The Hidden Wealth of Nations

David Halpern

• Publisher: Polity
• Year: 2013
• Print ISBN:
  9780745648026
  9780745648019
• Edition: 1
• eBook ISBN:
  9780745656274
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

Richer nations are happier, yet economic growth doesn't increase happiness. This paradox is explained by the Hidden Wealth of Nations - the extent to which citizens get along with other independently drives both economic growth and well-being.

Much of this hidden wealth is expressed in everyday ways, such as our common values, the way we look after our children and elderly, or whether we trust and help strangers. It is a hidden dimension of inequality, and helps to explain why governments have found it so hard to reduce gaps in society. There are also deep cracks in this hidden wealth, in the form of our rising fears of crime, immigration and terror.

Using a rich variety of international comparisons and new analysis, the book explores what is happening in contemporary societies from value change to the changing role of governments, and offers suggestions about what policymakers and citizens can do about it.

1

Prosperity and Well-being

… for the first time since his creation man will be faced with his real, his permanent problem – how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.

Keynes, Economic Possibilities for our Grandchildren (1930)

I hate the 7.45a.m. train from Cambridge to London. It’s a good train in principle. I can see the kids at breakfast, and get into Whitehall a minute or two after 9a.m. But it’s a good time for everybody else as well, so unless you get to the station very early and stand in just the right spot, you won’t get a seat.¹

It’s not just that you have to stand for an hour that makes it mildly unpleasant, it’s that it makes my fellow travellers sources of inconvenience and hassle. As the incoming train draws into the platform, we all huddle forward, bunched around where the doors will come to rest. Some will have misjudged their spot to stand, their closeness to the platform edge rendered worthless by the twenty other people that stand between them and the train doors. Meanwhile, ranged opposite us are the people in the train ready to get out. The two packs silently size each other up, like two rugby scrums about to engage. The doors open and we’re off! Thank god we’re English. Against all the odds, the cold but focused commuters hold back, parted like the Dead Sea to let the arrivals off. But at a certain moment the discipline will break – especially if one of the arrivals dare dawdle – and we surge forward to get on. If the discipline breaks early – perhaps we have a tourist in our midst – there will be ‘tusking’ and shaking of heads, but it will be everyone for themselves.

I have a double disadvantage. I am carrying a fold-up bike and, even worse, am prone to be over-polite, the mixed blessing of a minor public school education. But I am also a reasonably old hand, and do sometimes get a seat, albeit with guilt. Still, best to take the 6.45, though even that’s getting pretty tight now too.

Of course, crowded commuting is not unique to the UK. Commuters in the wealthy cities of New York and Tokyo have long endured their crowded subways, a pattern that economic growth often brings. In the booming city of Mumbai, Indian officials now refer to ‘super-dense crush load’ to refer to times when commuters now regularly exceed train capacities by two and a half (compared with the UK’s peak excess of a mere 1.76).

Markets and Well-being

Well-being is not the only justification that can be used for wanting economic prosperity, but it’s a pretty good start. This chapter looks at this relationship, and also offers some thoughts about what we might do to boost economic prosperity in its own right.

At the time of writing, there are grave concerns about the economy. Across the world, the credit-crunch induced recession has led public concerns about the economy to move back to centre stage. ‘The economy’ was a record-breaking top concern of 70% of the British public by early 2009, up from just 20% at the start of 2008.² The worry of losing jobs and houses became something extra for the crowded Cambridge–London commuters to think about. But for some city workers, offered generous redundancy packages, the crunch turned into an opportunity of sorts. Some took their money and went off travelling, or took a step down to a quieter life, and at least escaped the wretched train.

The crowded 7.45 is an everyday example of what Fred Hirsch, more than thirty years ago, called the ‘social limits to growth’.³ Cambridge is a great place to live, especially with kids, and the 7.45 should be the ideal train to take. But as more and more people reach the same conclusion and buy themselves a place there, the train gets busier and busier, and the comfort and convenience seems to melt away. Yet for all these concerns, people who live in richer nations do seem to be happier, and there seems little surprise that for most people recessions are an unwelcome reversal in their growing fortunes (see Figure 1.1).

Figure 1.1 Life satisfaction across nations (Gallup data; graph from Angus Deaton, Harvard). The size of the circles corresponds to population size.

In December 2002, we published a Prime Minister’s Strategy Unit paper on life satisfaction, updating the work of Hirsch and reflecting on what the policy implications might be.⁴ A number of people within No. 10 thought it a rather odd and potentially inappropriate issue for us to be meddling with, and it had taken more than a year for the workstream to be approved. When the paper did go out, just to be doubly sure there was no confusion, every page had printed at the top ‘This is not a statement of government policy’. We were putting our toes in what then seemed rather uncertain political and analytical waters.

Since 2002, subjective well-being has moved steadily from the fringe towards the mainstream both in academia and, albeit more tentatively, in policy. Figures such as the economist Richard Layard raised its profile among the academic community, while commentators such as Polly Toynbee began to pick up on its implications for a wider audience. In the political arena, Labour Ministers began to cautiously explore the idea. A further big leap in profile came from David Cameron, the Opposition leader, who flagged that we should consider following Bhutan’s lead and start talking about ‘Gross National Happiness’ instead of just wealth.

The 2002 paper reflected the body of evidence that had been built up by psychologists and economists in the twenty-five years after Hirsch wrote his book, including the impact on subjective well-being of everyday phenomena such as work, income, leisure and relationships – and even commuting. Classically, economists argued that commuters like me were making a perfectly sensible trade-off: getting on the 7.45 not only allowed me to sleep an extra half hour in the morning, but also meant that I got to live in a slightly bigger and nicer house than I could have got in London, perhaps with schools I liked better, and a more accessible town centre. The net effect is that I and my family made an overall choice that made us happier.

In fact, it turns out that we tend to get it wrong about commuting (see Figure 1.2). The longer you commute, the less happy you are, despite the fact that you might be earning more and living in a nicer place. It also makes your partner less happy – what economists call a ‘negative externality’ – it looks like we’d have been better off in the smaller house with the smaller commute after all.⁵

Figure 1.2 The relationship between life satisfaction and commuting time (from the work of Bruno Frey).

‘Of course,’ you say, ‘we just need longer trains.’ Alternatively, the operator can just keep putting the price up until enough people give up on the 7.45 for the remainder to all get seats again. No doubt pricing and new trains can help, but Hirsch’s point is that this kind of ‘crunch’ is an inevitable dynamic that will tend to repeat. It’s also quite difficult for me as an individual commuter – or even as an operator – to get the trains to double in size, such as because of the limited capacity of the network or stations run by someone else.

Writing at a similar period to Hirsch, Tibor Scitovsky also described how efficient markets will often fail to increase our well-being, a very troubling line of reasoning for economists who otherwise assume that if two people freely enter into a transaction it ought to be because it is increasing the well-being, or utility, of both. But it often doesn’t work like that for lots of reasons. To take an example, imagine that you are a skilled craftsman making beautiful, but expensive furniture. But then along comes Ikea. Though we all liked the old furniture, the Ikea stuff is so much cheaper and still kind of funky, so that lots of us go and buy that instead. So now the old guy who makes the hand-made furniture is out of business, and we can’t buy that furniture anymore. So he’s obviously less happy and, more controversially, we might not be that much happier either. The point is that individuals each rationally seeking to maximize their own well-being don’t always maximize the well-being of society, despite Adam Smith. This may help to explain why it is that decades of unprecedented economic growth have had such little impact on life satisfaction in industrialized nations such as the USA, UK and most of Europe.

A younger generation of economists continues to detail the circumstances under which efficient markets tend to increase well-being, or utility, and when they fail to do so. Much of this new generation of work draws on our growing understanding of behavioural economics – the mental shortcuts that we all use to reach decisions. It turns out that we’re not very good ‘utility maximizers’, at least when we’re in a hurry. Our predictions about what will make us happy in the future are strongly distorted by our mood and desires in the present; by a strong discounting of the future that we often come to regret; and by errors in remembering what made us happy in the past (see also Chapter 5). For example, consumers buy far more items that weren’t on their shopping lists and pick more unhealthy foods if shopping when hungry. Discounting of the future makes us commit to deferred payment mortgages we often regret, and we repeat activities and obligations that we didn’t enjoy, but thought that we did.

One important argument is that markets can sort out some of the errors that we are prone to. David Laibson, a professor of economics at Harvard, has explored how we make choices about investment decisions, including when markets ‘save us from ourselves’ but also when they amplify our proneness to error. For example, he gives the hypothetical example of someone who decided that an apple was worth millions, but who would be saved from this misjudgement by the fact that the marketplace would sell him one for 20 pence/40 cents just the same as everyone else. However, markets don’t always interact so helpfully with our departures from rationality. For example, our tendency to discount future gains relative to the hassle of making a decision today leads us to procrastinate perpetually– we end up, quite sincerely, always intending to sort out our pension, or other investments, tomorrow.

An everyday example that Laibson gives is banking. The average American pays $90 per year in add-on charges, against the banks’ costs of providing an account of $40. Customers are drawn to such accounts through freebies such as free toasters or cash gifts. Of course, a minority of savvy customers avoid paying the add-ons through managing their accounts and thereby get cross-subsidied by those who are less careful. The economics textbook, and classic libertarian, would point out that this leaves a market opportunity for a new bank to come along and offer a good straightforward service that dispenses with the gifts and the sneaky add-on charges, and just offers a good service for which you will pay, say, $50 per year. But as Laibson points out, with a good smattering of equations, this strategy is doomed to fail. If you are a savvy customer, you definitely want to stay with the old bank where your less savvy fellow customers will continue to subsidize you. If you’re a normal un-savvy customer, then you don’t get the point – and without a $50 gift you’re not going to move anyway. An interesting group are those customers who wise up and become savvy customers. But wait – now they’re savvy, they realize that they should stay where they are and just manage their accounts a bit better! So the net result is that few customers will move over to the new bank. Existing banks will lose a bit of profit to the unsuccessful newcomer, but not much. It turned out that it was in no banks’ interest to rock the boat after all.

Laibson and his colleagues aren’t against markets, and indeed highlight many examples where competitive markets will work to increase our total utility. But what his work does show, like that of his predecessors, is that in a significant number of areas markets won’t act to maximize our well-being even if they are highly competitive and efficient. This is a particular problem where the attributes of goods or choices are somewhat ‘shrouded’ or where our own mental shortcuts are prone to certain systematic biases.

The work of Laibson suggests a key role of government policy to overcome these types of subtle, systematic failures that arise between our cognition and efficient markets. But he is still left with the puzzle of what it is that government should be trying to maximize. Behavioural economics takes away the prop that economists used to rely on: that what people would freely choose was what they wanted.

Returning to the example of commuting, not all is lost. There are a couple of ways of reducing the problem apart from indefinitely expanding the rail network for rush hours. We can, as individuals, simply learn to adjust our habits – in this case to get an earlier or later train, or perhaps arrange to work at home more often. There is clear evidence that we do learn. Again, Laibson et al. have shown this in relation to many commercial activities, such as how people learn over several years to avoid charges on credit cards or avoid high interest rates on home loans. Typically around a third of credit card users pay late fees when they first get their card, but this drops rapidly over the first two years of using the card.

But, if Hirsch is right, economic growth will continue to create ‘limits to growth’ problems like the rush hour. Where this happens, and especially where the resources concerned have a natural limit, the social norms and habits that let us coordinate and get along with others become critical. These prosaic habits of everyday life tend not to get much attention, but they do much of the heavy lifting in both our economy and our society. Basically, they are what make modern life liveable, and will be a major theme through this book, including how they are built and can be strengthened by both state and citizens.

Can Well-being be Measured?

There is a popular argument that you can’t measure happiness. Empirically, this appears nonsense. Though some might wrinkle their noses a little, people across the world seem to have little trouble answering the question ‘Are you happy?’ or its more reflective cousin, ‘Thinking about your life as a whole, would you say you were very satisfied, fairly satisfied, not very satisfied or not at all satisfied?’

How people answer these questions is highly correlated with pretty much any other measure you can think of, such as the answer your friends would give about you; the answer a stranger would give if observing you; the answers you would give to a much more elaborate set of questions about your mood or your mental health; and even evidence from brain scans.

Similarly, it is sometimes said that the big cross-national differences in satisfaction and happiness that are found (see Figure 1.1, p. 8) really just reflect differences in language. However, the evidence is strongly against this hypothesis. In countries where more than one language is spoken, such as Switzerland or Belgium, it is the nation that you are in that seems to shape your answer, not the language you speak. For example, German and French speakers in Switzerland are both much happier than their cousins in Germany and France – it’s living in Switzerland that makes you happy, not some artefact of the language you speak. Second, as we shall see, the cross-national differences seem to be highly related to a host of plausible variables, not the random mess that you would expect if the answers people gave were just an artefact of the language they spoke.

Figure 1.3 Cross-national differences in public opinion that ‘free competition is best for prosperity’ versus agreement that ‘the state intervenes too much’ (data from Eurobarometer 69, 2008). A clear majority in most European countries now sees free market compet...

Table of contents

• Cover
• Title page
• Copyright page
• Preface
• Acknowledgements
• Introduction
• 1 Prosperity and Well-being
• 2 Not Getting Along
• 3 The Politics of Virtue
• 4 Fairness and Inclusion
• 5 Power and Governance
• 6 Conclusion
• Appendix: The PMSU
• Index