Standing Up for GDP

Joseph Stiglitz is right. GDP per capita is an inadequate measure of a country's prevailing standard of living for many reasons. If you want one number, something like median real consumption would be better. But I'm willing to stand up for GDP per capita as a rough and ready indicator of well-being within the bounds of nation states. Why?

First, as an indicator of well-being, it doesn't get much intuitively wrong. That is, GDP per capita tends to correlate positively with most of the things most of us think are constituents or side effects of well-being and negatively or not at all with most of the things most of us think are corrosive to well-being. (I go through some of this data around p. 29 of my happiness paper [pdf].)

Moreover, alternative rankings such as the UN's Human Development Index, which accounts for things like health and education, correlate so closely with rankings of per capita GDP, it's pretty clear that income levels are doing most of the work. As Justin Wolfers put it:

For all the work that goes into the Human Development Index, it just doesn’t tell you much that you wouldn’t learn from simple comparisons of G.D.P. per capita.

And don't forget that the link between GDP per capita and self-reported happiness is positive and strong! Here's a reminder of what the relationship looks like this:

As you can see, the doubling in GDP per capita from $1000 to $2000 has about the same effect on average self-reported life satisfaction as the doubling from $16,00 to $32,00. It was this finding that led Daniel Kahneman last year to say:

The implied conclusion, that citizens of different countries do not adapt to their level of prosperity, flies against everything we thought we knew ten years ago.  We have been wrong and now we know it.  I suppose this means that there is a science of well-being, even if we are not doing it very well.

But I think the most neglected argument in favor of GDP per capita as a measure of well-being is its neutrality. Here's how I put it in my happiness paper:

Many people seem to think that a government’s emphasis on measurements like GDP indicate a kind of collective affirmation of materialist goals, encouraging a narrowly materialist attitude at war with more exalted values. But this is simply a mistake. The very function of money is to serve as a neutral medium of exchange. It is a shape-shifting embodiment of almost any value. The same $100 can be spent on a prostitute or donated to an HIV/AIDS clinic. The relative value neutrality of money is precisely why the measurement of per-capita wealth is well suited to pluralistic liberal societies; it doesn’t beg many questions about competing concep- tions of the good life. Money can’t be converted into  anything that someone might value, but it is of the nature of money to be convertible into a phenomenally broad range of values. Societies with high levels of average income and wealth are societies in which people have more resources at their disposal to achieve their aims, no matter what those aims might be, which is why it should be no surprise that, other things equal, people with more money are more satisfied. By measuring GDP, household wealth, and the like, government is not affirming one set of values over others. It is, in fact, embodying an ideal of liberal neutrality by measuring something that is valuable in varying degrees to all of us.

Because of their neutrality, economic measures are excellent inputs to public deliberation in pluralistic societies containing a great deal of disagreement about ultimate values. There are lots of candidates for alternative indicators or progress and well-being, but most are transparently motivated by ideological antagonism to the kinds of policies known successfully to promote income growth. These are obviously not very well-suited for use in public deliberation in pluralistic societies containing a great deal of disagreement about ultimate values.

The demand for alternatives to GDP resides predominantly in certain quarters of the environmental movement. It's easy to see why. Many environmentalists demand policies that, if implemented, would show up as unmitigated damage in economic measures like GDP per capita. I think it's difficult to overstate how huge an impediment this is to much of the environmental movement — especially since these measures do track the elements of well-being pretty well.

Some enviromentalists, like Thomas L. Friedman and Van Jones, go the congruence route and jump into the business of retailing fantasies about pro-growth green central planning. But this kind of “and a pony!” no tradeoffs stuff is a pretty hard sell. Anybody really serious about saving the world from the peril of a more livable Canada is going to have to argue for policies that will indeed gut-punch world income growth. That argument is a lot easier to make if you can first persuade governments and journalists to shelve standard economic measures and replace them with new figures that make a virtue of green-tinted impoverishment. It's hard to fail when you've redefined success.

That's why I'm ready to hold onto my wallet when luminaries of the left like Stiglitz say they're eagerly awaiting the September 14th publication of a report by Nikolas Sarkozy's Commission on the Measurement of Economic Performance and Social Progress. But it probably won't be that bad.

Here's my predication. Good ol' GDP per capita will be found (perhaps rather annoyingly to this congress of authors) to do better as a measure of social progress than one might have thought, for reasons similar to those detailed above. Chief among the problems with GDP-like measures will be that they fail to capture the value of environmental sustainability. Also, the value of economic equality. But not the value of economic liberty. That GDP fails to capture the value of, say, policies that reduce the probability of a future in which tens of millions die due to a massive flu pandemic, or due the availability of portable nuclear weapons, will go unmentioned. Less severe but equally indeterminate environmental threats will get many pages.

Surprise me Commission on the Measurement of Economic Performance and Social Progress!

Flaws and Frictions

I was pretty impressed with much of Krugman's NYT Magazine magnum opus. Macro is a mess. Now, this isn't what Krugman was saying, but I think his account of the disagreements on fundamental questions exposes macro as a proto-science at best.

Economics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system. If the profession is to redeem itself, it will have to reconcile itself to a less alluring vision — that of a market economy that has many virtues but that is also shot through with flaws and frictions. The good news is that we don’t have to start from scratch. Even during the heyday of perfect-market economics, there was a lot of work done on the ways in which the real economy deviated from the theoretical ideal. What’s probably going to happen now — in fact, it’s already happening — is that flaws-and-frictions economics will move from the periphery of economic analysis to its center.

There’s already a fairly well developed example of the kind of economics I have in mind: the school of thought known as behavioral finance.

One might have thought Krugman was going to do something like acknowledge the immensely important point, associated with economists such as Ronald Coase and Douglass North, that market institutions in which “frictions” or transactions costs are relatively low are the exception rather than the rule. Markets are not only not frictionless, frictions generally keep markets from getting off the ground at all. When frictions are managed sufficiently to get markets up and going, that's because they are embodied in a complexly interlocking set of institutions and organizations which make this possible. A scientific economics might seek to explain how it is that embodied markets achieve otherwise impossible feats of social coordination.

The “flaw” part of “flaws and frictions” is a little loaded. It's an annoying habit of economists to hold on to homo economicus as a standard for rationality even after they have conceded that homo economicus is a more or less useless over-idealization. That we don't live up the standard of more or less useless over-idealizations obviously does not imply that we are somehow defective. Be that as it may, one might have thought the recognition that a useless over-idealization of rationality does not apply to us might lead one toward a more sophisticated idea of the way minds and markets work together. There are, for example, the profound Hayekian points that individuals are computationally bounded, that expertise is local, that markets enable coordination by conveying otherwise inaccessible information, that epistemic and practical norms are both cause and effect of institutional structure, etc. Maybe we could look at experimental work, such as Vernon Smith's, that explores how real people operate in different kinds of market structures.

It's not like Hayek, Coase, North, and Smith don't have Nobel prizes! But Krugman ignores the best of existing “flaws and frictions” economics and jumps straight to “behavioral finance,” which I'm fairly sure is the same old shit Krugman is complaining about — elegant models of counterfactual worlds — with ad hoc emendations to improve fit with the history the actual world.

Krugman should go further, but he won't. He should say that beginning without “flaws and frictions” — assuming at the start unbounded perfectly rational agents and zero transactions costs — has all the virtues of theft over honest labor. An economics based on those assumption is ipso facto unscientific. The same goes for ad hoc variations on these assumptions. What sciences do is explain. (Sorry Milton.) And scientific explanation is largely a matter of detailing the causal mechanisms underpinning observed regularities.

“Freshwater” economics is not a science. It is a sometimes illuminating exercise in modeling counterfactual worlds. Insofar as “saltwater” economics recognizes that the need for a better account of human psychology and transactions costs in embodied institutions, it is better. But, so far, it isn't. So far, “behavioral” macro is mere aspiration. It's not something anyone is actually doing in a systematic way.

Maybe the most important conclusion I drew from Krugman's piece is the politics of the freshwater/saltwater divide is complete nonsense. To seriously acknowledge “flaws and frictions” is to acknowledge that some institutions create friction while others reduce it; that some institutions enhance the salience of certain “flaws” while others work around them; etc. Having recently read a bunch of “Keynes was right” pieces, it seems pretty clear that lots of left-leaning economists are mistaking flawlessness and frictionlessness as necessary premises in the argument for limited government intervention in market institutions. But the upshot of flaws and frictions could very well be that we shouldn't expect very much from government intervention. It seems pretty clear to me that Keynes' characterization of the role of not-exactly-rational “animal spirits” in recessions is a very small part of an adequate general account of the way the quirks of human psychology tend to scale up to the macro level. The inference from flaws and frictions to Keynesian technocracy tends to be embarrassingly hasty.

The fact is, macro isn't close to resembling a real science. (“The economy,” nationalistically construed, isn't even close to resembling a subject of scientific investigation!) But we can't count on elite economists to admit it, since their claim to authority on matters of public policy stands or falls with their claim to scientific expertise.

The Tragic Flute

I found this little thought experiment, inserted by a Forbes editor into an interview with Amartya Sen, pretty peculiar.

[Note: In the book, Sen describes a problem of divergent views on justice in which you have one flute and three children who want it. One child wants the flute because she knows how to play it, the second one wants it because he is poor and doesn't have toys, and the third one says she made the flute, so she should get it. Who do you give it to?]

This is no knock against Sen, since there's probably more context in the book. But this is not really such a puzzling question, is it? The correct answer is: It all depends on how “you” ended up with the flute!

Is the flute yours because you provided the materials (which were yours) and paid the kid who made it? If so, you can give it to anyone you want, or you can keep it. It's yours! Did you steal it from the kid who made it? Then you should give it to the kid who made it. It's hers! You've got no right to redistribute her flute.

Anyway, I find this thought experiment, and the not uncommon practice of assuming away the relevance of property rights when considering questions of distributive justice, confusing. A settled scheme of property rights is the main solution to the problem of distributive justice. As Hume said:

No one can doubt, that the convention for the distinction of property, and for the stability of possession, is of all circumstances the most necessary to the establishment of human society, and that after the agreement for the fixing and observing of this rule, there remains little or nothing to be done towards settling a perfect harmony and concord.

Of course, ingrained intuitions about equality, reciprocity, need, desert etc. will tend to shape this most necessary convention as it develops over time. One of the things we already know before coming to questions about who should get a flute is that things like flutes don't grow on trees. Somebody has to make them. And the production of valuable goods, like flutes, tends to take place within a stable scheme of property. It's sort of silly to drop that context and ask who “you” should give the flute to. If the conditions under which flutes are produced is in already place, then the answer about who should get it is likely already settled.

Anyway, Sen's point no doubt was just that if you're trying to do the best you can in giving away your rightful possessions, considerations of desert (e.g., both “I made it” and “I can best use it”), need, and fairness (e.g., “I don't have ANY toys!”) are definitely relevant, but it's not clear how to weigh them against one another.

What I'd add is that because the relative importance of considerations such as desert, equality, need, reciprocity, etc. tends to be indeterminate in the abstract, we need a system of property to peacefully settle particular distributional questions. Stable property conventions will tend to have evolved over time in a way that has taken the various elements of justice into account. If they didn't, they'd likely lead to conflict and wouldn't be stable. But we shouldn't be surprised that the aggregate pattern of holdings that emerges from cooperation and exchange according to a just scheme of property rights will fail to resemble a counterfactual pattern determined solely by considerations of desert, or of equality, or of need.

Update: Also, I like what Sen says at the end of the interview:

The idea of perfect justice drives to a mistaken route. If you believe that any judgment has to be examined through public agreement, reasoned agreement, it's my submission that

a) We won't have agreement on the nature of a perfectly just society. But very likely, we will have agreement, reasoned agreement, on a variety of arrangements, outcomes, social states which are unjust and should be removed.

b) Secondly, even if we succeeded in identifying a perfectly just society on which everybody agrees, that's not what we are debating about. No one expects we can have a perfectly just society in the foreseeable future. Our policies don't depend on it. So why waste your time on a question which is probably unanswerable and certainly redundant.

The Gender Politics of Mad Men

Micha Ghertner takes me to task for saying that a lot of guys enjoy Mad Men because they like to glimpse the world when men were men who had hot secretaries and bars in their offices. Micha says:

I don't know what Will was thinking of when he wrote this. Maybe he just hasn't watched enough episodes yet? The overall point he is trying to make is a fine one, but Mad Men displays exactly the opposite of what he is trying to express.

What I see when I watch Mad Men is a bunch of privileged dominant white males – and their trophy wives – who are absolutely miserable, partly ( largely?) because they can see their privilege and dominance cracking under the weight of inexorable social change.

That's why Peggy seems to creep everyone out except Don, who is too busy trying to juggle all of the various lies he has made to his wife, kids, coworkers, mistresses, and clients to care that Peggy is breaking the glass ceiling, getting impregnated out of wedlock, and doing all of the things a woman of her station in life shouldn't be doing. Don sees himself reflected in Peggy, as a rule breaker and successful social status climber who has to navigate a new, false identity.

No one is truly happy in the show, and we the audience, with the advantage of 50 years of hindsight, know that things are only going to get worse for those characters desperately trying to clutch onto some romanticized, illusory past.

Notice the title sequence of a businessman falling from the top of a skyscraper, eliciting a sense of vertigo? It's not that subtle Will, and you were an art major!

I think everything Micha says is right on. I like to watch Mad Men for the menswear and a sense of the superiority of my postmodern egalitarian consumption partnership. But that's not inconsistent with the idea that lots of guys who like the show don't get the point of it and like to imagine how sweet it would be to have women take care of all the annoying details of life and smoke at work.

Like Micha, I see Mad Men as a show about status and status anxiety in an age of cultural ferment. Let's talk about it! In this week's episode [SPOILERS, if my stupid tendency toward abstraction can actually spoil anything] I particularly enjoyed the contrast between Peggy and Joan.

Joan is omnicompetent, authoritative, and in full control of her abundant femininity. She has fully mastered the arts of mid-century haute bourgeois womanhood and she knows it. Yet her clear clerical, sexual, social, and domestic excellence cannot guarantee her a status among women–a status among wives–equal to her own sense of her worth. Her status, in the end, is a function of her husband's. And she does not seem to second-guess that this should be so. She gambled and lost with Sterling and is now confronting the suspicion that her fiance is not really good enough for her. And she is getting on in years. Despite her flawless performance of womanhood, her ambitions may end up stymied by the flaws in her men.

Peggy is equally talented and ambitious. But in stark contrast to Joan's knowing, cultivated breed-standard womanly completeness, she is a naive, raw, curious puppy of a female. She is anxious and awkward about how she stacks up in the world of women and she is anxious and awkward about how she stacks up in the world of men. But she is toughly confident in how she stacks up as a creative worker. The new willingness of the world to reward her for what she does rather than for what she is grants her a power to independently realize her ambitions unavailable to perfect, normatively realized women.

As I see it, Mad Men is centered on Peggy, not Don. The very possibility of Peggy's success is the engine of dramatic conflict. It threatens to devalue the relative status both of the professional men with whom she directly competes and of their wives with whom she doesn't compete so much as humiliate by rejecting the grounds of their social and self-esteem. She is not yet in a position to really much threaten anyone, but the broader movement of liberation she represents will seem to many as little more than a violent, unfair, ad hoc emendation to the rules of the game they shaped their lives around.

Don is comfortable with Peggy, for now, because he sees these rules as little more than a fixed creative constraint, like the form of a sonnet. Don knows everyone is a manufactured thing, a product, advertising him- or herself in some market niche or other. (Don cannot believe Sterling is happy rather than performing happiness, which he finds unbecomingly “foolish.”) The fact that Don is a self-conscious and thus superlative performer explains both his outward success and his sense that it is empty. But what if self-construction does not necessarily mean living a lie? What if something like authenticity is compatible with success? In the end, Peggy may threaten Don more than she threatens the hierarchies of the trads by proving the possibility of successful integrity–by creating a persona, however awkward, that is both outwardly successful and inwardly satisfying.

Anyway, I'm totally overinterpreting. But that's how I'm guessing things might shape up. Also, menswear!