In his latest Financial Times column, “Undercover Economist” Tim Harford reminds us of two important points about GDP per capita and economic growth: they are not a measure of welfare (think about Middle East oil plutocracies), but they are highly correlated with individual welfare. Individual welfare is of course the only thing we should, or even can, be concerned with. While voicing some proper caveats, Harford expresses the two important points as follows (“Liz Truss’s Growth Delusion,” September 30, 2022):
Gross domestic product is not, and never has been, an attempt to measure the wellbeing of a society. …
Nevertheless, it is striking how countries with a high GDP also have flourishing citizens. Pick your issue, from life expectancy to child mortality, from opportunities for women to the protection of basic human rights, cleaner streets, lower crime, even better-quality art, from TV to opera. Somehow, people who live in richer countries are likely to be enjoying more of the good stuff.
Having much command over goods and services is not a sufficient condition for individual happiness, but it usually helps.
Note that Harford does not criticize Liz Truss, the new British prime minister, for focusing on economic growth, but instead for neglecting some of its essential and constituent conditions:
Her rant about the “disgrace” of cheese imports suggests someone who hasn’t appreciated the importance of free trade in goods to a prosperous modern economy. …
Her vast and open-ended energy price cap is a kick in the teeth for market forces. By some measures the largest fiscal event in living memory, it feels closer to Mao than Thatcher. And it is unnecessary: a truly pro-growth government would have achieved the same social goal by letting prices rise, but giving an offsetting cash grant to each household.
On the benefits of trade—whether domestic or international does not matter—remember James Buchanan, who was expressing a very Smithian idea (James M. Buchanan and Richard A. Musgrave, Public Finance and Public Choice: Two Contrasting Visions of the State [MIT Press, 1999], p. 245):
If I observe someone with apples and somebody else with oranges, I don’t want to try to say a particular allocation of oranges and apples in a final position is better than in the other allocation. If I observe them trading without defrauding each other, whatever emerges, emerges, and that is the way I define what is efficient.
READER COMMENTS
Thomas Lee Hutcheson
Oct 3 2022 at 11:25am
“Note that Harford does not criticize Liz Truss, the new British prime minister, for focusing on economic growth,”
Because nothing about the package promotes growth.:) There was no reduction in the deficit, no reduction in trade restrictions [de-Brexit anyone?], no shift from corporate to personal income (or consumption) taxation.
SAYING the word “growth” is not enough; you have to do the policies.
Jon Murphy
Oct 3 2022 at 12:02pm
Thank you for the quote and citation at the very end from Buchanan. It helps me a lot for a paper I am writing
Pierre Lemieux
Oct 3 2022 at 12:54pm
Jon: Buchanan is always useful, and much more so than I once thought.
Jon Murphy
Oct 3 2022 at 1:03pm
I have never gone wrong by reading him
Thomas Lee Hutcheson
Oct 4 2022 at 5:38pm
This is true only if there are complete markets. If, for example, there is no market in the release of CO2 into the atmosphere, a transaction that results in an emission will not be completely efficient. I am also sure (although he did not say it in that sentence) that Buchanan would agree that a transaction based on the assumption of an eventual government bail out of mistakes in pricing (property insurance rates in Florida?) also are not efficient.
Jon Murphy
Oct 5 2022 at 8:03am
Only if one uses the neoclassical definition. But note that is not what Buchanan is doing. He is providing how he evaluates the efficiency of a market.
Mactoul
Oct 3 2022 at 8:57pm
Laws of a country aim or ought to aim at something that is not within the scope of market freedom.
That is, long-term flourishing of the country, over many generations.
Disdain of these laws in name of freedom may not be apparent in short-term so you see short term flourishing.
Jon Murphy
Oct 3 2022 at 10:03pm
Two questions:
1) Why do you assume market freedom is not conducive to the long-term flourishing of a country? The evidence overwhelmingly indicates otherwise
2) Why do you treat law as independent of market freedom?
Mactoul
Oct 4 2022 at 12:16am
I don’t say market is not conducive to long-term but it is indifferent to it, focusing as it does on the present.
It is the laws and customs of a people honed over generations that are directed to long-term and it is the essential role of government to look to the conservation of these laws and customs, even if they appear to violate individual liberty.
Jon Murphy
Oct 4 2022 at 5:58am
As an empirical matter, that is incorrect. Interest rates are prices of time and one of the main advantages of property rights is that they encourage owners to consider both the present and the future.
Now, I agree with your last sentence that there may be conflicts between individual liberty and overall liberty and that governments should act to preserve those laws. But do be careful with that reasoning as it is incorrect to discount individual liberty as only caring about the present or that individual liberty is not conducive to overall liberty
Pierre Lemieux
Oct 4 2022 at 11:25am
Mactool: I think that if you read Friedrich Hayek and James Buchanan, you will see that your objections and interrogations have already be answered. To get only a very brief introduction, you may want read my review of Buchanan’s Why I, Too, Am Not a Conservative. On Hayek, you may remember how he criticized Keynes’s aphorism that “in the long run, we are all dead”? And indeed Hayek’s main concern (in his maturity) was with the law in a free society: just to get a faint impression of that, have a look at my review of the second volume of his Law, Legislation, and Liberty, just out at Econlib. Of course, these are very poor substitutes to reading the books themselves (in case of Hayek, though, I recommend starting with his 1960 The Constitution of Liberty).
Andrew_FL
Oct 4 2022 at 12:17pm
This is a better policy than price controls only in the sense that throwing gasoline on a fire is a better fire fighting technique than sending in a wrecking crew
Pierre Lemieux
Oct 7 2022 at 10:50am
Andrew: If all consequences are duly factored in, least bad is the same as better.
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