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Economic Growth, Human Welfare and Inequality Lord Turner Chairman - - PowerPoint PPT Presentation
Economic Growth, Human Welfare and Inequality Lord Turner Chairman - - PowerPoint PPT Presentation
Lionel Robbins Memorial Lectures Economic Growth, Human Welfare and Inequality Lord Turner Chairman of the Financial Services Authority, the Climate Change Committee and the Overseas Development Institute Lord Layard Chair, LSE Lionel Robbins
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Lecture I: Lecture II: Lecture III:
Means: Do free financial markets maximise efficiency, growth, or other
- bjectives?
The case for economic freedom: implications for public policy: and for the discipline of economics Objectives: Why growth should not be the objective in rich countries
Starting Point: The Instrumental Conventional Wisdom
Free markets Allocative efficiency Growth Human happiness Inequality: Justified because it helps deliver growth Free markets
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Satisfaction with life and growth of income in Japan
Source: Bruno Frey & Alois Stutzer, Happiness and Economics, Princeton University Press, 2002
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Happiness and income per capita in the USA
Source: Bruno Frey & Alois Stutzer, Happiness and Economics, Princeton University Press, 2002
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Income and happiness: Comparing countries
Algeria Argentina Bulgaria Belarus Chile Colombia Estonia France Germany Hungary India Israel Italy Japan Lithuania Mexico Nigeria Norw ay Poland Portugal Romania Russia Slovakia South Africa Zimbabw e Spain Sw itzerland Ukraine Macedonia USA Uruguay Venezuela Albania Azerbaijan Australia Austria Bangladesh Belgium Brazil Canada China Croatia Czech Republic Denmark Dominican Republic El Salvador Finland Georgia Greece Indonesia Iran Ireland Jordan South Korea Latvia Moldova Morocco Netherlands New Zealand Pakistan Peru Philippines Singapore Vietnam Slovenia Sw eden Turkey Uganda Egypt Britain Tanzania
30 40 50 60 70 80 90 100 5000 10000 15000 20000 25000 30000 35000 Income per head ($ per year) Average of % happy and % satisfied
Source: Richard Layard, Happiness, Penguin, 2005
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Average Income and Human Contentment: Possible stylised pattern
Happiness / Wellbeing Income
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Global Living Standards: A Millennial Perspective
Source: Angus Maddison, The World Economy: A Millennial Perspective, OECD 2006
Average per capita GDP (in 1990 $)
1000 AD 1500 1870 1998 Western Europe 400 775 1200 18000 Western off-shoots 400 400 1200 26000 Japan 420 500 670 20000 Asia (excl. Japan) 450 570 575 3000 Africa 400 400 400 1400
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Income and Human Contentment: Possible stylised pattern over time
Income / Contentment Pre-industrial societies The Great Transformation Economic and technological progress Income Human wellbeing contentment / happiness
China Africa Developed economies
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Life satisfaction and real GDP per capita
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Changes in life satisfaction and economic growth in Europe
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Decadal differences in life satisfaction and log GDP
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Diminishing Marginal Utility
Utility Consumption of specific good
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Utility/Contentment and Aggregate Consumption: The impact of new products and services
Contentment Aggregate Consumption Product 1 Product 2 Product 3
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- 3. Congestion externalities
Three distinct reasons why relative income matters
- 1. Rising
expenditure on fashion and branded goods Concern for relative status in itself Relative income influences absolute living standard Rising average incomes degrade quality of some forms of consumption
Higher relative income increases happiness Happiness a function
- f others’
income as well as
- wn
- 2. Increased competition
for inherently limited supply positional goods
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Income and wellbeing in the USA (1981-84)
42 40 38 36 34 Annual Income (Thousands) 20 40 60 80 100
Source: Bruno Frey and Alois Stutzer, Happiness and Economics, Princeton 2002
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“Distributive” versus “creative” activities
“Creative” “Distributive” Winning increasing income at expense of
- thers
Increasing the net real income available for consumption
Source: See Roger Bootle, The Trouble with Markets, chapters 4 and 5
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Two dimensions to rising inequality
Fall in lowest decile income relative to median – particularly in the US Rise in top decile income relative to median
– And top 1% relative to rest of top decile – And top 0.1%... – And top 0.01%...
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Four Factors driving inequality at top end
1. Celebrity rents 2. Increasing potential for rapid private value creation 3. Highly remunerated “distributive” activities 4. Cross-comparisons, changing social attitudes, and the role of agents
Inherent factors driven by changing patterns Inherent factors driven by changing patterns Sociological / political processes – but influenced by inherent factors Sociological / political processes – but influenced by inherent factors
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Two different perspectives on the growth of average US income
Source: Tony Atkinson’s essay Economics as a moral science, Oxford University 2009
10000 20000 30000 40000 50000 60000 70000 80000 1 9 6 7 1 9 6 9 1 9 7 1 1 9 7 3 1 9 7 5 1 9 7 7 1 9 7 9 1 9 8 1 1 9 8 3 1 9 8 5 1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 1 2 3 2 5 2 7 2 9
Arithmetic Mean income Geometric Mean income Mean income
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Health and social problems
Income Inequality
Source: Wilkinson & Pickett, The Spirit Level , Penguin 2009
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Mental health and inequality
Income Inequality
Source: Wilkinson & Pickett, The Spirit Level , Penguin 2009
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Imprisonment and inequality
Income Inequality
Source: Wilkinson & Pickett, The Spirit Level , Penguin 2009
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Most people can be trusted
Income Inequality
Source: Wilkinson & Pickett, The Spirit Level , Penguin 2009
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David Cameron, Hugo Young Lecture
“Research by Richard Wilkinson and Kate Pickett has shown that among the richest countries, it’s the more unequal ones that do worse according to almost every quality of life
- indicator. In “The Spirit Level”, they show that per capita
GDP is much less significant to a country’s life expectancy, crime levels, literacy and health than the size of the gaps between the richest and poorest in the population. So the best indicator of a country’s rank on these measures of general wellbeing is not the difference in wealth between them, but the difference in wealth within them”
(November 2009)
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Diminishing Marginal Utility
Utility Consumption of specific good
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Utility/contentment and Aggregate Consumption: The impact of new products and services
Contentment Aggregate Consumption Product 1 Product 2 Product 3
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Aggregate diminishing marginal utility – driven by aggregate satiation
Consumption
Product 1 Product 2 Product 3
Utility / Contentment
Aggregate Product n
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Happiness, income and changing aspirations
Income Happiness
Aspiration 1 Aspiration 2 Aspiration 3
Flat line of long-term happiness
1 2 3
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Happiness and already achieved income/wealth
Income / Wealth Happiness Current position
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Happiness, already achieved income, and changing aspirations
Happiness Income
Plus: Happiness as function of relative as well as absolute income 1 2 3 4
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Starting Point: The Instrumental Conventional Wisdom
Free markets Allocative efficiency Growth Human happiness Inequality: Justified because it helps deliver growth Free markets
The journey matters, not the destination Economic freedom as an end in itself
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Income and Human Contentment: Possible stylised pattern over time
Income / Contentment Pre-industrial societies The Great Transformation Economic and technological progress Income Human wellbeing contentment / happiness
China Africa Developed economies
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