WEALTH vs Welfare

This brings us back to the second of the two arguments for economic growth with which I started this chapter. According to this second argument, economic growth offers the prospect of continued improvements in human welfare. It is largely this equation of wealth with welfare which makes the pursuit of rising levels of GNP so attractive in political terms.

Clearly, however, increased wealth is not the same thing as improved welfare. We saw in Chapter 2 that the industrial revolution delivered somewhat mixed blessings in terms of human welfare, even in the early days. Some industrialists became very rich, very quickly, as a result of massive increases in output in certain industries. But many of their employees lived in conditions of appalling poverty, working in dangerous environments, and subject to economic forces over which they had absolutely no control.

Today, in advanced economies, we like to believe that we have overcome the 'growing pains' of industrialisation. But there are still a number of reasons why we should be suspicious of the equation of human welfare with measures of national wealth such as GNP.

In the first place, welfare is not solely determined by economic assets. Health, individual well-being, quality of life, environmental quality, individual and collective security, all make contributions to welfare which are not reflected in conventional measures of economic output like GNP.

Second, national income may be spent in a number of ways, some of which are purely 'defensive' rather than contributing additionally to welfare. An increasing proportion of income may be spent on cleaning up environmental damage resulting from the production of goods and services, or on treating illnesses arising from impaired environmental quality. For example, the costs of cleaning up oil spills (such as those from the Exxon Valdez and Braer tanker disasters) contributed to GNP. These kinds of defensive expenditure may be necessary to offset the adverse welfare effects of other expenditures. But it is then inappropriate to count both sets of expenditures as positive contributions to welfare.

Third, the notion of success in economic terms contains within it some notion of accountability for the future. It is not enough to have achieved a successful balance sheet for today, if this has been achieved by actions which render bankruptcy inevitable on the morrow. Recognising this need, the national accounts are sometimes adjusted to calculate the Net National Product (NNP), which measures the economic output net of capital depreciation.13 But this adjustment is generally restricted to man-made capital: buildings, machinery, vehicles, etc. What about the depletion of what has been called natural capital:14 mineral resources, clean air and water, fertile soil, diversity of species and so on? Figure 6 (in Chapter 2) showed how the industrial economy has become increasingly reliant on mineral resources. But no account is made of the depletion of these vital reserves of natural capital. Equally, no economic adjustment is made for the loss of environmental capital such as agricultural soils and pristine water supplies. As the Business Council for Sustainable Development describes it: 'The human species is living more off the planets capital and less off the interest. This is bad business.'15

Ironically, many of these costs may not be felt by the present generation. Instead they are left as a legacy for our descendants. For example, the costs that will be associated with global warming from the fossil fuels emitted now may not be felt for several decades. Present industrial activity is living off the environmental quality of future generations. Accounting for long-term costs should also be an element of our attempt to measure overall welfare rather than present economic wealth.

Finally, aggregate measures of income may offer misleading indications of welfare if wealth is not evenly distributed throughout the population. Figure 30 presents an index of income distribution for the UK based on the so-called 'Gini coefficient'.16 This number is a measure of the inequality of income between different income groups. The higher the Gini coefficient the less equal is the distribution of wealth.

The graph shows that the distribution of wealth remained more or less constant during the 1950s and 1960s, and even improved somewhat in the 1970s. But the index rose sharply through the 1980s, indicating

1950 1955 1960 1965 1970 1975 1980 1985 1990

Figure 30 Inequality in the distribution of incomes in the UK: 1950-90 (The Gini coefficient is set at 100 in 1950 and subsequent years are indexed relative to the base year.)

1950 1955 1960 1965 1970 1975 1980 1985 1990

Figure 30 Inequality in the distribution of incomes in the UK: 1950-90 (The Gini coefficient is set at 100 in 1950 and subsequent years are indexed relative to the base year.)

that the distribution of incomes was more sharply skewed towards the rich during that period. A dollar (or a pound or an ECU) in the pocket is worth more (in terms of welfare) to a poor family than to a rich one. So welfare cannot be said to be increasing at the same rate as income, if income is unevenly distributed. Furthermore, an uneven distribution of incomes may lead to social divisiveness, threatening personal security, and reducing rather than enhancing collective welfare.

But if GNP is an inadequate measure of welfare, for all these reasons, how exactly are we to judge whether or not economic growth is delivering improved welfare? One way of making that judgement17 is to try and measure trends in welfare by adjusting GNP to account for a variety of economic costs which are not generally included in the analysis. The most recent attempts to do this are based on an Index of Sustainable Economic Welfare (ISEW) proposed by economist Herman Daly and theologian John Cobb in the United States.18 This index attempts to measure welfare by adjusting an economic measure of consumer expenditure to account for a variety of environmental and social factors. Subsequently, the same methodology has been developed and applied to other countries. Figure 31 shows the indexed results of three of these preliminary attempts to measure sustainable economic welfare.

0 -I-1—j-1—(-1-1-1-1—|-1-J—1-1-1—|-1—I-1-1—j-1-1-1-1—I-1—1-1-1—|-1-1-1-1—1-1-1—1-!—

1950 1960 1970 1980 1990

Figure 31 Trends in sustainable economic welfare in three industrialised countries: 1950-90 (The index is set at 100 in 1950 and subsequent years are indexed relative to the base year.)

Comparison of these results with Figure 8 (see Chapter 2) suggests that the trend in welfare departs significantly from the straightforward measure of economic performance over the four decades. In the UK, for example, per capita I SEW is barely greater by the end of the study period than it was at the beginning of the period, despite growth in GNP of over 200 per cent, and the index falls significantly through the 1980s, even though GNP continues to rise.

These results have to be regarded at best as illustrative. But the lesson from Figure 31 is nevertheless striking: welfare is not the same as economic wealth. Economic growth does not necessarily mean improved welfare.

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