaneously to help strangers to clean up their properties. This suggests to me that the best aspects of the mateship ethic is still alive and well in Brisbane. I can’t be as confident that people would help each other to the same extent in the event of a disaster in Sydney or Melbourne – but I hope I am being too pessimistic.

Postscript:
I rarely write a postscript so soon after writing an article. However, after checking the World Values Survey data on qualities that parents consider important in children I found that the situation has turned around between 2000 and 2006/7 surveys. In the later survey 64% of Australians identified independence as a desirable child quality versus 54% in the US. The percentages identifying determination/perseverence as desirable were 50% among Australians and 40% among Americans. That suggests to me that Australians might now place a higher value on rugged individualism than US citizens.

A comparison of active membership of voluntary organizations in the US and Australia does not suggest that volunteering is more important in one than the other. Americans are about twice as likely as Australians to be active members of a church, but Australians are about twice as likely as Americans to be active members of a sporting organization. (That lines up with the view that sport is the national religion of Australia). Active membership of 'Arts, music and educational' organizations and charitable organizations is much the same in both countries.

Why are people reluctant to volunteer at playgroups in the eastern suburbs of Sydney?

2011-05-24T10:42:00.000+10:00

This post - the 300th on this blog - is a guest post by Shona. This is the fourth post in a series on volunteering. Earlier contributions can be found here, here and here. Shona has provided the following additional comments:

My thoughts continue down the path of not why do people volunteer, but rather, why don’t people volunteer.

I loved your reference to Australian mateship ethic, described by Russel Ward, in your comments on my first contribution. Having recently studied arduously for my citizenship test, I too am familiar with the ideas about the harsh environment bringing people together. Perhaps our playgroup is suffering from the opposite of this. We live in the affluent eastern suburbs of Sydney – a beautiful but densely populated area, hardly a harsh environment to live. As you know more about Ward’s work perhaps you could discuss this aspect further. Has the mateship ethic been lost in the large conurbations?

The dynamics of playgroups are unique in many ways so I’m not sure the theories relevant elsewhere apply. People with young children moving into the area look up the local playgroup and head there straight away – even more so than people who have lived here for years before starting families. People moving into the area see it as the best way to make friends and connect.

Playgroups are a unique form of volunteer community groups – any action of one person has an immediate effect, one that can be benefitted from by that person immediately, but also shared by the free riders. Still, this is perhaps more tangible than other volunteering efforts such as environmental or social work, where someone’s actions don’t necessarily result in direct benefits to the individual. That to my mind is altruistic action and I commend it – if only I had more time! That is when the dynamics of volunteering that you write about are more relevant.

I’ve noticed two breeds of volunteers – obviously I am going to place myself in the more favourable of the two groups. One which selflessly carries out work with little fuss, without taking the task or themselves too seriously (I could go on but I won’t). And the other, where they take the role far too seriously and make it almost political or personal. I had a conversation with a friend at playgroup a few years ago. She had been heavily involved in the local surf club and as a result, was put off from volunteering for any other community organization. When I asked her why, she said that it became all too political. (I have some other great examples, but I don’t want to bore you or embarrass anyone concerned). It only takes one bad experience or story of another’s experience to put someone off.

Back to my original point – I still cannot understand why people don’t volunteer, whether this is for the session they attend, in whatever form, or to a more long-term role. I agree, the timescales of a bigger role may put people off. Maybe some people do such a great job, they think it is a hard job or a hard act to follow (I say that in regard to two day leaders that have just finished an eight month stint and not myself!). I’d be interested to discuss any other barriers. One friend also suggested that people won’t commit (even for a month) if they are thinking of moving out of the area. Given this is an expensive area to live, this could be the reasoning for many attendees. However, at least two of our volunteers last year were both here on a temporary basis (not knowing how long for) and both have moved back overseas.

How well can volunteering be explained by a naive economic model?

2011-05-23T14:41:00.001+10:00

I should begin by defining what I mean by a naïve economic model. The naïve model I have in mind is a conventional neoclassical model, with a few bells and whistles added. The bells and whistles are necessary because so called ‘rational economic man’ who is the basis of conventional neoclassical economics doesn’t practice altruism. There are probably still some economists who claim that everything everyone does is for a selfish reason, but I am not one of them. While I recognize that a lot of people do a lot of noble things for their own satisfaction, I see no reason to doubt people when they claim to be motivated by altruism.

So, in terms of the naïve model I have in mind, the objective functions that individuals follow in making choices take some account of the well-being of other people (i.e. I am assuming interdependent utilities). That means that individuals might volunteer to do something even if they perceive that this involves some cost to their own well-being. The extent that they do this would depend on the net cost in terms of loss of individual well-being and the extent that their actions affect the collective benefit they seek to obtain by volunteering. The main potential source of net loss of individual well-being would be the value to the individual of opportunities foregone from use of time in volunteering, which would be offset to the extent that the individual obtains satisfaction from volunteering, or from recognition of her efforts. The effect of individual actions on the collective benefit being sought would depend on the size of the group seeking the collective benefit. In a large groups the actions of each individual tend make a small contribution to the objective being sought, so there would be a greater incentive to free-ride on the efforts of others.

The naïve model suggests to me that people would tend to volunteer to a greater extent when they had fewer opportunities for paid employment. It therefore suggests that volunteering would tend to decline if workforce participation increased. It also suggests that volunteering would be a substitute for other forms of charitable giving – people with time on their hands would tend to volunteer their time and people in well-paying jobs that give them little leisure would be more inclined to put their hands in their pockets to make financial donations. It also suggests that people would tend to volunteer to a greater extent in small, well-defined communities (e.g. country towns) where their efforts are more likely to be recognized that in major urban centres where individuals are more likely to get lost in the crowd.

How well does this naïve model explain volunteering in Australia? Not particularly well. The first point I noticed when I looked at the relevant section of the Productivity Commission’s recent report on ‘Contribution of the Not-for-profit sector’, is that there has been a consistent upward trend in rates of volunteering across all age groups over the last decade, although this has been offset to some extent by a decline in the average number of hours volunteered. This has occurred at a time when labour force participation has continued to increase.

As might be expected, ABS data show that volunteering rates are higher among women than among men. The difference is confined mainly to the 35-44 year age group – when most female volunteering could be expected to be associated with school canteens etc. People with young children are the group most likely to volunteer regularly, but they spend fewer hours per week volunteering than do people with older children and older people without children.

Again, as expected, the rate of volunteering is higher outside capital cities than within capital cities. But the difference is not huge. The rate for regular participation in voluntary work was 19% in capital cities and 23% outside capital cities in 2006.

The naïve model would not predict that employed people would be more likely to volunteer than unemployed people. For women, although those in full-time employment had the lowest rates of regular volunteering, those who were employed part-time had higher rates of regular volunteering than those classified as unemployed. For men, rates of volunteering for those in full-time and part-time employment were the same and higher than for those who were unemployed.

The most surprising departure from the naïve model relates to donations of money as a substitute for donation of time. I know such substitution does occur, but it doesn’t show up at an aggregate level in the ABS survey data. Volunteers are much more likely to have donated money or contributed financial assistance to someone outside the family in the last 12 months than non-volunteers.

In order to explain non-volunteering we seem to need a model of behaviour that recognizes that volunteers and non-volunteers have different personal characteristics. It seems that non-volunteers tend to have relatively weak links to the community in general. The evidence suggests that they are much less likely to have attended a community event recently. They are also less likely to agree with the proposition that most people can be trusted.

Other posts on volunteering:
This is the third in a series of post on volunteering. In the first post, Shona discussed her experience in a volunteer role in a community playgroup. In the second post I discussed some research on the determinants of volunteering.

What does research show about determinants of volunteering?

2011-05-20T16:43:00.001+10:00

In the preceding post, What determines who volunteers?, Shona discussed her experience in getting parents to volunteer to help in running a play group. In this post I discuss some Australian research which suggests that volunteers fall into several distinct groups.

A paper by Sara Dolnicar and Melanie Randle, ‘What Moves Which Volunteers to Donate Their Time?’ uses data collected from a national survey of volunteer work conducted by the Australian in 2000 to segment the ‘market’ for volunteer work. The authors use motivations as a basis for statistical techniques that enable them to identify distinct subgroups of volunteers.

Six sub-groups were identified as follows:

• Classic volunteers are involved to do something worthwhile, gain personal satisfaction, and help others. They are older, less frequently active in the workforce, and very active in their volunteering efforts.

• Dedicated volunteers contribute the most hours per year to an average of six volunteering organizations.

• Personally involved volunteers appear to participate in volunteering temporarily, as long as (most probably) their child is part of an organization that relies on parental support.

• Volunteers for personal satisfaction and altruists (two sub-groups) are motivated by gaining their own satisfaction and represent the least distinct segments, with altruists doing the most work in the area of befriending and listening to people.

• Niche volunteers are young, new to volunteering, highly educated and state a variety of rather atypical reasons for volunteering, like feeling obliged to volunteer and having slid into volunteering rather passively, gaining work experience or as a result of religious beliefs.

These research findings are interesting but they don’t shed a great deal of light on the issues that Shona raised. The potential volunteers that Shona was most interested in would be in the ‘personally involved’ sub-group. The question is why some people become more involved than others.

Perhaps the people who are most involved are motivated, consciously or unconsciously, by the feelings they get from volunteering. Recent research findings suggest that it feels good to be good (but I am not sure that we needed researchers to tell us that).

It seems to me that human nature has evolved in such a way that people have a natural desire to contribute voluntarily to activities that are best undertaken collectively. If that makes sense then perhaps it would be more productive to try to explain why a substantial proportion of people are reluctant to volunteer. One idea that has crossed my own mind from time to time as a member of voluntary organizations is that I don’t want to be left ‘holding the baby’. (That expression might not be entirely appropriate in a discussion of volunteering in play groups, but for some reason I can’t resist using it.) It may be worth exploring whether people would be less reluctant to take on onerous voluntary roles if they had some assurance that they could readily pass them on to other members after a defined period.

What determines who volunteers?

2011-05-19T11:01:00.000+10:00

This post stems from a discussion I had with Shona a couple of days ago. I had to admit that although I strongly support volunteering I don’t know much about it, or about the characteristics of people who volunteer versus those who free ride on the efforts of others.

Shona agreed to write this guest post about her experience in the hope that it might lead to further discussion of this important issue. Shona writes:

I’ve been involved in a volunteer role at my local playgroup for two and a half years now and over that time I have taken an interest in the types of people that volunteer compared to those that don’t.

The whole point of a community playgroup is that everyone pitches in and helps, thus keeping operating costs to a minimum whilst providing maximum benefit to the kids. There are parents and carers that take on more formal roles, key holders, treasurer, secretary and co-ordinator. But this in theory should simply provide other parents and carers a framework in which to enjoy playgroup. Simple game theory in practice – everyone contributes a small thing for everyone’s greater gain.

Every time someone vacates one of these formal roles, it is my job as co-ordinator, to fill them. I watch people, I see who comes regularly, I look at who pitches in. I also notice those that turn up late, leave early, and make sure they are no-where to be seen when help is required (we’re not talking anything major here, just cutting up fruit for morning tea, putting toys away, etc).

My approach is to narrow down suitable candidates; it is futile asking the group as a whole – no-one ever comes forward, in fact, if we were in a school yard, you would actually see a line of individuals take a huge theatrical step backwards. I approach people individually, quietly, and ask them if they would take on a small role. I think I have about a 30% success rate. The interesting thing is the dynamics of the group that says yes and the dynamics of the group that says no.

The people who I think will say yes can be described as follows. They have a child of an age where they are not clingy or over-dependent on their carer. They attend regularly, either weekly or more than once a week and know many of the other attendees. They have also been attending for more than 6 months and therefore know how the playgroup works. They attend both for their kids benefit, and their own – they have made friends and appreciate the adult interaction. They generally have good communication skills and have contributed more than their share during their visits.

Amazingly, after they say no (on the grounds that they don’t attend regularly), they stop attending as regularly as if to prove they can’t commit to something.

The people who do say yes surprise me every time. They often have two kids, the youngest usually new-born or very young. They are often new members, but do attend regularly, usually more than once a week. They don’t necessarily know how playgroup works but want to learn. I feel guilty accepting their gracious help – but I guess I am one of those people too.

In writing this, I realise it is quite clear cut. Those that have attended for a long period are used to free riding – why contribute? Someone else will step up. Those that are new aren’t aware of the free-riders, they want to contribute and make connections within the community. Finally, I suspect that the longer a person stays in any of the formal roles, the less likely other people are likely to step into those roles. Perhaps we should only have day-leaders (the face of those official roles) on a very short rotation.

My two years are up, it is time to move on, but any tips I can provide my successor (should I be able to find one), would be more than welcome.

What do NSW solar panel owners have in common with mining investors?

2011-05-16T15:23:00.003+10:00

‘So you think I am a cranky old fool, do you?’ I knew it was Jim before I turned around to see who was talking. I referred to Jim as a cranky old fool on this blog a couple of weeks ago. At this point I should make sure readers are aware that this Jim is unlike any other Jim I have ever met. He is a royalist. He thinks incentives to put solar panels on roofs of houses are an abomination because the high costs of this method of generating electricity are borne by taxpayers and other users of electricity. And he asks difficult questions. A lot of the people I know avoid Jim when they see him coming. Perhaps that is why he sneaks up on people and just starts talking.

Anyhow, Jim isn’t such a bad old coot. He wasn’t even particularly upset with me for calling him a cranky old fool. After he had my attention, he said: ‘You know that photo of Sydney you have on your blog – the one with the cloud over most of it?’ I replied: ‘Yes, I’ve been thinking about replacing it with a photo I took on a sunny day, now that the dreadful Labor government has been swept out of office’. Jim said: ‘Don’t do that. Find a photo with a darker cloud!’

I was surprised to hear this from Jim. I had never thought of him as a Labor supporter. So, I asked him to explain. As I did so I couldn’t help looking at my watch. I knew I was about to be sucked in to a discussion that might take some time.

Jim asked: ‘What do you think of the decision of the New South Wales government to reduce the feed-in tariff that they will pay people who have installed solar panels?’ I said I didn’t have an opinion. I added that I thought the decision would make him happy because I remembered that he thought solar panels were an abomination.

Jim scowled and just asked another question: ‘What do you think of the proposed mining rent tax?’ I explained that I thought the latest proposal wasn’t quite as bad as the tax first proposed last year. I mentioned something I wrote last year explaining that the main problem was sovereign risk. I argued that when governments enter into agreements with mining companies they should honour those agreements whatever happens, rather than insisting on a higher share of profits because the price of minerals has gone up. I concluded my little speech by suggesting that if this tax is introduced investors will become more wary about signing any kind of agreement with any government in Australia.

Jim said: ‘That is precisely my point about the solar panels. The feed-in tariff specified in those agreements must be one of the worst deals that any government has ever made. But for a new government to just tear up the agreement is one of the lowest acts of bastardry that has ever been perpetrated on investors anywhere in the world’.

I agreed that the decision was dodgy but I said I didn’t think the rating agencies would downgrade the NSW government because of it. It might actually improve the finances of NSW. Jim said: ‘Look, you aren’t going to try to tell me that any investors should take any notice of the rating agencies after the global financial crisis. The real issue is whether anyone can be confident that the people running the NSW government at present are any more trustworthy than Jack Lang. Do you really think these people are more trustworthy than Jack Lang?’

Jim asks difficult questions. Jack Lang was the premier of NSW during the depression in the 1930s. One of the things he is remembered for is his efforts to stop payment of interest to overseas creditors until the financial situation improved in NSW. If he had succeeded this would have done enormous damage to Australia’s reputation as a destination for foreign investment. On the basis of recent performance I think the politicians running NSW at present and those currently running the Commonwealth government might default on interest payments if they had to deal with the kind of economic crisis confronting Australian politicians in the 1930s.

I told Jim that people would like him a lot more if he didn’t ask difficult questions.

Postsript: 7 June 2011

When I saw Jim this morning I asked him what he thought of the decision of the NSW government to honour their contractual obligation to people who had installed solar panels. Jim said he would have been more impressed if the Premier had made the decisions to back down because his conscience was troubling him rather than because he didn't have the numbers in the upper house to pass the legislation.

I suggested that in any case the cloud had lifted over Sydney and that I would find a better photo to put on my blog. Jim said: 'Don't do that! There is a new cloud over Sydney. They have decided to award the Sydney Peace Price to Noam Chomsky'.

I don't know who 'they' are, but if 'they' are interested in promoting peace 'they' should try to avoid provoking people like Jim.

Should we view human flourishing in terms of psychology, capablility or opportunity?

2011-05-16T07:48:00.000+10:00

This question may seem like just another intellectual puzzle, but it is actually has important implications for the way we view public policy issues. My bottom line is that the way we answer this question if we are thinking about the flourishing of a close relative or friend might be quite inappropriate if we are thinking about the development of public policy.

I think the best place to begin my explanation is with a brief discussion of the three different perspectives. I don’t wish to imply that these are the only ways of looking at human flourishing – they just seem highly influential.

Martin Seligman is a leading exponent of the psychological perspective. In his recent book, ‘Flourish’, Seligman suggests that well-being theory ‘is essentially a theory of uncoerced choice, and its five elements comprise what free people will choose for their own sake’. The five elements he identifies are: positive emotion (pleasant experiences, happiness and life satisfaction); engagement (the flow state); relationships (positive relations with other people); meaning (belonging to and serving something bigger than yourself); and accomplishment (success, achievement, mastery). In an earlier post I suggested that Seligman has missed another important element that people seek for its own sake, namely control over their own lives. A more fundamental criticism of this approach is that it ignores all elements of well-being other than psychological well-being. For example, it seems reasonable to suppose that free people would usually choose to be healthy rather than ill even if their health made no contribution to their psychological well-being.

The capability approach has been developed by Amartya Sen, an economist. Sen argues that a person’s capability reflects the alternative combination of functionings the person can attain and from which he or she can choose one collection. Functionings include objective criteria as being adequately nourished and being in good health as well as a range of other factors such as achieving self-respect and being socially integrated. In his contribution to ‘Capabilities and Happiness’ (2008, edited by Luigino Bruni et al) Sen notes that individuals may differ a good deal from each other in the weights they attach to different functionings. He seems unwilling, however, to leave the weighting exercise to the individuals concerned. He suggests that ‘the weighting exercise has to be done in terms of explicit valuations, drawing on the prevailing values in a given society’. He also refers to our capability ‘to achieve functionings that we have reason to value’.

The concept of opportunity proposed by Robert Sugden, also an economist, rests on ‘an understanding of persons as responsible rather than rational agents’. According to this view individuals may sometimes act foolishly but nevertheless accept responsibility for the consequences of their actions. The term ‘opportunity as mutual advantage’ expresses the idea that ‘one person’s opportunities cannot be specified independently of other people’s desires’. The freedom of some other person to seek out and take advantage of opportunities for mutual benefit encompasses his or her freedom to seek out and take advantage of opportunities to benefit you and me. Sugden implies that if everyone has opportunity in this sense, then you and I should see ourselves to be part of an economic system that is full of people who can expect to be rewarded for finding ways to benefit us (‘Opportunity as mutual advantage’, Economics and Philosophy (26)).

If we are considering the well-being of relatives and friends we might consider that opportunity, capability and psychology are all relevant to our assessment. For example, we might be able to think of people who have high levels of psychological well-being even though they have relatively low capability in some respects because we consider that they have not made good use of the opportunities available to them. We might be able to think of others who are unhappy even though they have high levels of capability and have had superior opportunities in life.

However, from a public policy perspective, what business does the government have in trying to improve the capability or psychological well-being of a person if this interferes with his or her status as a responsible agent? We might think that the capability and psychological well-being of such people would be improved if they drank less alcohol or gambled less, for example, but as far as I can see we have no right to prevent them from spending their income as they choose.

The situation becomes rather different if the government is offering some kind of benefit that is intended to improve the capability or well-being of some group. In that situation, it seems to me that the donors (taxpayers) have every right to attach conditions to the proposed benefit and the intended beneficiaries have every right to refuse to accept it if they don’t like the conditions attached.

Some might suggest that the alternatives to accepting a benefit with strong conditions attached could sometimes be so unpalatable that the conditions amount to coercion. I don’t accept that economic incentives ever force people to do anything. Nevertheless, if a person chooses to die rather than accept the conditions attached to a benefit, the question arises of whether this should be viewed as the choice of a responsible agent. Paternalistic intervention may be warranted to protect people who are not of sound mind as well as children.

However, there are also difficult issues involved in considering government proposals to improve the psychological health of children. The recent Australian Government Budget proposes a health and well-being check for 3 year old children on the grounds that ‘around 15.4 per cent of all children and adolescents (those aged up to seventeen years) have a mental disorder’. Internationally renowned experts are apparently telling the government that ‘there is a growing body of evidence showing that you can identify kids with (or at risk of) conduct disorders or poor development very early – from three years old’. The government claims: ‘Intervening early means building strong and resilient children, and avoiding behavioural or mental health issues that can persist for the rest of a person’s life’.

Should I be concerned about this proposal? Perhaps it just offers parents better opportunities to ensure that children get services necessary for their psychological wellbeing. On the other hand, it could be the thin end of a large wedge leading to greater use of pharmaceutical products to control behaviour of children and greater government intervention in family life. I wish I could be more confident that the proposed intervention will actually build strong and resilient children.

Postscript:
On reflection, the paragraph beginning 'Some might suggest that the alternatives to accepting a benefit ... ' doesn't adequately capture the ideas I would like to express. In my view, although welfare systems should be directed to a large extent toward helping people to help themselves, communities should have an over-riding commitment to meeting basic needs of people who have no other means of support.