The paradox of economic growth and happiness in an economy

By Benard Ayieko

Just like we evaluate personal growth using various personal parameters, so do countries measure their annual economic progress using designated parameters. Greatest of those indicators used to bellwether the progress of economies is the ‘mighty’ – Gross Domestic Product (and its various forms).

World Bank defines GDP as the sum of gross values added by all resident producers in an economy plus any product taxes less any subsidies not included in the value of the products. GDP is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Therefore, it aims at capturing the true monetary value of the economy. GDP has in its various forms been considered to be the best aggregate measure of economic activity and by extension the only measure used to refer to when an economy is growing or contracting.

Taken on its own, GDP becomes an incomplete measure of many facets of modern economies. Debate among economists focuses on adoption of different methods of measuring progress or otherwise in economies. Besides measuring the progress of economies over time, GDP is used to measure “success” or “failure” of government and how policies propagated by those in power impact not only on the expansion of the countries’ GDP but also on the welfare of its people. Economic growth is seen as being so vital to the success of an economy. The essence of economic growth should be a means to an end: an economy that supports everyone in society to live happy, flourishing lives, now and in the future.

With researchers finding out that there is clear mismatch between economic growth and happiness in an economy, many questions are being asked on why it is becoming prevalent to find more happy people in economies recording modest economic growth than those with higher levels of growth. Economists have begun to use research into happiness to explore questions in economics, policy, and management. Some of the limitations of using GDP as a way of measuring welfare in an economy have become too obvious to be ignored.

In calculating GDP, policy makers do not take into account the effect of negative externalities particularly the effect of economic activities on the environment. If the economy is filled with industries that are polluting the environment, natural habitat for human beings and wildlife then this will have a negative effect on the livelihoods of both people and world life. GDP growth will record an increase in production but failure to capture the disquiet caused by air pollution. What this means is that the level of unhappiness might outweigh the effect of economic growth. This phenomenon was espoused by Richard Easterlin, a professor of Economics and researcher on happiness economics who pointed out that people do not become happier when they grow richer if they crossed some rather low threshold in terms of income – Easterlin paradox. 

Since GDP accounts for aggregate economic growth, it does not imply increase in household incomes from economic activities that guarantee a sense of happiness. To this end, there is some threshold beyond which we have no more time to enjoy the fruits of our affluence or the correlation between increasing affluence and increasing competition for “positional goods” that can be attained by anyone, but not by everyone. Both effects, in terms of GDP, make the pursuit of ever-increasing affluence sisyphean and interpretations of the gross domestic product as a happiness indicator flawed in many economies. Does economic growth really make us happy? If not, why the overemphasis on GDP?

Richard Easterlin in his study, “Does Economic Growth Improve Human Lot? Some Empirical Evidence”, points out that considerations affecting personal happiness in different cultures are similar. A survey on happiness cites good own health, decent standard of living, successful children, decent housing, happy family, adequate leisure time, good working conditions, resolution of religious problems and modern conveniences as the main source of happiness among people in a nation. Within countries there is noticeable positive association between income and happiness. Those in the highest status group are happier than those in the lowest status group. However, there is no positive association between the level of economic growth and the number of people in an economy. What this means is that a country could experience a relatively higher economic growth rate but with a stagnating or even decreasing number of people who are happy. The use of financial measures like GDP has the potential of introducing serious distortions in assessing economic performance and the level of happiness in an economy. This is why there is need to use non-financial indicators of human, social and natural systems to assess economic performance and wellbeing of people in the economy.

The writer is an economist and a commentator on trade and investment.

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