What did Adam Smith think of externalities associated with the efforts of individuals to improve their relative position?

I have enjoyed reading Robert Frank’s new book, ‘The Darwin Economy: Liberty, Competition and the Common Good’, more than I thought I would. This may be because I felt that the book had been written for people like me - the author seems to want people who have a strong regard for individual liberty to give serious consideration to his views.

I had expected Frank to argue that competition for positional goods involves a negative externality because those who are most successful are envied by many of those who are less successful. However, the view he presents of the nature of externalities associated with competition for positional goods is more subtle and less easily dismissed.

The starting point of Frank’s analysis is the ‘invisible hand’ of the market, which Adam Smith had suggested in ‘Wealth of Nations’ leads self-interested individuals to promote the greater good of society, without intending to do so. Frank describes Smith’s invisible hand as ‘a genuinely groundbreaking insight’, even though, as Smith recognized, the invisible hand ‘breaks down’ to some extent in the presence of externalities, public goods, and so forth. The particular negative externality that Frank is most concerned about in this book is associated with circumstances where individual rewards depend on relative performance and result from the strivings of individuals to improve their relative position. He contrasts this striving to improve relative position (which he describes as Darwinian competition) with the benign competitive forces associated with Adam Smith’s invisible hand.

Frank’s discussion of the different views of competition that he attributes to Darwin and Smith reminded me that Adam Smith had actually written about the strivings of individuals to improve their relative positions in ‘The Theory of Moral Sentiments’ (TMS). Smith suggested in TMS that what people hope to achieve by bettering their condition is not ‘ease’ or ‘pleasure’ but ‘to be taken notice of with sympathy, complacency and approbation’ (p 50-51, Liberty Fund edition, 1982). Later in the book, Smith suggests, however, that ‘the poor man’s son, whom heaven in its anger has visited with ambition’ imagines that if he attained wealth and greatness ‘he would sit still contentedly, and be quiet, enjoying himself in the thought of the happiness and tranquillity of his situation’. According to the story, this ambitious man endures a great deal of misery striving to better his position. By the time he achieves his goal, however, he is near the end of his life ‘his body wasted with toil and diseases, his mind galled and ruffled by the memory of a thousand injuries and disappointments …’. At this point he begins to think that ‘wealth and greatness are mere trinkets of frivolous utility’ offering little ‘ease of body or tranquillity of mind’ (p 181).

In my view, Smith’s story understates the benefits that people obtain from wealth because it doesn’t take account of the greater autonomy wealth enables them to enjoy. (I have discussed the link between wealth and autonomy previously on this blog.)

Smith was suggesting that people tend to make cognitive errors of the kind discussed by Daniel Gilbert in his book, ‘Stumbling on Happiness’. This view of strivings to improve relative position differs from that of Robert Frank, who does not rely on departures from the individual rationality assumptions normally used in neo-classical economics.

The similarity between the views of Adam Smith and Robert Frank in relation to strivings to improve relative position lies in the fact that both seem to see this as more or less a zero sum game, with externalities involved. Adam Smith wrote as follows about the externalities associated with the strivings of individuals to better their condition:

‘The pleasures of wealth and greatness … strike the imagination as something grand and beautiful and noble, of which the attainment is well worth all the toil and anxiety which we are apt to bestow upon it.

And it is well that nature imposes upon us in this manner. It is this deception which arouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and the arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth’ (p 183).

These days many people would be less inclined to count as a benefit some of the ways in which the face of the globe is being changed by the motion of industry. But Smith’s insight that strivings of individuals to improve relative position can encourage technological progress is still relevant. If such strivings also result in negative externalities, those need to be balanced against the positive externalities that Adam Smith identified.

I promise to write about Robert Frank’s views in my next post.

Can measurement of subjective well-being help us to assess whether life is getting better?

The British government has recently taken some steps toward measurement of subjective well-being in the hope that this will provide ‘a general picture of whether life is improving’ and eventually ‘lead to government policy that is more focused not just on the bottom line, but on all those things that make life worthwhile’.

The quoted words are from David Cameron, the British prime minister. I find it interesting that he refers to ‘the bottom line’ as though the bottom line in British politics has always had a pound sign in front of it. Philip Booth, editor of the recent Institute of Economic Affairs (IEA) publication ‘… and the Pursuit of Happiness’, suggests that the prime minister was attacking a ‘straw man’; the British government has always had a multitude of objectives.

Booth makes the point that attempts to ‘centrally direct policy toward improving general wellbeing’ will fail just as attempts to increase GDP growth through use of central planning also failed. I agree with the point, but I suspect that it is also a straw man. I doubt whether David Cameron is proposing to adopt some form of central planning in an attempt to raise national happiness. It seems to me that attempts to obtain a better picture of whether life is improving are no more likely to encourage central planning than was the measurement of national income likely to encourage central planning. Like many happiness researchers, the pioneers in the field of national income measurement were of an interventionist frame of mind. They actually wanted better measures of economic activity as an aid to implementation of Keynesian macro policies.  The central planners were not slow to jump on the national income measurement bandwagon, but there was no slippery slope leading inevitably from national income measurement to increased government intervention.

However, I can’t claim to know what the British prime minister has in mind. Initial survey work by the Office of National Statistics (ONS) has focused on a comparison of different measures of subjective well-being. Some of the results are interesting. For example, there is a fairly high level of correlation (0.66) between responses to a standard life satisfaction question (How satisfied are you with your life nowadays?) and a eudenomic question (Overall, to what extent do you think the things you do in your life are worthwhile?).

Yet, that kind of information will not tell us much about whether life is getting better. As Paul Ormerod demonstrates in his chapter of the IEA publication, levels of life satisfaction in high income countries tend to fluctuate over time without any obvious trend – and despite improvements in many different well-being indicators. I think the metaphor of a ladder attached to a helicopter, which I used in a recent post, is helpful to an understanding of why successive snapshots of life satisfaction cannot measure progress. If I am climbing a ladder that is attached to a helicopter, my height above the ground depends on the height of the helicopter as well as on which rung of the ladder I have reached. The ladder represents the benchmark of possibilities against which I assess my life satisfaction, but upward movement of the helicopter (i.e. expanding possibilities) may be my main source of progress.

In my view, if you want to know whether people feel that their lives are improving you need to provide them with an appropriate benchmark against which to make that comparison. The ONS survey enables this by also asking respondents to rate their life satisfaction a year ago and five years ago. The scores for life satisfaction five years ago and one year ago were slightly lower than those for current life satisfaction. This suggests, somewhat surprisingly, that Brits generally feel that their lives are still improving despite the global financial crisis and its aftermath. That kind of information seems to me to be worth having.

Unfortunately, I couldn’t find any discussion in the IEA publication of what measures of progress would be superior to the successive snapshots of life satisfaction that are targeted for criticism by several of the authors. The publication certainly serves a useful purpose in bringing together the contributions of a range of authors who question false assertions that have been made on the basis of happiness research and caution against government attempts to use the findings of happiness research to introduce policies to promote happiness. Nevertheless, I was slightly disappointed that the editor did not show a little more sympathy for the idea that there could be some merit in the aim of the British prime minister to obtain a better picture of whether life is improving in that country. 

I expect that if government policies were focused more clearly at expanding the opportunities that make life worthwhile, there would actually be less government regulation in most countries, including the UK.

Does GNH measure progress towards a better society?

In my last post, ‘Can happiness be aggregated?’, I suggested that any statement about aggregate happiness or gross national happiness (GNH) involves judgements – explicit or implicit – about the characteristics of a good society.

I used the example of Mary, who is flourishing at level 9, and Jane, who is just surviving at level 1, and asked whether their combined level of flourishing is equivalent to that of two other people who are flourishing at level 5 ( i.e. (9+1)/2).  I suggested that you may feel that combining the ratings of different individuals together should involve value judgements rather than just arithmetic. I argued that if we introduce value weights into the process of aggregating the flourishing of different individuals, we are making a judgement about the extent to which the distribution of flourishing is consistent with our views about characteristics of a good society. 

I think the issues raised by the example of Mary and Jane can be brought into sharper focus if we consider whether aggregate flourishing increases to the same extent if Mary’s level of flourishing rises from 9 to 10 as when Jane’s level of flourishing rises from 1 to 2. I think most people would feel that Jane’s increased flourishing should receive more weight than Mary’s in the assessment of aggregate happiness. As argued above, the assignment of relative weights involves a value judgement. Different people can be expected to have different opinions about this matter.

The people responsible for the GNH survey in Bhutan have taken the position that ‘beyond a certain point, we don’t need to keep adding in higher achievements to the quality of life mechanically’. Their methodology would not count the increase in Mary’s level of flourishing as making any contribution to GNH on the grounds that it is appropriate to confine attention to ‘a middle band of achievements that contribute significantly to human wellbeing for most people’. I am not sure whether these implicit weightings reflect a consensus of the people of Bhutan, but in any case the weightings in the GNH index have validity as an expression of the values of the elected government.

The way I see it, Bhutan’s GNH index is the method that the government of Bhutan has chosen to measure progress toward a better society.

Can happiness be aggregated?

My starting point for this post is take it as given that everyone agrees that for public policy purposes it is appropriate to view happiness in terms of individual flourishing. My reasons for this view have been presented in the draft of chapter 2 of the book that I have been writing.

I doubt whether it is possible to obtain an accurate measure of the extent to which each individual in the community is flourishing because some of the subjective information involved is probably not accessible to people conducting surveys. But let us assume that we have a measure that is good enough to compare the extent to which different people are flourishing in terms of a rating scale from 1 to 10, with a rating of 1 indicating that the individual is just surviving and a rating of 10 indicating that the individual is fully flourishing.

The measurement system that I am assuming would enable us to determine the percentage of people at different levels of flourishing within a particular community. If other communities adopted the same measurement system we could make observations about the percentage of people who are flourishing in different communities. It might be possible to say, for example, that 50 per cent of the population in community A are flourishing at a moderate level (with a rating of 7 or above) whereas the corresponding percentage in community B is only 40 per cent. There could be considerable interest in such observations, particularly if they enabled comparisons to be made between countries and over time.

Would such a measurement system enable us to say that the aggregate or average level of flourishing is higher in one country than another? I don't think so. For example if you are told that 50% of the population is flourishing in country A and 40% is flourishing in country B, that doesn’t necessarily mean that the average level of flourishing is higher in A than B. It is possible that 20% are struggling for survival in country A while only 5% are struggling for survival in country B. The average (mean) calculated from the percentages flourishing at each level might indicate that the level of flourishing is higher in B than in A. In this instance, is the mean a better measure of the 'average' than the median?

There is also a more fundamental problem. Let us assume that Mary is flourishing at level 9 and Jane is just surviving at level 1. Is their combined level of flourishing equivalent to that of two other people who are flourishing at level 5 ( i.e (9+1)/2) ? I don’t think so. It seems to me that, other things equal, it is preferable to have two people flourishing at level 5 than to have one person at level 1 and the other at level 9. But that judgement reflects my own values and is not related to the preferences of the people most directly concerned? We should ask Mary and Jane what they think. But their views might differ. Perhaps we could ask a random sample of the population what they think, or conduct experiments to find out what choices most people might make behind a veil of ignorance. (I have in mind the kind of experiment conducted by Hörisch Hannah, which I described in an earlier post.)

The point I am getting to is that even if you can conceive of ratings corresponding to different levels of flourishing, you may have good reasons to feel that combining the ratings of different individuals together should involve value judgements rather than just arithmetic. You may not be comfortable in thinking of the combined level of flourishing of Mary and Jane as though these individuals are just metric stations.

However, if we introduce value weights into the process of aggregating the flourishing of different individuals, are we not then making a judgement about the extent to which the distribution of flourishing is consistent with our views about the characteristics of a good society? It seems to me that any statement about aggregate happiness or gross national happiness involves judgements – explicit or implicit – about the characteristics of a good society.

So, why not ask directly whether society A is better than B, rather than asking whether aggregate happiness is greater in A than B? This would mean attempting to achieve consensus on the characteristics of a good society. I presented some thoughts about this in a post a couple of years ago.