One More Time About Growth and Well-Being

One of the subjects I write on in this blog most frequently is my opposition to the idea that economic growth (i.e. growth in GNP or GDP) is contributing to an increase in well-being (see, e.g., here). There is a correlation between them in some times – but in others it is quite the opposite. Today I found an impressive example of the latter. Interestingly, I found it while listening to a lecture by a professor of mine – whom I already mentioned in this blog. It is one coming from the past of Germany, from the most horrible part of it – the Second World War.

Consider this picture:

It shows the economic growth in Germany during the 20th century. As one can see, in the time of the world war it was positive – declining, but positive. Now, is there anybody who would like to claim that Germans were well off during the war? Maybe they were during its first part, until, say, the Barbarossa operation. But it is sure that they were not after that. Anyway, if one takes GDP as an indicator of well-being, one would be forced to conclude that Germans were better off in 1943 than in 1942(for instance). The decline in GDP (not in its growth rates which are shown in the above picture) started shortly after the end of the war, in 1944 – and then it took huge dimensions. That corresponds with the historical reality. But if there would be any causality (and there is equality between saying that GDP is an indicator of well-being and claiming that GDP growth causes increases in well-being), this correlation would have to be visible at all times – but, as I already have shown, it does not. Although Germans suffered much at least in the last 2-3 years of the war, GDP was still increasing in this period.

One question remains: why was there still economic growth in? It is actually straightforward, but I nonetheless wish to emphasize this point here: GDP is a measure of industrial production. During wars the industry is busy. Especially when there are ever more frontlines and ever more fighting – then there is a big need for arms, transportation, food etc. So the industrial output is rising. But, at the same time, ordinary citizens are suffering. First, just because there is war. Second, because all the products are delivered to the frontlines – not to them. (Of course, soldiers are suffering as well, although they receive most of the production in some way or another.)

One may say that this is so only in times of war, that I am describing an exception and generalizing it. I don’t think so, but if you need more arguments against GNP/GDP as an indicator of well-being, please continue reading here.

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18 thoughts on “One More Time About Growth and Well-Being

  1. Sir,

    While I do not agree with some of your contentions epressed in the articles I do read them with keen interest. My I add some thoughts to the current subject ie. economic growth ( expressed by GDP for example) and well – being. Being a student of economu you obviously know ( better than me) that GDP is an attempt in statistical representation of the activities of any given economy. However, there is no attempt to attach any emotional and/or psychological meaning to it. On the other hand well – being is a very fuzzy concept ( at least in my view) and it means differnt things to different people, peoples and cultures. It depends what value one attaches to certain things in life. The well -being will also depend on the circumstances one is in. So, the link might or might be not there – it is up to each one of us.

    Regards,

    vandermerwe

  2. Thank you for the comment (or shall I write: dziękuję?).

    You are right that GDP (actually) represents an attempt to statistically express the “health” of an economy. You are right as well that well-being is a rather subjective concept. Meanwhile, my general point here is the following: most economists are claiming that GDP growth is a good thing, at all times. Why? Just because “we are all better off” when our economy is growing (so the argument goes, mostly). And that is simply not true, as I repeatedly tried to emphasize. Economic growth is not a good thing – in many societies it has become a bad, rather. Nevertheless, mainstream economics still considers “balanced growth” as a main objective of economic policy. Implicitly claiming that this increases our well-being (exactly what you call “fuzzy”).

    I think, it is objectively true that people are not better off when their natural environment is destroyed – to call just one example. But exactly this is caused by our blind pursuit of economic growth. And that is the main reason for what I am writing here all the time.

    And one last thing: there are measures of subjective well-being (with comparisons across countries) that one can compare with the economic success of the considered society. One example is the so called Happy Planet Index. They are worth a look.

  3. I have looked at Happy Planet Index. I suppose my observations are not of the rocket science type but, nevertheless, confirm what frquently is being ignored. Well, our development and even “well-being” comes at a cost. The case of Africa is a agood example here. Africa scores badly overall, in life expectancy and life satisfaction categories. Africa scores highly ( may I say, is the champion) when it comes to the ecological footprint.
    Despite decades of foreign aid it is underdeveloped, with disfunctional state agencies and its infrastructure being neglected to the point of non existence. The state of affairs influences life of african population what is clearly shown by the Happy Planet Index ( in this particular case rather “unhappy”). To change all this ( not a simple task ) you will have to improve functioning of the state, rehabilitate what is left of the infrastructure, build more roads, railroads, hospitals clinics, schools etc. And here is the crunch – all of this will be reflected in the statistics as increased growth ( possibly 7% or more per annum), improved well – being of the population ( soon reflected by the Happy Planet Index) but surely Africa will slip down the ecological footprint scale. So , at least here there is a direct link between GDP growth and the well-being. In fact the higher the growth the higher score on the well-being scale ( possibly up to a point) . As I see it, here is the real problem which one may call ” a complete disconnection” between the First World concept (and proposed solutions) and the Developing World needs and desires. Just in short, coal ( as a commodity)is a very good example here. Many of the poor countries derive wealth out of it. Sometimes it is the only source of significant income of the state or the population. Once you take it away abject powerty will be back. And lets not kid ourselves, the First World will not find any sensible solution to that new situation. Another round of financial aid ( as it is in fact foreseen in all those plans) will only perpetuate current state of corruption and neglect .

    Regards,

  4. I cannot agree with you for a variety of reasons. First of all, as I already have frequently written (e.g. here), my opposition to growth as a measure of increased well-being is related to the so called developed world – I think, there is nobody who would claim that Africa, or parts of Asia, would become “happy” without economic growth. But growth is not always the same as growth.

    That’s the second point of disagreement: coal or natural resources in general as a source of growth in poor countries. I would not say that they have much benefit out of it. Yes, there are a few additional jobs. But, at the same time, natural invironment is destroyed (one of the best examples is the Niger Delta), human rights are often violated, and – when we talk about economic effects – most of the money of the extraction of natural resources (be it coal, oil, or lithium, for that matter) doesn’t stay in the poor country where extraction takes place, but flows to the rich world, where the extraction companies have their offices. Meanwhile, while concentrating on natural resources, the governments of the countries in question often neglect other sectors – something called the resource curse.

    So, I agree that there is a big problem in the developing world, especially in Africa, that we have not been able to solve yet. But natural resources are not the solution. Look after the countries most blessed with them: Nigeria, Sudan, Namibia, Kongo… Are they better off because of their oil/uranium/whatever?

  5. We may not like raw materials but they are here to stay and are a source of wealth ( just look at Australia). At the local scene Mozambique comes to my mind. In recent years there is huge investemnt in the country by the Brasilians , the Chinese and other players. It is mostly coal related. Out of that comes investment in the infrastructure: harbours, railways, roads, buildings. This is a major departure from the previous models applied. While the mines remain a property of the foreign capital the rest is owned by Mozambique and will generate income ( rails, harbours) and improve quality of life ( roads, rails, power stations, buildings ) of the population. In this particular case ( not the unique one) once you take away specific commodity the rest is gone with it. So the impact, contrary to what you say, is much more significant than a small number of jobs. One additional comment. In a country with persistent powerty even small number of jobs have significant impact and should not be dismissed as irrelevant. Yes, there are serious internal problems ( partly reason why so many countries on the continent are poor) but this is the other side of the same coin.

    Regards,

  6. I don’t agree. First of all, most of the investments are merely project related – as you said, rails, roads and so on, needed to export the extracted. What about schools? Health infrastructure? And another problem: what if the foreign investors draw back, for whatever reason? One can see in statistics: just having natural resources doesn’t necessarily better the life of ordinary people. Examples you name are exceptions, I would argue. Australia is a specific case, since its wealth is not built on natural resources, at least not mainly.

  7. It is easy to dismiss relevance of such investment when one lives in a completly different situation. Secondly, you have not read my post carefully. Yes part of the development is project related but a lot is not. Further, as I have noted, foreign capital may have the ownership of the mine ( for example) but the infrustructure is locally owned. Whatever happens with the foreign owner, roads, rail, clinics, hospitals etc. will stay. My examples are not exceptions. This is how these days China invests in Africa. Yes, you are right that having resources is only part of the equation, there must be local political will to change things. Where such will exists investment in natural resourses does change/improve people’s lives. In the prevailing “political climate” it sounds like heresy. I suggest to look a little bit more beyond statistics ( well in fact part of the discussion is our doubt in the value of GDP – another statistical creation)

    Regards,

  8. I have heard a little bit about what the Chinese do in Africa from people who were there – it was not really nice. I acknowledge the fact that they don’t commit some of the wrongs common to Western activities in the Third World (as I have written here). But, nevertheless, their aim is not to help the poor in Africa, but to secure supplies of raw materials for their economy.

    The big problem is: when foreign investors draw back, the infrastructure may be left back – but not the know-how. Developing countries’ governments rely too much on the inflows of money from extraction fees – not investing them reasonably, but accumulating them in their own pockets. And the foreign companies are happy about that – since this means as well that they can maximize their profit without much consideration of the needs of the country in question.

    Where such will exists investment in natural resourses does change/improve people’s lives.

    This may be. But mostly there is no such will. Why there should be?

    If your examples are not exceptions, tell me, why are there so many not fitting your description (I named a few them some comments ago)?

  9. Nobody claims that China is in Africa to help the poor. They look after their interest but have identified a way of achieveing their goals. China has simply recognised needs of African countries and uses that to their advantage. Yes, there are problems there, one can not deny that but right now African countries are getting “goods” ( sort of an off-shoot of main projects ) which otherwise nobody was prepared to offer. If one doesn’t like Chinese we may look at Brasilians. Not as “generous” as the Chinese but still with better understanding of realities of a poor country than their Ist world opposition. Problem of know -how is in equal measure applicable to any activity. So popular these days tourist “industry” will face the same problem – foreign investor builds a holiday resort and then pulls out leaving behind a know-how “black hole”. This is why I have mentioned political will having in mind local political elites. Without their will and changed attitudes any possible social gain from any investment will be significantly reduced. Just one final observation. Today’s Europe ( EU?) is what it is because of Industrial Revolution which meant at the time: coal, iron, industries, and industrial expansion. How on Earth can we claim that all those “goods” do not and will not benefit currently poor countries?

    Regards,

  10. Today’s Europe ( EU?) is what it is because of Industrial Revolution which meant at the time: coal, iron, industries, and industrial expansion. How on Earth can we claim that all those “goods” do not and will not benefit currently poor countries?

    Perhaps because the world is not what it was in the 18th/19th century? Of course, the Industrial Revolution did many good to us (although it caused many evils as well). But there are some differences between now and 200 years ago:

    1. Population density: using nonrenewable resources in a relatively “small” world is not as severe a problem as it is in ours, where the demographic pressure is huge.

    2. In the 19th century nobody knew the ecological costs of burning coal (and social costs were often underestimated). By now, we know that they are huge – as I have argued repeatedly, in many cases bigger than their benefits.

    3. Today there are alternatives there. Consider energy production: is it better to build a big power plant somewhere in, say, Kenya, then to build and maintain (centrally – always a problem) a grid to provide energy for poor villagers, or is it better to use small, decentralized electricity generation, based on renewables (e.g. solar panels) that are generally easier and safer to maintain?

    tourist “industry” will face the same problem – foreign investor builds a holiday resort and then pulls out leaving behind a know-how “black hole”.

    These are different categories of know-how. It is easier to learn “autodidactically” how to run a holiday resort than it is to run a coal mine.

    And one more argument against the resource-dependence: what if the resource in question suddenly is not needed any more (a hypothetical case)? Or if the demand suddenly falls drastically? There is infrastructure left, of course. But how to run this infrastructure? How to pay the roads, teachers, medicins and so on, when the only (or main) source of income is gone? Development needs diversity.

  11. May I respond:

    1 & 2. Yes at the time of Industrial Revolution our world was different, our knowledge was lacking in many areas. However, this does not change the fact, it has been because of that historical “incident” that Europe is wealthy. Just take away steel ( the main structural material ) from our life. We would have to forget about some of the things which we take for granted: trains and rails for that matter, ships, cars etc. Previously timber had been the main structural material with all consequences. For that matter timber had been also a source of energy before introduction of coal. Britain’s almost treeless landscape is an excellent example of the damages.
    3a. Domestic consumption of electrical energy is not the main issue. Yes, each house may have its own “piggy back” power station, wind or solar or whatever. However there are instant practical issues: storage of energy, transfer of power surpluses between areas etc.
    Industries require continuous power supply in big quantities and of certain quality
    ( this is between 70 to 80% of total consumption) and “green ” sources of energy are not able to satisfy industrial demands. Considering that even with a system of “piggy back” small power stations a grid system is required ( for practical reasons), a system consisting of small number of big power stations is more effective than one ustilising a big number of small units. One may also argue about the maintenace issues but this is something else.
    3b. Possibly it is easier ( whatever we mean by that) but somehow daily life is not the best example of such contention. In the same way we may say it is easy to learn how to run a railway line. At a very basic level it is simple.

    3.c What if GM/Opel decides to pull out of Poland? These are universal problems. Resources or not the issue is what countries make of the opportunities. Even in Europe some do better than others.

    Regards,

  12. I looked up the electricity consumption by sector in OECD-Europe (I guess, this is a rather representative example): industry 40%, transport 2,5%, residential 29%, commercial/services 26%, others 2,5%. In regard of primary energy consumption it is: industry 24%, transport 27%, residential 24%, commercial/services 12%, others 13%.

    This is a rather different picture than yours, you must admit. So maybe the situation is not that dramatic.

    I don’t know how important GM is for Poland, but I am sure that it is by far not as important as oil for Nigeria or Sudan – as natural resources for most endowed developing countries, indeed. And: that we make ourselves too one-sidedly dependent is not an argument for pushing developing countries to do the same.

  13. It is representative of Europe, there is no doubt. Some interesting observations can be made when looking at the primary consumption graphs. One will see different trends between European and countries like Australia or Korea. Industrial energy consumption in Europe shows a distinctly declining trend, the opposite to Korea or Australia ( just an example ). In Europe non – industrial sector is a significant consumer of energy !! Some of the European trends may be as a result of increased efficiency but there is another factor – a lot of industrial activities have moved from Europe to other continents. In fact, for all practical purposes some industries have disappeared from Europe ( well EU). I would say that family silver has been given away. Lets settle for that 40% ( my figures did not refer to any European country for that matter) and ask. How are we going to satisfy energy needs of those industries ( still in Europe) in the proposed “new energy” order? Most likely they will sooner or later move somewhere else.
    Whether situation is dramatic or not depends how you look at it. In my view it is dramatic as a lot of knowledge and experience is thrown to the wind and replaced by half baked ideas which have not been tested on a big scale. History of industrial development ( and not only) is littered with cases of bright ideas which worked on a small scale but failed completly beyond that.
    Nigeria is a prime case of bad management. In the same way as Greece, Iceland, Portugal, Nigeria has messed it up. On the other end of the scale one may quote Botswana which made a success off its resources .

    ” we make ourselves too one-sidedly dependent is not an argument for pushing developing countries to do the same.”

    There is nothing one – sided here. Our technologies are as they are. Are you able to show a single industrial product which has not started its useful life without extracting some sort of commodity and processing? Rather difficult task. Do we have other, better suggestions for developing countries wihthout them engaging in industrial activities and consequently needing raw materials, energy etc? I doubt it unless we would like to keep them totally dependent on our know how, technologies and products.

    Regards,

  14. With the one-sidedness I meant the structure of the industry, not single products – the dependency of the whole economy on one particular industry.

    In my view it is dramatic as a lot of knowledge and experience is thrown to the wind and replaced by half baked ideas which have not been tested on a big scale.

    In my view it is dramatic that we seem unable to recognize the fact that we have no alternative except “overthrowing” our whole way of life, including industrial structures. If we do not, we are going to destroy the environment (in a broad sense, including the climate) so far that nature may “defend” herself through Malthusian corrective mechanisms.

  15. With all due respect. All this lokks like: I want everybody to be happy. A noble idea but what is behind that in reality? Are we suppose to go back to pastoral way of life and live off the land? Have we got a viable alternative to materials used by various industries? Can we replace steel with something else and provide accommodation to millions of people? How are we going to satisfy growing needs of various societies without industrial output: think houses, transportation, energy, clothing, you name it? How do we define those needs? Are we going to introduce some sort of a higher “wisdom” which would know what is good for us irrespective of our views? I do agree that many things in this world could work differently, more efficiently and in a more pro – human way. However, we cannot wipe out everything and start with a clean board. There are no means to do that. Just think about food preparation or baking bread. You need some bits and pieces ( wher do they come from ?) and you need energy. In very poor countries that means timber, bushes – whole areas are being “cleaned out”. In modern societies it is electricity, gas etc, things which we somehow don’t like. The basic fact remains – we need energy if all those “bits and pieces” are to come together and fill out stomachs. Possibly, with time new technologies will be developed and will change our way of life. No guarantee here. Look at the planes. While being more sophisticated and bigger the technology has not changed for 60 years. Yours and my computers are as dependent on raw materials and processing of those as any other industrial product , energy is needed to produce them and to power them each time we want to make sensible use. And so on……

    Regards,

  16. Maybe I expressed myself in a somewhat fuzzy way… Yes, I want everybody to be happy, but I recognize that this is not achievable (which does not mean that one cannot strive toward this goal).

    No, we have not to live a pastoral life again. Of course we need natural resources. Of course we need energy. The question here is not about “what” but rather “how many”. There is a huge difference between using natural resources in a way that enables our descendants to use them as well and that does not cause excessive disruptions in ecosystems, on the one hand, and how we use them now, on the other. I have written on this frequently (just look under the tag “TESCO society“), so I don’t want to repeat all this here.

    Possibly, with time new technologies will be developed and will change our way of life.

    Why must it always be a technology that should change our life? Why cannot we do it by ourselves? There are possibilities there. We cannot do everything well, but we can do a lot better. But we have to grasp these possibilities and use them.

  17. 1. If there are technological limits we must think about our habits. Technology is not an aim in itself . We have discussed an issue of railway transport. It is not the train which is at fault but us.
    2. I sense what you are trying to convey. In a way it is in agreement with my views. Societies of the developed world have become “consumption societies”. My guess is that this is the way how “artificial” demand is created ( my name ) – looking logically we do not need many things and too often but there is “outside” pressure to buy. I am significantly older than you so can compare simple things. A silly example. Thirty years ago I could wear the shoes I liked for years, until they were really worn. These days I am lucky if they last for a year, makes you think doesn’t it? I f you look around it is more of a rule than exception. Technologies we have allow production of lasting goods. When it comes to industrial development nobody in his right mind would build a factory or a railway line just for a year or two ( on average it is between 20 to 30 years).

    3. How do we determine our needs? Those are definitely dependent on place and time. Percived needs of Mr. X in Britain might be rather similar to those of Mr. Y in Germany but vastly different from the needs of Mr Z in some very poor country. While the nees in the poor world are defined by the daily struggle and survival in the developed world it is more about desire and pleasure with minimised effort . Dembisa Moyo in her book “How the West was Lost” points this out rather well.

    4. ” and will change our way of life.” A sort of a mental shortcut. You are right, it starts with us while technology is only means to achieve set goals.

    Regards,

  18. I am pleased to see that we finally agree, to a certain extent of course.

    1, 3, 4. You are completely right.

    2. Unfortunately, this is how our society functions (I have written about it repeatedly): our consumer goods wear out very fast, creating what you called “artificial demand” – a kind of built-in wear-out effect. We could change it, but we seem not to be willing to.

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