The Herald/Age Lateral Economics Index of Wellbeing

Herewith my op ed from the Herald and Age today.

What is the good life and are we living it?

Assessing and measuring wellbeing has vexed us since ancient times. But a funny thing happened on the modern world’s way to the answer. The metric that economists used to dampen down the business cycle – Gross Domestic Product (GDP) – received such prominence that it ‘went viral’ as we say these days. It became the default measure of national progress.

But there’s lots wrong with GDP as a measure of economic wellbeing let alone more general wellbeing. Measuring gross activity, it ignores the growth and depreciation of assets – such as buildings, equipment, natural resources like farmland and mineral deposits, biodiversity and clean air. And that’s not to mention the greatest asset of all – our knowhow.

Moreover GDP is measured by money changing hands. So converting bread, mince and salad into a hamburger increases GDP in McDonalds but not at home. More starkly, an evening of passion and pleasure only adds to wellbeing as measured by GDP if it happens in a bordello! More broadly still, GDP takes no account of the distribution of income or of our physical or social wellbeing.

But considering how different all these phenomena are, how can we possibly measure their sum impact on national wellbeing in a single number? Because it would ‘dumb down’ complex issues, economics Nobel Laureate Amatya Sen initially refused to participate in the construction of a single index of human development to help guide development in poorer countries. But he relented because he appreciated that, however unsatisfactory a single wellbeing index might be, it was better than the alternative. Given the thirst for simple answers, the alternative is even more dumbing down as would occur if GDP yet again filled the vacuum.

The Herald/Age Lateral Economics (HALE) Index of Wellbeing takes in social, environmental, educational and health outcomes. But aggregating them into a single measure requires the wisdom of Solomon. How would you weight the environment against education for instance?

Many existing indices of wellbeing give equal weighting to the different dimensions that they consider. Thus for instance the Kingdom of Bhutan’s famous index of Gross National Happiness takes nine ‘dimensions’ of wellbeing and weights them equally. The architects of this measure claim that equal weighting avoids bias, but this is smoke and mirrors as an unexamined choice is essentially arbitrary.

Thus in Bhutan’s measure, Dimension Two of wellbeing is ‘time use’. Should it really receive equal weight to Dimensions Six and Eight – education and living standards? Wouldn’t extreme poverty or illiteracy be worse than serious time imbalances in one’s time-use? And how would you measure such an imbalance given wide ranging preferences between different people and trade-offs between the labour-leisure choice and other values like health and education?

The HALE Index makes these choices by beginning with GDP – which in fact correlates surprisingly well, though not perfectly, with many of the most important aspects of wellbeing such as educational, environmental, social and political cohesion and health. We then adjust GDP for factors – both economic and non-economic.

Beginning with Net National Income (NNI), which is essentially GDP adjusted for the depreciation of physical capital, we adjust our index to reflect the depletion of non-renewable resources by mining and the discovery of new mineral resources. We allow for any degradation of agricultural land. We also adjust the index by estimating a cost to represent the risk we are taking today of substantial climate change in the future.

However, the biggest news in our index is that we bring Australians’ knowhow into the picture. For this stock of ‘human capital’ is many times more valuable than all other (tangible) assets combined. In our index, human capital is measured by the risk of early childhood deprivation, school results when compared with other countries and post-secondary education.

But what about more value-laden questions? How much weight should health and employment outcomes carry and how should we treat changes in the distribution of income?

Agreeing with former UK Chancellor Denis Healey that policy’s task is “eroding by inches the conditions which produce avoidable suffering”, we went in search of something which one might call ‘Gross National Suffering”.

Here we used evidence from surveys that ask people to rate their own happiness or life satisfaction. Indices built directly from this data rarely move much. Most people rate themselves at around 7.5 out of 10 with the private ups and downs of different lives cancelling each other out when aggregated.

However, the survey data enable us to detect specific associations between lower self-reported wellbeing and specific phenomena. Of course many problems produce suffering in individual lives, but not amongst sufficiently many Australians to move a national index. But some things make a difference even in the scheme of the whole population’s wellbeing.

Underemployment (including unemployment), overwork, mental illness and obesity are all relatively widespread and strongly influence reported wellbeing. And the direct wellbeing surveys also give us a way of escaping from the arbitrariness of our own subjective values when considering how changes in the distribution of income should be considered when measuring total wellbeing.

The data suggest that on average for those Australians on very low incomes, a $6,000 increase in income is associated with increased self-reported wellbeing by one percentage point. By contrast the same increment in happiness requires over $100,000 for a household already earning over $100,000 a year.

These relativities enable us to adjust aggregate income growth in the economy for its efficacy in improving people’s reported wellbeing. When national income flows to lower-income households it funds more improvement in wellbeing than when the same amount goes to higher income families.

Does the sum of these manoeuvres solve the age old dilemma of measuring our wellbeing? Far from it. Having sought the wisdom of Solomon, what wisdom we’ve gained has been that of Socrates. We know only too well how little we know.

All that acknowledged, are we proud of what we’ve come up with – and with the praise our index has already received – as a reasonable compromise between heart and mind, rigour and common sense? Definitely.