Using happiness scales to inform policy: Strong words of caution
Timothy N. Bond, Kevin Lang04 July 2014
Self-reported measures of happiness are growing in popularity as alternatives to GDP. This column presents a novel statistical critique of the validity of comparing such measures across groups. Since monotonic transformations of individuals’ happiness levels can reverse average happiness rankings between countries, no meaningful comparison can be made without assumptions on the distribution of happiness.
Economists have long known that GDP is an imperfect measure of well-being. In addition to missing nonmarket transactions, it ignores environmental degradation, the quality of social interactions, and many other outcomes of economic interest. But at least since Easterlin (1974) some economists have gone further, and challenged the view that per capita GDP and well-being are positively related.
As a measure of economic activity, GDP is imperfect, but no more so than any single indicator of the whole economy. Yet public policy debate about the economy is often focused on GDP growth to the exclusion of other important considerations. This Vox Talk argues the case for a ‘dashboard’ of alternative indicators that, in addition to measuring economic activity, could also capture social welfare, sustainability and the benefits of innovation.
Criticism of Gross Domestic Product (GDP) as an indicator of the health of the economy has grown in recent years, in part because of a new focus on measures of subjective well-being or ‘happiness’. This column argues that the debate needs to distinguish between the different purposes of measurement: economic activity, social welfare, and sustainability are distinct concepts and cannot be captured by a single indicator. There are good arguments for paying less attention to GDP and more to indicators of welfare and sustainability, but it would be a mistake to adjust or replace GDP.
The debate about how best to measure economic activity dates back to well before the ‘invention’ of GDP by Richard Stone and others during the Second World War (Stone 1947). The earliest attempt was William Petty’s 1665 estimate of income and expenditure in England and Wales, followed by a variety of other approaches in the 18th and 19th centuries. By the 1930s, partly in response to the demand from policymakers for a better handle on what was happening in the economy, the current approach to national income was taking shape (Coyle 2014).