December 12, 2018 Reading Time: 13 minutes

It is a commonplace that there is more to life than money and the material benefits that it may provide someone. We often make trade-offs between income-earning work opportunities and more time with family or friends, or between risky but well-paying employment and a calmer and less stressful job that does not pay as well. We might decide whether it is worth forgoing some amount of personal material wealth for a more pleasant and healthy environment. The question is, Should government be trying to measure and manage these and other things like them, instead of each of us finding the right balance and values for ourselves?

Columbia University professor and Nobel Prize winner in economics Joseph E. Stiglitz thinks that it is more the government’s role to sort these things out, and, by implication, less each of ours as individuals. In a recent article titled “Beyond GDP,” Stiglitz points out that the usual measurements of economy-wide economic well-being fall short and leave out a lot of important things that make up a happy, fulfilling, and better life. Correct and recalibrate the measurements, and government can be trusted to take care of a lot of the rest.

The Meddler Wanting to Manage Society

It is an interesting sociological phenomenon how there seems to be an inexhaustible urge and drive among some people to constantly look for ways and means to remake society into their own preferred image. The idea that it is not the business or the right of such people to tell other people how to live, what values they should prefer, and in what manners they should interact with others never seems to enter their heads, particularly when they wish to use the coercive powers of government to make everyone conform to their vision of how to live. In the past, they sometimes have been called busybodies or meddlers.

They are incessant in their belief and confident that they know how to set things right and would make the world a better place if only they had the authority and power to do so. Professor Stiglitz thinks that governments and citizens have been wrongheaded when using gross domestic product as an indicator of human happiness.

If this aggregate measure is widened and modified to include such things as calculated feelings of insecurity, qualities of human health, patterns of family imbalance, degrees of income inequality, and amounts of environmental harm due to climate change, then there will be an economy-wide, even a worldwide, set of statistics that could then be used as quantitative benchmarks for guiding wise and enlightened government policy so humankind can be made so much better off.

The Meaning and Limits of GDP

Gross domestic product has been the most widely used statistical benchmark of macroeconomic well-being since the 1930s. It is a measure of the market value of all final goods and services produced within a country (or region, or the world) within a given period of time — say, during a year. The economic components are the total market value of purchases of consumer goods (C), all net new investment (I), all government spending on goods and services (G), and net exports (that is, all exports minus imports [X-M]). Combined, GDP = C + I + G +(X-M).

Every student who takes an introductory economic course learns this formula. At the same time, virtually every economics textbook points out some of the widely understood problems with GDP. First, it does not take into consideration nonmarket productive activities. If someone mows his or her own lawn, for instance, it is not recorded in GDP, because there is no monetary transaction to which a market value is assigned for valued work done. But nonetheless a valued productive service has been performed.

Then there are underground and black market transactions in which money is paid for services rendered or products made, but which are off the books to avoid taxes or because the transactions are illegal. Also, GDP has a hard time accounting for product-quality improvements; for instance, if some electronic feature is introduced into the manufacture of an automobile but there is no increase in the market price of the automobile, GDP does not register that more is now being received by the buyer from the product.

Another neglected aspect often pointed out is that GDP does not account well for leisure time and human costs. Over the decades, the average workweek has decreased for many in the United States, not only with no decrease in wages but with increases in real income. At the same time, technological innovation in the workplace has reduced the physical strains and risks of many types of work. But these changes, while having brought about greater safety, less exhaustion on the job, and increases in real income, are not easily calculated and incorporated in GDP.

Finally, the student is usually informed that often-negative environmental effects from production and consumption are not included in measured GDP. This is often due to poorly defined or nonexistent property rights that prevent a fuller “internalizing” of negative (or positive) externalities that otherwise would be captured in the prices of market transactions.

Besides these generally understood shortcomings in measured GDP, this macroeconomic measurement hides from view all the real and ever-changing microeconomic components of market activities that are aggregated away in the economy-wide totals of consumption in general, investment in general, and imports and exports in general.

In the ongoing and never-ending market process,the relative price and wage structures, the patterns of resource uses and production outputs, and the degrees of coordination or discoordination across the complex multitude of sectors in the extended social system of division of labor are all lost in translation into an economy-wide single statistical aggregate called gross domestic product. (See my article “Macro Aggregates Hide the Real Market Processes at Work.”)

Designing a “Better Life Index” for Government Planning

Professor Stiglitz praises a 2017 report on the Better Life Index issued by the Organisation for Economic Co-operation and Development (OECD). The index incorporates many of the additional features that he thinks are needed to “go beyond” GDP. For instance, there are often observed mismatches between jobs available and workers’ skills for them. The OECD wants indices for these mismatches as a guide for governments to know for what jobs workers should be educated and trained.

Then it’s pointed out that early childhood and education are significant for a healthy upbringing and preparation for later life. These indicators and indices are crucial so governments can plan for how children should be brought up in terms of living conditions, family environment, dietary needs, and early training in politically correct “inclusiveness” thinking, as well as designing primary education and its content. The international political mandarins need these statistical measures so they can regulate and direct the transitions to a happier and more socially just world community that can only come through government guidance of young minds.

Then there is planned and directed “green growth,” which requires governments to have the statistical indicators to “raise awareness, measure progress and identify opportunities and risks” for the right policies that will promote a post-carbon global economy. All these statistical measures are essential so governments working through the network of international organizations can know the desired and right “environmentally related taxes and subsidies, technology and innovation, and international financial flows” to create the better world that free men and competitive markets cannot be trusted to bring about.

Finally, the OECD report wants the necessary statistical data and indices to better direct how private business can be made to introduce and participate in “apprenticeship” programs that the OECD “experts” just know are and will be the best ways to integrate young entrants into the workforce, along with integrating migrants as the best way to overcome discriminatory barriers.

In addition to the above-described report, on behalf of the OECD Joseph Stiglitz has coauthored a new report titled “Beyond GDP: Measuring What Counts for Economic and Social Performance.” Besides the types of elements just summarized, Stiglitz’s joint report also tries to measure the types and degrees of inequality between the rich and the poor and between different racial and gender groups in society.

But added to these measures are “subjective inequalities.”That is, how do people think of themselves in terms of opportunities, standards of living, and comparison to others? Here it is necessary for economists to more closely link up with social psychologists to survey and measure how people feel about such things so as to introduce policies that will result in people feeling better about themselves and their standing in society. As the authors say, the goal is to find out from such surveys whether people have “satisfaction with their life as a whole, their feelings at a particular moment, or the extent to which they feel that their lives have meaning or purpose.”

Appreciating the Complexity of Markets and Society

To begin with, the idea that all of the complexities of people and society can be quantified, measured, and reduced to a series of statistical categories and indexes in the way the OECD and economists like Stiglitz believe they can shows the degree of hubris these social engineers harbor in their hearts.

If anything, modesty should be the order of the day. Several decades ago, the Austrian-born economist Oskar Morgenstern ( probably best known as one of the developers of game theory) wrote a paper titled “Does Gross National Product Measure Growth and Welfare?” He emphasized:

I find however that very few men, even few economists, or should I say regretfully, especially economists, have a real appreciation and understanding of the immense complexity of an economic system. Now I have used the word “system” but it is not even clear whether the word “system” is appropriate because we do not understand fully the organizing principles that make the economic life of a nation possible.…

In all this, there is no central genetic regulation, nobody who plans for all; there is no one to whom everybody is responsible.… At present, at this very moment, raw materials are being produced, for which there is no conceivable way of telling how they will be finally molded, into which kind of finished products they will be turned. A steel producer has no idea whether his steel will be used for the making of tanks, or ships, or paper clips.

And yet all this works and works miraculously well, although of course it is easily subject to great disturbances. The astonishing fact is not that the thing does work well, but that it works at all. It is only when we realize the complexity of the economy that we begin to see, and possibly understand, how dangerous it is to interfere in these matters.…

In the light of these observations, one should become extremely modest in making proposals for policy. In general, I would say that unless we are reasonably sure that we know what the consequences of new policy measures will be — for example, of new taxes introduced, prices regulated, etc., etc. — we should leave things alone. One interferes only if one understands what the consequences of the interference are.

Morgenstern went on to point out that an economic system is constantly open to change: changes in technology, changes in people’s knowledge and wants and desires, changes in the availabilities of resources and in the patterns and forms of production.

To attempt to reduce all this complexity and never-ending change to a single statistical number (or small handful of such numbers) as with GDP is the height of absurdity. As Morgenstern expressed it: “We have just seen that the economy too is of high complexity and therefore its description, or rather its changes, could be given and measured — accurately, without the slightest error of measurement — by one scalar number is equally absurd.”

The Experts Micromanaging Everyone’s Life

But in spite of the type of argument that Oskar Morgenstern (and others) has made, Joseph Stiglitz (the social engineer) and his fellow political paternalists arrogantly presume that they can classify, categorize, quantify, and create a world to their own liking.

Does it ever enter into their minds that people might prefer to simply be left alone and not be manipulated and moved about according to the whims and wishes of a handful of self-anointed experts — experts who claim to know how humankind should be organized, how people should live and work, what economic and income relationships should exist among them, and whether they were born, grew up, and have been living in what these experts assert to be the right and just ways?

If the OECD has its way, governments and their international organizations will be peering and prying into everyone’s homes. Are parents raising their children correctly? Are they giving them the family and community environments, attitudes, and beliefs that are “socially just” and “inclusive”? These are words that can mean anything or nothing because their contents are a matter of the values that those social engineers put into them concerning how humankind should live, should act, and should believe.

Back in the early 1950s, University of Chicago economist Frank H. Knight declared in a presidential address before the members of the American Economics Association that Keynesian economics had taken economics back, with its simplistic aggregated approach, to the “dark ages” of economics.

Adam Smith Warned About the Hubris of the Social Engineer

Joseph Stiglitz’s notion of a socially engineered economic and social order is no less a return to the dark age of economics before Adam Smith and the Scottish Enlightenment. Must he be reminded of Adam Smith’s words in The Theory of Moral Sentiments (1759) about the dangers from the “man of system,” Smith’s term for the social engineer?

The man of system … is apt to be very wise in his own conceit, and is often so enamored with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it.… He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board; he does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of society, every single piece has a principle of motion of it own, altogether different from that which the legislature might choose to impress upon it.… It is to erect his own judgment into the supreme standard of right and wrong. It is to fancy himself the only wise and worthy man in the commonwealth, and that his fellow-citizens should accommodate themselves to him, and not he to them.

Must he be reminded of Adam Smith’s warning in The Wealth of Nations (1776) concerning the hubris and danger of he who would assert such a right to direct and plan the social and economic order?

The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had the folly and presumption enough to fancy himself fit to exercise it.

I find it almost embarrassing to have to include these quotes from Adam Smith. Any trained and experienced economist should have had them imprinted on their mind and their memory as part of their education. The hallmark of a qualified economist, in my opinion, is an essential and always-present humility about the complexity of the economic system and the workings of the market order that should make every thought about types of interventions, regulations, redistributions, and central plans always be held in abeyance.

Misunderstanding Markets and the Inescapability of Inequality

Perhaps Professor Stiglitz may say that Adam Smith’s words are all well and good, but we do not live in a word of “perfect competition” as stylized in most introductory economics textbooks. In the real world, not every producer is a most cost-efficient “price taker.” There are market inefficiencies and monopolies; there are unjust inequalities of income and lack of opportunities; there are racial and gender discriminations; and there may be environmental hazards threatening quality of life.

All of these shortcomings may be conceded, but doing so does not lead us to the type of nationally and globally planned societies that the introduction of the panoply of policies that Professor Stiglitz proposes would require. The economic world seems sometimes out of joint only because of the faulty economic model of perfect competition that has for far too long dominated the thinking of mainstream economics. (See my articles “Capitalism and Competition” and “Capitalism and the Misunderstanding of Monopoly.”)

Thought of differently, in the dynamic market-process manner that economists such as Friedrich A. Hayek and Joseph Schumpeter outlined, a free and competitive market system offers the very types of opportunities and advancements in the standard and quality of life that Stiglitz says he desires for more of humankind.

Business bigness by itself means nothing in the marketplace. It is a matter of how that bigness has come about: through continuing success in satisfying consumer demand, or through favors and privileges bestowed by governments. If the latter, the answer lies in freeing markets, not in burdening them even more with heavy-handed regulation. (See my article “Consumers’ Sovereignty and Natural vs. Contrived Scarcities.”)

Though it may shock Professor Stiglitz, human beings are not equal, and any attempt to make them seemingly equal must result in people being treated unequally by government. People differ in parenting and upbringing, in experiences and the inescapable accidents of life. They come to want different things, value different ends and have different goals, and weigh alternatives differently over the great and small affairs of human life; therefore, their attachments of estimated (marginal) costs and benefits to the trade-offs they both face and create are different.

Equality Before the Law, and the Realities of Human Life

The classical liberal ideal of equality has been an equality of individual rights before the law, with privileges and favors for none. Each individual then has the chance to set their own goals and purposes in life, and to find and utilize what they consider the best means at their disposal in their pursuit. What great truth do Professor Stiglitz and others expect to glean from surveys of multitudes of people other than that they never are perfectly sure what will give their lives meaning and value, though the human psyche seems to be hardwired for human beings to try to find such and pursue it? Or that at every moment, human beings experience ups and downs, successes and sorrows, frustrations and fantasies, hopes and desires?

This is called life, and humans have been experiencing it as long as humans have been around. Does Professor Stiglitz think that some secret of life is going to be found through those surveys and the policies that he will want to implement to move people in the directions that he thinks will make their lives more meaningful and happy?

Read the ancient Greek philosophers and playwrights, or the Analects of Confucius, and what does one discover? The same qualities in the human heart and mind as now, including the same desires, fears, hopes and dreams, and appeals to finding meaning and peace in a world of frequent disappointment and frustration.

But Professor Stiglitz clearly is confident that humanity can be made better; just collect the data, organize and catalog it, and reduce all to a series of statistical indices, and heaven will be a little closer on earth once the right policies are implemented. What arrogance, what hubris to reduce the individual human being to a data point summed into a larger aggregate just waiting to be manipulated and managed by  the “men of system,” the social engineers. What contempt for the unique, distinct person. (See my article “The Inequality Trap Distracts From the Real Issue of Freedom.”)

The idea that governments and their armies of experts can centrally plan the betterment of humanity through more intensive and expensive welfare-statist policies, as is recommended in these reports, shows little appreciation for the limits of what one mind or group of minds can ever know, and what greater potentials for helping those who may need a helping hand can be found in the decentralized and voluntary associations of civil society. (See my articles “A World Without the Welfare State” and “A Real Agenda for a Renewal of Free Market Liberalism.”)

The world that Professor Stiglitz dreams about is a world that reduces humanity to a set of chess pieces on that great chessboard of society about which Adam Smith wrote and warned. Followed consistently to its logical end, Joseph Stiglitz’s “Beyond GDP” is just a new road to serfdom with experts like him asserting the right to be the politically empowered social-engineering lords of the manor, lording over all those tied down as welfare-statist dependents unable to escape the paternalistic grasp of those in control.

Richard M. Ebeling

Richard M. Ebeling

Richard M. Ebeling, an AIER Senior Fellow, is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel, in Charleston, South Carolina.

Ebeling lived on AIER’s campus from 2008 to 2009.

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