How can good health care be affordable in developing countries?

When you consider that there are people in high-income countries who are struggling to afford good health care, it might appear obvious that it can only be afforded by wealthy people, or by people who have access to the bank accounts of wealthy people (including wealthy taxpayers). That perception is not entirely wrong – access to the most advanced medical technologies is often costly. Research, equipment embodying high technology and extensive staff training have to be paid for one way or another.

However, it is surprising how good, and how affordable, the health care available to ordinary people in developing countries could be with appropriate technology and incentives. The book, Pharmacy on a Bicycle, by Eric Bing and Marc Epstein, provides many examples of good health care being provided at low cost in low-income countries.

The authors are well qualified to write on this topic. Eric Bing is a physician with an MBA, who works on global health challenges at the George W Bush Institute. Marc Epstein is a business school professor, who has a special interest in commercializing technology in developing countries. The authors acknowledge assistance of several other people including their editor, Troy Camplin.

The book is written around the acronym: IMPACTS.

“I” stands for innovation and entrepreneurship. In some instances products have been designed specifically for use in developing countries. For example, to detect heart abnormalities General Electric designed a low cost ECG. The product was developed for use in India but is now marketed globally.

“M” stands for maximizing efficiency and effectiveness.  An example provided is the Aravind Eye Center in India which uses a production line process to undertake a large number of surgeries per day. This reduces cost, but it also improves surgeons’ skills and enhances the quality of care they can provide.

“P” stands for partner coordination. This is not always about government regulation. For example, VisionSpring, a non-profit organisation, has developed partnerships with schools and businesses to provide inexpensive spectacles to students and workers.

“A” stands for accountability. As might be expected, the authors emphasize the need to set clear goals and targets, and to monitor and evaluate performance to support effective decision-making. This is easier said than done, particularly in the public sectors of low-income countries, but the authors manage to find examples to illustrate how accountability systems have improved performance.

“C” stands for creating demand. The benefits of services are not always obvious to potential users. One method of creating demand discussed by the authors is the use of vouchers which enable consumers to obtain access to services at reduced cost. They can also create competition among providers and create incentives for them to give low-cost, quality care. Several examples are provided of successful use of vouchers, but the one that appealed most to my imagination was an experiment in Uganda where expectant mothers were given vouchers to take motorcycle taxis to attend a clinic for prenatal care, delivery and postnatal care.

“T” stands for task shifting.  This involves shifting tasks from doctors to nurses and from nurses to community providers or patients. Task shifting reduces bottlenecks and reduces cost.  For example, nurses have been trained to conduct screening in a program for prevention of cervical cancer in Zambia. Photographs were taken as part of the procedure and reviewed on a weekly basis by doctors and nurses. Over time, nurses became nearly as accurate in their diagnoses as doctors.

“S” stands for scaling. How can innovations that have proved successful for small groups of people be scaled up to reach more people? The authors claim:  “By focusing heavily on the fundamentals of program, process and passion, organisations operating in even the most challenging of conditions can achieve scale while maintaining outstanding quality”. The contribution the authors have provided on the scaling question seems to me to be a good example of the well-meaning, but ineffectual, approach that management experts tend to adopt when they are confronted with economic problems.

Readers might have gathered by now that I think the discussion of the scaling issue is the weak point of this book. In scaling up successful pilot programs to reach large numbers of people the prime consideration has to be to ensure that organisations (firms) have appropriate incentives to deliver high quality goods at low cost. It would be useful for more consideration to be given to the question of whether market incentives, such as those that drive high quality service delivery around the world in franchise operations such as McDonalds’ fast food restaurants, could apply to a greater extent to delivery of medical services in developing countries. An irrational aversion to the idea of McDonaldizing health seems to prevent governments from allowing health markets to function effectively in the interests of patients.

My overall impression of this book is favourable, despite the reservations just expressed. The authors have done an admirable job in demonstrating that there is potential for a lot more people in the world to have access to high quality, affordable health care.  

What are the implications for PNG of Australia's new foreign aid policy?

My interest in Australian aid to Papua New Guinea was heightened while I was in Papua New Guinea late last year and earlier this year working on a review of agricultural policy implementation for the PNG government. I was surprised to learn that, apart from some ACIAR projects, not much Australian aid money has gone to agricultural development in PNG in recent years. (In case anyone is wondering, the project I was working on was not funded by foreign aid. Work on this post was not funded by anyone other than myself and I have not discussed the topic with anyone prior to publication.)

PNG is still a major recipient of Australian foreign aid. Development grants to PNG are estimated at about $500 million in 2014-15, which is more than half of all allocations for Pacific countries and about 15 percent of total allocations for country and regional programs.

From a PNG perspective, however, development grants from Australia do not now make a huge contribution to the government’s budget. Such grants currently account for about 6 percent of total PNG government spending; development grants from other foreign sources account for a further 2 percent of spending. The amounts involved are substantial when compared with current tax receipts from sources such as GST and personal income tax, but seem quite small when compared with amounts raised by borrowing – amounting to about 34 percent of estimated government spending for 2014. The high level of borrowing reflects the rapid rise in government spending in recent years in anticipation of substantial revenue flows from LNG exports.

The relatively small amount of Australian aid money flowing to agricultural projects can be explained in terms of the priorities established in the “PNG-Australia Partnership for Development” in 2011. This agreement gives priority to education, health, transport infrastructure, and safety and justice (policing, security, access to justice etc.). Those priorities, in turn, reflect the priorities of PNG’s Medium Term Development Plan 2011-2015 (MTDP).

That all seems to make sense in terms of ensuring that aid money contributes to national goals of the recipient country. The priorities of the MTDP also make sense in terms of its objective of laying the foundation for economic growth by addressing supply side constraints. Improvements in law and order and transport infrastructure have potential to reduce costs and improve the competitiveness of export industries. Improved education and health services (e.g. malaria prevention) have potential to make an important contribution to improving productivity. Moreover, while many services in the priority sectors can be most efficiently provided by private firms, those sectors also encompass core functions of government.

So, what is wrong with the idea that foreign aid should be used to help the government to perform its core functions better? Not much really, except that in the context of a country like PNG there is no magic wand that can be purchased, with or without foreign aid, to improve performance of core government functions. I puzzled over one aspect of this question a few months ago in a post entitled “How do peaceful societies come about?”. History seems to tell us that law and order is more likely to be established through the emergence of better economic opportunities for potential criminals than through massive investments in deterrence of crime.

The dynamics of the development process certainly do not require that improvements in core government functions must necessarily precede the development of more widespread economic opportunity. In the PNG context I think such considerations provide a strong case for agricultural policies to be used to help promote more widespread economic opportunity. I don’t want to attempt to explain why that is so in this post. I think it is adequately explained in the report I helped to prepare, entitled “Towards Agriculture Transformation and a New Direction for Enhancing Productivity in Agriculture”, which is now publicly available. The recommendations of the report have been accepted by the PNG government.

So, that provides the context in which I ask myself what are the implications for PNG of Australia’s new foreign aid policy. The new aid policy has a strong focus on private sector development, growth of international trade and the development of agriculture and fisheries.  The new policy links funding to performance: programs and partner organisations that perform well will be rewarded with additional funding.

There seems to be potential for the new framework for agricultural transformation adopted by the PNG government to mesh well with Australia’s new foreign aid policy. It will be interesting to see how much emphasis there is on encouraging innovation in agriculture in PNG as Australia’s new aid policy is translated into Aid Investment Plans over the next 12 months. 

Postscript:

The following comment has been supplied by the PNG Minister for Agriculture, Hon. Assik Tommy Tomscoll, MP:

“I read your article and agree. In PNG the best opportunity to create wealth, capture a large proportion of the population in economic participation, promote industrialisation and improve living standards for the majority, lies in the development of the agriculture. Around 87% of our people depend on agriculture for both cash and subsistence, and the agriculture sector contributes 24% to 27% to gross domestic product. PNG is an agriculture-based economy, not a hydrocarbon and mining economy.

Thanks for your worthy contribution in the FER - and so the sector is forging ahead at long last.”

Appreciative comments were also received from Dr Vele Ila’Ava, Secretary of the PNG Agriculture Department, and Dr James Kaiulo, Chairman of the FER Steering Committee and FIA Team Leader. Dr Kaiulo commented as follows:

“You have ‘hit the nail on the head’ in relation to the Australian Foreign Aid Policy on social (health, education, law and justice) programs that are being promoted and funded by the Australian Government while ignoring the agriculture sector.  The Australian Aid on agriculture has been focused in the area of R&D programs without any significant impact on the improvements to the livelihoods of the rural farmers.

I hope they take note of your comments.”

Some of my colleagues on the FER team have also provided supportive comments. I would like to draw attention to the comment provided below by Dr Eric Omuru: 

"Increased funding support to agriculture by PNG government is gaining momentum. The findings and recommendations of the FER report have been well received by the government. The support and efforts to this cause by our minister and secretary is the best I have seen in the sector in a long time. If Canberra can join the party and contribute a certain % of what it gives to PNG as foreign aid specific for agriculture, it will be a meaningful contribution. 

Enjoyed reading your article."

Should researchers recognize that emotional states are influenced by life evaluations?

There is nothing novel about the idea that people who have a positive frame of mind about the opportunities and challenges that life offers tend to experience positive emotions as they go about their daily lives. 

We are not surprised that people who smile and laugh a lot, obtain enjoyment from whatever they are doing, feel they are learning or doing something interesting and feel that they are treated with respect tend to rate their lives highly. If such people don’t consider their current lives as close to the best possible, it is likely to be because they are optimistic about the potential for their lives to get even better. It might be reasonable to suppose that their positive emotions reflect frames of mind stemming from their dispositions and their evaluations of their lives as well as from their current experiences.

However, when I looked up “positive emotion”, “frame of mind” and “research” on Google I found a lot of references to research on cognitive approaches to improving well-being, but I didn’t see any on life evaluations as a determinant of positive emotion. Researchers do not seem to have perceived life evaluations – for example, responses to survey questions asking people to rate their lives between best possible and worst possible – as frames of mind. Emotional state variables (positive emotion and negative emotion) are sometimes included in analyses which seek to explain life evaluations, but I am not aware of studies which view life evaluations as a potential explanatory variable.

The question posed in this post is linked to the finding in my last post that average positive emotion ratings in countries in the former Soviet Union are lower, while those in Latin American countries are higher, than might be expected on the basis of negative emotion ratings in those regions. I suggested that the most likely reason for this was the development of shared frames of mind by people in those regions. That poses the question of whether these shared frames reflect life evaluations or something more profound.

Which variables should be included in a regression model to assess the influence of frames of mind on positive emotions at a national level? The most obvious measure of positive emotions to use is the Gallup measure which reflects the extent to which people are well-rested, smile and laugh a lot, obtain enjoyment from what they are doing, are learning or doing something interesting and feel that they are treated with respect. It seemed appropriate to include the Gallup measure of negative emotion (reflecting pain, worry, sadness, stress or anger) as an explanatory variable to take account of experience that might lead people to have a negative frame of mind. Regional variables were included for reasons just discussed. Gallup data was used to reflect average life evaluations at a national level (Cantril ladder).

Three other frame of mind variables were included because they have previously been found to be significant determinants of both life evaluation and positive emotion ratings. (See, for example, the research by John Helliwell and Shun Wang presented in Table 2.1 of Chapter 2 of World Happiness Report 2013.) These variables were satisfaction with freedom, perceptions of social support and generosity. All data was obtained from the online appendix to Chapter 2 of the World Happiness Report.

Separate regional variables were included in the initial regressions but only Latin America, the Former Soviet Union, Central and Eastern Europe and Middle East and North Africa were found to be significant. The final regression model explains about 70 percent of the variation in positive emotion at a national level. The results of the analysis are reflected in the Figure below. (All estimated coefficients were significantly different from zero at the 95% level. Further information can be made available on request.)

Two important points are evident from the Figure:

• The relatively low positive emotion ratings of people in the former Soviet Union and the positive ratings of people in Latin America are still evident after controlling for several other variables. These anomalies cannot be explained in terms of life evaluations or the other frame of mind variables considered.
• The influence of life evaluations on positive emotion involves more than just satisfaction with freedom, perceptions of social support and generosity.

Postscript 1:

I acknowledged above that frames of mind can stem from dispositions as well as from life evaluations. In retrospect, I should also have noted that dispositions can affect life evaluations.

A paper just published by Eugenio Proto and Andrew Oswald explores the role of genetics in influencing average life evaluations at a national level (“National Happiness and Genetic Distance: A cautious exploration”, July 2014, IZA DP 8300). The paper suggests that genetic distance from Denmark is a significant determinant of life satisfaction.

If the genetic influence on disposition had an impact on positive affect in addition to its influence on life evaluations (and other variables including negative affect and regional variables) that should be reflected in the residuals of the regression described above. However, the residuals for Denmark and countries that are genetically close to Denmark (Norway, Sweden, Czech Republic, Austria and Switzerland) are small and mainly negative.

Postscript 2:

Inclusion of genetic distance from Denmark in the regression analysis made little difference to the results obtained. The coefficient on the genetic variable had the 'wrong' sign and was not significantly different from zero. The results suggest that any genetic influence on positive affect occurs via life evaluations and other variables.

Postscript 3:
Research by Gian Vittoria Caprara, Nancy Eisenberg and Guido Alessandri on the dispositional basis of happiness is relevant to this post. The authors note that life satisfaction, optimism and self-esteem have recently been traced to a common disposition, namely positivity. The authors' measure of positivity reflects all these factors. Their research suggests that positivity predicts future positive affectivity, rather than vice versa. 

Why don't we see a close relationship between low negative emotion and high positive emotion?

Think about how you felt yesterday. Did you feel much pain, worry, sadness, stress or anger? If you felt less of those negative emotions than the world average, then do you think it would be reasonable to predict that your experience of positive emotions might be higher than the world average? The relevant positive experiences are smiling and laughing a lot, feeling enjoyment, well-rested and treated with respect, and learning or doing something interesting.

Apparently that prediction is not as reasonable as I thought it would be. People in countries where average levels of negative emotion are relatively low do not necessarily have relatively high average levels of positive emotion. This is apparent in the Figure below which has been drawn from data from recent polls conducted by the Gallup organisation.

The Figure does show an inverse correlation between positive and negative emotion, but most of the action is at the upper end of negative emotion. It seems to be much less common for people with high negative emotion to also experience high positive emotion than it is for people who experience low negative emotion to also experience low positive emotion.

Interestingly, the chart also shows that the average of positive emotion for people in Bhutan - the home of Gross National Happiness (GNH) - is low by comparison with both of its giant neighbours, China and India. Gallup has suggested that Bhutan’s low score on positive emotion is attributable to the fact that the percentage of the population who feel that they are treated with a “great deal of respect” was the lowest for all countries included in the 2013 survey. Perhaps this reflects the restrictions on individual liberty imposed by the government in pursuit of its GNH objective. It is also possible that the GNH objective gives participants in happiness surveys an incentive to use their responses to tell the government that they are not happy with its performance. 

   

However, the main point I want to make concerns the salient characteristics of the countries which combine low negative emotion with low positive emotion or unusually high positive emotion. Most of the countries in the first category were formerly members of the Soviet Union (shown with red diamonds). By contrast, most Latin American countries (shown with purple diamonds) have unusually high positive emotion scores.

The most likely explanation of the different emotional experiences of people in the former Soviet Union and Latin America is the development of shared frames of mind (cultural framing). Sonja Lyubomirsky has observed that expressions of happiness or success in Russia are often perceived as inviting envy, resentment, and suspicion, at least partly because there is a cultural belief in Russia that anyone who is happy or successful might have used immoral means for achieving these states. (Reported in a recent article on happiness aversion by Mohsen Joshanloo and Dan Weijers). I guess such beliefs could have been reinforced by living under communism and the regimes that have followed the fall of communism. It is also possible that negative emotions would be understated in a culture where people had incentives to adopt a “must not complain” attitude to life.

With regard to Latin America, Jon Clifton, the author of the report of the Gallup survey suggests:

“That so many people are reporting positive emotions in Latin America at least partly reflects the cultural tendency in the region to focus on the positives in life”.

There is evidence (for example in a report by Eduardo Loro) that when people in Latin America are asked about their health, they tend to report a higher level of satisfaction than is warranted, given objective indicators of their health status.

The existence of such a cultural bias does not mean that the high positive emotion reported for Latin America is not genuinely felt. Research by Mohsen Joshanloo provides some evidence of lower happiness aversion in Latin America than in many other parts of the world. It seems reasonable to predict that the high positive emotion in Latin America would provide health benefits e.g. lower rates of hypertension, as in other parts of the world (see research by David Blanchflower and Andrew Oswald). Unfortunately, I haven’t been able to find studies that control for the relevant variables to confirm whether that is the case. There are studies suggesting that rates of hypertension are relatively high in some Latin American countries, but that seems to be attributable to obesity and other risk factors.  

We are good?

I was asked that question by a waitress in the restaurant at Holiday Inn in Port Moresby a few months ago. I told her that I was good and asked whether she was good. She responded: “We are good”.

This novel use of the hospital ‘we’ seemed amusing. But the incident came to mind just now because of the potential for ‘good’ to mean different things.

How do you respond when someone greets you by asking: How are you? There was a time when I nearly always said “I’m good”, but I became more conscious of what I was saying after some clever person responded that he was not asking about my morals. In retrospect, I should have told him that I was referring to my emotional state, which was good because I was in good health and also felt somewhat virtuous and competent.

A few years ago I wrote a post on the topic: Is our inner nature good? What I wrote still seems ok; perhaps I could even claim it is good. I ended up more or less endorsing the view that our inner nature must be good because moral beliefs and motivations come from a small set of intuitions that evolution has prepared the human brain to develop. Those intuitions enable and constrain the social construction of virtues and values. 

There is scientific support for that line of thinking, but a scientific approach cannot take us far in considering our inner natures.

It may be worth considering why a scientific approach cannot be particularly enlightening about our own inner natures. One basic reason is that we live our lives as players rather than spectators. If we try to observe ourselves in the way we observe other people we tend to make predictions that get in the way of our intentions. We cannot escape the fact that our perceptions influence our behaviour, and vice versa. If I perceive myself as the kind of person who behaves in a particular way, then that will influence my intentions and how I behave; and if I change my behaviour, that will influence how I perceive myself.

In order to become more like the person you would like to become, you need to know how and to “do it like you mean it” (to use a phrase I heard often as a child while helping grown-ups with farm work). A story told by Tim Gallwey in The Inner Game of Golf comes to mind to illustrate the point (p183). A golfer came to Gallwey for coaching to improve his golf swing. After the golfer demonstrated his dreadful swing, Gallwey asked him how he would like to be able to swing. When the golfer started to explain, Gallwey asked him to demonstrate. That resulted in an immediate improvement in performance.

Now, it is fairly obvious that people can’t become experts in any field by just pretending to have expertise. The golfer only had the potential to improve his swing instantaneously because he knew how to do so.

Going back a step, how do we know we can trust our intuitions about what kind of person we would like to be? Our perceptions about our inner natures must influence our thinking about what kinds of persons we would like to be. There are many different stories we can tell ourselves about our inner natures. If you tell yourself that “the flesh warreth against the spirit” then I guess your goal must be to overcome the temptations of the flesh.  If you tell yourself that your body is just a machine designed to make you happy then I guess your goal would be to keep all the parts in good working order and become a proficient machine operator. If you tell yourself that all sensations are illusory or impermanent and that attachment to them causes suffering, then I guess your goal would be to become equanimous. If you tell yourself that you have an authentic self which grows into a strong, healthy and peaceful presence when you practice unconditional acceptance of all your bodily sensations, then I guess your goal is to get into the flow and let that happen.

Although it must be fairly obvious that I think some of those stories would serve me better than others, I don’t think it is possible to prove any of them to be false. Even so, it seems to me that plausibility is still an important consideration in choosing which stories to accept. As a general rule small leaps of faith are probably better than large leaps of faith. That thought occurred to me as I was reading Michael Winn’s book, Way of the Inner Smile, a few days ago. For example, the following passage explaining how the inner smile differs from feelings of love and compassion seems to me to be a plausible description of personal experience:

“The Inner Smile is probably something closer to the experience of unconditional acceptance. The seed quality of unconditional acceptance is smiled through the outer biological layers of the self in towards the core of one’s being, and this generates a counter-wave of smiling energy that emanates back out from the core and flows in the chi (subtle energy) channels of the body”. (p 55)

The plausibility of that story relies on personal experience rather than on scientific verification of the existence of such things as smiling energy and chi channels. Some ideas in the book seem to me to be less plausible, but it would distract from the points I am trying to make if I elaborate now.

So, what points am I trying to make? Feeling good is about competence and virtue as well as health. Feeling good is about becoming more like the person you want to become. In order to develop a strong sense of what kind of person you would like to become it may be helpful to find a story about your inner nature that you find plausible. When considering your inner nature, the most relevant test of plausibility is personal experience rather than science. And we should not forget to smile.

Postscript:

Lucy Lopez has provided the following comment:

 You wrote: "Feeling good is about competence and virtue as well as health. Feeling good is about becoming more like the person you want to become. In order to develop a strong sense of what kind of person you would like to become it may be helpful to find a story about your inner nature that you find plausible. When considering your inner nature, the most relevant test of plausibility is personal experience rather than science. And we should not forget to smile."

Firstly, the thinking mind is almost never inactive and so intervenes in every experience.  So much so that most people find it hard to distinguish between their thoughts, beliefs and ideas and their FEELINGS.  In fact, most find it hard to actually allow themselves to feel, almost always reporting on what they think rather than how they feel.  

So, for instance, if I ask you how you feel and you say 'I'm good'. that is more than likely an expression of the idea of 'I'm okay' or 'There's nothing terribly wrong with me' rather than an expression of how you're really feeling.

But it is possible to get in touch with our feelings and acknowledge them even when we sometimes may not have any existing words for them.  When you really allow yourself to FEEL, or should I say to ACKNOWLEDGE how you're feeling, it can be quite a revelation.  That's because we have been so conditioned to deny, distrust and hide our feelings.  

When we do allow ourselves to tune into our feelings fully and acknowledge them, we can do two things:

1. We can decide if we want to continue feeling the way we are feeling or not.  If we want to continue feeling the same way, there is nothing more to do.  If we don't want to feel the way we're feeling, we can ask the question: How would I LIKE to feel?  Without presuming we know the answer (in other words, without resorting to thought/ideas, we allow that feeling to arise spontaneously.  Again, it may often surprise us how different that feeling is to what we might THINK we want to feel.  (BTW, this is a technique I teach).

2. We can look for the thoughts and beliefs that underlie our feelings and examine these for their validity, whereupon we might consider different thoughts and different beliefs.

The point to all this is that you don't need to rely on some intellectual concept of the kind of person you'd like to be.  Sure, you may begin by thinking about it but it is far more effective, efficient and natural to FEEL the kind of person you want to be because more than likely, you'll be guided by what feels good i.e. peaceful, joyous, blissful, equanimous even...The kind of states you experience during meditation as Voltaire describes it:

'Meditation is the dissolution of thoughts in Eternal awareness or pure consciousness without objuectification, knowing without thinking, merging finitude in infinity'.

Always happy to respond to your ideas :)

Lucy's blog:  "Get Enlightened Today"

Why are economists talking about income distribution?

The distribution of income was once at the core of economics because it helped to explain differences in growth of wealth and population in different nations. Interest in income distribution then shifted to the implications of income inequality for social justice and aggregate happiness. Around the middle of the 20th Century, however, most economists realized that they had no particular expertise in contemplating such matters. Economists retained some interest in income distribution because many governments pursued distributional objectives and it made sense to consider how such objectives might be pursued at least cost. Nevertheless, it is probably fair to say that income distribution became somewhat tangential to the main interests of most economists.

The situation seems to have changed radically over the last few months, following publication of Thomas Piketty’s book, “Capital in the Twenty-First Century”. The interest that leading economists have shown in the book seems to stem from two factors: the increased public interest in income distribution since the GFC; and respect for the amount of intellectual effort that the author has put into his book.

While the author may deserve some praise for his statistical efforts, in my view he does not deserve any praise for the clarity of his exposition. The main point being made in the book, over and over again, is that r (the rate of return on capital) tends to be greater than g (the rate of growth of national income) and that r > g  implies that “the risk of divergence in the distribution of wealth is very high”. I mistakenly thought that an explanation of the significance of this inequality might flow from the two “fundamental laws of capitalism” expounded by the author.

The first “fundamental law” is merely a definition of capital’s share of national income:

α = r × β , where α is capital’s share of national income, r is the rate of return on capital and β is the capital/income ratio (K/Y).

Although r > g could imply that β will rise (if we make the heroic assumption that the capital stock grows by r% per annum) it is still possible for α to fall if r is falling.  

Piketty’s second “fundamental law” is about the long-run implications of savings and economic growth rates for the ratio of capital to income:

β = s / g    where s is the savings rate.

When you put the first and second laws together you get:

α = r × (s / g)  .

That implies that what happens to capital’s share depends on what happens to r, s and g. The significance of r > g is not obvious in that context either. 

I am not alone in having difficulty in grasping the significance of r > g. Scott Sumner noted on The Money Illusion the difficulties he experienced with Piketty’s verbal explanation.

However, even if the distribution of income is becoming more unequal, why should that be of concern to us? It seems to me that the best answer is that distributional considerations are relevant to judgements about the quality of different societies. When I looked at these issues on this blog a couple of years ago I concluded that the distribution of opportunities is the relevant variable. Other people may make different judgements about such matters, but I find it hard to see how a society can be judged to  be better if it sacrifices opportunities available to low income earners in order to achieve greater income equality.

If we are interested in the economic opportunities of people who rely solely on labour income, it seems to me that Robert Solow made a highly relevant point in his review of Piketty’s book, entitled “Thomas Piketty is Right”:

“The labor share of national income is arithmetically the same thing as the real wage divided by the productivity of labor. Would you rather live in a society in which the real wage was rising rapidly but the labor share was falling (because productivity was increasing even faster), or one in which the real wage was stagnating, along with productivity, so the labor share was unchanging? The first is surely better on narrowly economic grounds: you eat your wage, not your share of national income. But there could be political and social advantages to the second option.”

(The significance of this point has previously been noted by others, including David Henderson.)

However, I don’t think we can assume that an increase in capital’s share will always be associated with higher real wages. What happens if technological progress makes capital a close substitute for labour? If a substantial component of the capital of the future can be thought of as a work-force of robots, the economic consequences might be a little bit like introducing slave labour to compete with the existing workforce. Real wages might fall under such a scenario, even though national income could be expected to continue to rise.

I wrote about that possibility on this blog a few years ago. It is a more challenging scenario than the one painted by Piketty, but I don’t think we should be losing too much sleep over it. There is still potential under that scenario for nearly everyone to be made better off than at present as a result of the introduction of new labour-saving technology. Governments may need to remain involved in wealth re-distribution to ensure that happens, but there is scope for them to do that in ways that are consistent with a high degree of individual liberty.

The most important point that should be made about Piketty’s book is that it suffers from the limitations of any analysis which seeks to hover in “the economy’s stratosphere, gazing down on the only phenomena visible from such a distant perch – big statistics such as population growth or the share of national income ‘claimed’ by the very rich”. The quoted words are by Donald Boudreaux, who made the point effectively in his review:

“Instead of actually looking at the behavior behind his statistics, the author serves up ad hoc and ultimately unpersuasive theories about the "behavior" of his big statistics themselves, including such hulking impersonal aggregates as the return to capital and the ratio of national wealth to national income. He imagines that such aggregates interact in robotic fashion through a logic of their own, unmoved by individual human initiative, creativity, or choice.”

How can desirable economic reforms be pursued more effectively in Australia?

Soon after the Abbott government was elected, I speculated on this blog that it could end up looking quite similar to the Fraser government which held power in Australia from November 1975 to March 1983. It seemed likely that there would be plenty of tough talk without much economic reform.

Perhaps I should apologize to Tony Abbott and Joe Hockey. The government has made some tough decisions in its first budget. I don't endorse everything they have proposed, but it is good to see a government proposing action to deal with a looming problem before a more painful adjustment becomes unavoidable.

Nevertheless, it still seems quite likely that the end result will be tough talk and not much action. These days the budget speech is just the starting point of a political negotiation. The final outcome is likely to be strongly influenced by minor parties in the Senate, which are seeking to increase their popularity by fanning the flames of interest group opposition to spending cuts.

The minor parties only pose a problem because the government does not at this stage have strong public support for its policies. Minor parties do not like to be seen to be obstructing popular government initiatives.

In an article in the Australian Financial Review a few weeks ago (May 28, 2014: ungated version here) Ian Marsh suggested that adverse public reaction to the budget reflects a more fundamental problem which afflicts any government trying make bold reform. He gives several examples: 

“The Resource Super Profits Tax was released in May 2010, and was followed by a public opinion firestorm which unseated Kevin Rudd. WorkChoices led to the downfall of John Howard’s government. Refugees and climate change destroyed Julia Gillard. Earlier, John Hewson was undone by Fightback and sponsorship of indigenous reconciliation and a republic contributed much to Paul Keating’s defeat. In all cases, an unprepared public opinion delivered a populist verdict.”

My problem with that list of examples is that I think public opposition was justified in some instances.

Nevertheless, I think Professor Marsh is on the right track when he suggests:

“There is no infrastructure through which more complex political narratives can be aired or debated. Political leaders have almost no capacity to build a supportive public opinion for significant policy change.

There is only one recent exception: John Howard’s sponsorship of the GST. He won the ensuing election but lost the popular vote. It was a dangerously close call.”

If we had adequate institutional infrastructure in place it might help to ensure that governments propose policies that deserve public support, as well as helping to promote broader public understanding of the need for policy changes.

Marsh seems to be correct in claiming that big policy change requires a solid base in public opinion, or bipartisan agreement. He noted that the big parties broadly adopted the same economic rationalist program during a short period of “acknowledged crisis” between 1983 and 1993. But bipartisan agreement evaporated after the crisis receded:  

“After 1993 the crisis receded, and normal politics resumed. But differences between the parties had narrowed. So how were they to distinguish themselves? Opportunism and manufactured difference were the new currencies of debate.”

Ian Marsh endorses proposals for a change in the role of the Senate to create the public conversation needed to build a support for significant policy change:

“The late Liberal senator David Hamer suggested converting the Senate to a committee house with ministers no longer appointed from that chamber. The Australian Senate would be more like its American progenitor. At present this seems the most likely path for the needed reform”.

However, I find it hard to see how that proposal would promote better outcomes. Despite its admirable Senate, the US seems to have even greater problems in pursuing desirable economic reforms than we do in Australia.

More radical change is required if we want Senators who are capable of getting beyond party political opportunism and the representation of narrow interest groups (including wealthy individuals). In my view we should consider a system of selecting Senators that has less political party and 'big money' involvement. For example, Senators could be chosen using a two stage process:

• Sortition (random selection) could be used to select candidates from volunteers who have the written endorsement of a minimum number of voters (e.g. 100). 
• Approval voting’ could be used to weed out those whom the electorate considers to be least likely to make a useful contribution. 

Even if the Senate played a more constructive role, however, we would still need political leaders who are willing to take unpopular decisions.

Postscript 1:

I have been asked whether the change proposed in selection of Senators would require a constitutional amendment. I don't think it would, although I do not pretend to be an expert in such matters. The Constitution provides:

"The Parliament of the Commonwealth may make laws prescribing the method of choosing senators, but so that the method shall be uniform for all the States" (Section 9).

The proposed change would, of course, require the support of the major parties, but that is not impossible.

Postscript 2:

Ian Marsh has responded as follows:

"I accept what you say about the US. Our political world is different. The argument is developed at much more length in my 2012 book Democratic Decline and Democratic Renewal. In an earlier study (1995) I had a detailed account of how a similar system worked prior to the emergence of the two party system in 1909 (Chapter 10). That first decade of federation is my template. I am not opposed to random selection etc. I just think its so far from the norms of representative democracy that it won't happen - at least short of some major crisis and/or decades of the development of public opinion. Deliberative democracy (on which this idea is based) is to my mind an invention of the US where the structure of power is frozen by the constitution. In Australia (and Britain and NZ) these things are governed by convention. Thus there is a possibility of peaceful change from within. That's what happened in 1909. Regards, Ian."

Will we continue to allow economic development to provide better opportunities for people to have happy lives?

Some friends who have visited my blog have told me that they have had some difficulty in understanding the purpose of my recent series of posts related to emancipative values. This post is dedicated to those people.

Recent posts on my blog have been concerned with the future of human flourishing in wealthy countries. Is the future likely to bring greater and more widespread opportunities for people to live happy lives in wealthy countries?

 Before attempting to summarise my answer that question I need to show how economic development produced better opportunities.

My story begins a few centuries ago when it was normal for the vast majority of people in all parts of the world to be preoccupied with obtaining adequate food and shelter. The threat of famine was never far away, even though there were seasons when food was bountiful and some centuries when the pressure of population on food supplies was reduced in the aftermath of plagues.  For the most part, people lived in small communities isolated from the outside world. They often lived under the threat of being robbed by their own rulers as well as by people in neighbouring communities. It was common for people who did not share the religious beliefs of their rulers to be persecuted and to be deprived of property and even their lives. Violence was rife despite widespread religious observance.

Everyone should be aware that the process of economic development began in earnest a couple of centuries ago with the industrial revolution in north-eastern Europe. Important technological innovations had previously occurred in various parts of the world, but this was the first time that technological advances led eventually to a sustained improvement in material living standards for large numbers of people.

A range of factors help to explain why the industrial revolution occurred when and where it did, but values and beliefs that became more approving of markets, experimentation, innovation and entrepreneurship were of crucial importance. Market exchange promoted more trustworthy behaviour, which reduced the cost of doing business and encouraged innovative investment activities. The new values and beliefs favoured greater economic freedom, including by removing regulatory barriers that had been protecting traditional patterns of production from competition. Firms were free to use new technology that enabled them to produce at lower cost and they were free to sell those goods to consumers.

Over the following couple of centuries, economic development provided greater economic opportunities to vast masses of people, first in Europe and then in many other parts of the world. As people satisfied their basic material needs to a greater extent they gave higher priority to such matters as having freedom to choose what kind of work to do, where to live and who to live with, having a say in community decisions and ensuring equal rights for women and members of ethnic minorities. That is what we mean by the growth of emancipative values.

So, will economic development continue to produce better opportunities for people to live happier lives in wealthy countries? There are several aspects to this question, but the one that concerns me most is that prevailing values in high income countries might take us further towards an ‘entitlement culture’ that will threaten economic freedom and further economic development.  

It is not hard to find evidence of the emergence of an entitlement culture in wealthy countries. Interest groups that might have had their origins in removal of discrimination or providing minimal opportunities to needy groups now often make a lot of noise in seeking additional entitlements for the people they represent. That tends to result in more government regulation of business, higher government spending and higher taxes i.e. a decline in economic freedom.

However, the results of my research provide some optimism that the entitlement culture can be prevented from taking over and bringing economic development to an end, along with the emancipation that has accompanied it. While economic freedom has fallen in some wealthy countries (e.g. US and Japan) it has risen in others (e.g. Sweden and Norway). There is evidence that the priority that people give to economic growth has risen in some wealthy countries in response to economic crises (e.g. Sweden) and that when this has occurred, economic freedom has tended to rise.

Most importantly, it is a mistake to think that there is some kind of battleground in society with people with high emancipative values on one side pushing for an entitlement culture and materialistic people on the other side pushing for higher economic growth. I could not find much evidence of a tendency for people with high emancipative values to give lower priority to economic growth – even after I went looking for it!

If you want more information on the  research that lies behind this post you will find relevant links in my last post. 

Can the people in wealthy countries continue to climb the emancipation ladder?

This article is my attempt to provide an overview of the series of posts I have been writing about emancipative values.

A good place to start is by explaining what I mean by an emancipation ladder. The basic idea is that the opportunities for individuals to live happy lives are constrained by the circumstances in which they live. The opportunities available to people on the bottom rung of the ladder are heavily constrained. They are likely to be illiterate, to live in small communities with poor communication with the outside world and to be preoccupied with satisfying basic material needs. As these constraints are lifted, more people are able to climb to higher rungs of the ladder, where opportunities are greater. Climbing the ladder may not make our lives blissful, but it emancipates us from the constraints imposed by predation, persecution and poverty.

The concept of emancipation that I am using here owes a great deal to Christian Welzel’s book Freedom Rising, which I reviewed on this blog a few weeks ago. Professor Welzel’s research suggests that as a consequence of economic development people have tended to adopt emancipative values - showing more concern about such matters as personal autonomy, freedom of choice, having a say in community decisions and equality of opportunity. In an increasing number of societies, larger numbers of people have come to recognize the value of civic entitlements - such as the right to vote - and have used their growing material resources, intellectual skills and opportunities to connect with others to take collective action to achieve such entitlements. The process is ongoing, with greater concern being shown for opportunities available to ethnic minorities, gender equality, entitlements of the disabled etc. as material living standards have risen and emancipative values have strengthened.

However, the people in wealthy countries can expect to experience great difficulty climbing further up the emancipation ladder if social norms and ideologies turn against economic development. As societies become wealthier, economic development becomes less dependent on factories belching smoke and does not necessarily involve vast property developments that destroy the natural beauty of the landscape, but it still requires ongoing advances in technology, innovation and productivity growth. If economic development ceases we can expect our societies to become meaner, with greater disputation over whether different groups in the community are getting a fair share of the national economic cake. (Benjamin Friedman made some valid points about such matters in his book, The Moral Consequences of Economic Growth, which I discussed here a few years ago.)

My understanding of the economic development process suggests strongly that the chances of economic development are greatly improved when prevailing social norms and ideologies support economic freedom i.e. the rights of individuals to use their resources for purposes they choose, including endeavours involving the voluntary cooperation of others. As I see it, the most plausible explanations of why the process of economic development began when and where it did - in north-eastern Europe a couple of centuries ago - are those which emphasize changes in norms and ideologies that legitimised systematic experimentation in the realm of technology as well as in science, and became more approving of innovation and markets. (For example, the views of Joel Mokyr and Deidre McCloskey, which I wrote about here.) Research explaining current differences in per capita incomes in different countries (including some referred to in another post ) suggests that a strong economic culture – with emphasis on interpersonal trust, respect for others, individual self-determination and individualism – is complementary to economic freedom in fostering economic development.

The relationship between economic freedom, average incomes levels and emancipative values is summarised in the chart below for 54 countries for which comparable data is available.

The question of whether people in wealthy countries will continue to be able to climb the emancipation ladder hinges on whether their values will remain sufficiently supportive of economic freedom. Are emancipative values developing in ways that increasingly emphasize personal freedom and individual responsibility, or are they morphing into an ‘entitlement culture’ that will threaten economic freedom and further economic development?

The main points that have emerged from my research are as follows:

• There is evidence that, other things equal, individualistic societies tend to have smaller governments and that countries with high emancipative values tend to be individualistic. See: Do emancipative values support economic freedom?
• There has not been a general tendency for economic freedom to either rise or fall over the last few decades in wealthy countries with rising emancipative values. Economic freedom has fallen in some such countries (e.g. US and Japan) and risen in others (e.g. Sweden and Norway). See: What is the relationship between emancipative values and economic freedom?
• There is evidence that economic freedom tends to rise in countries with a strong economic growth ideology i.e. where people consider economic growth should have high priority as a national aim and have attitudes favourable to scientific advances. See: Can we identify the characteristics of national ideologies that promote economic freedom?
• There is evidence that the priority given to economic growth has risen in some wealthy countries (Sweden and the US) in response to economic crises. See: How have attitudes towards economic growth changed since the1990s?
• There is not a consistent tendency for people with high emancipative values to give lower priority to economic growth than do other people in high income countries. See: Do people with strong emancipative values give lower priority to economic growth?

The results of this research provide some grounds for optimism that wealthy countries will maintain sufficiently high levels of economic freedom to enable their citizens to continue to climb the emancipation ladder. However, as I see it, actual outcomes are likely to depend on the quality of the political institutions that have evolved in different countries.

Do people with strong emancipative values give lower priority to economic growth?

This question is worth considering because previous posts in this series (links here) have discussed how economic development has been associated with the strengthening of emancipative values and more widespread opportunities. This means that the ongoing generation of more widespread opportunities for individual human flourishing depends on a substantial proportion of the population maintaining a fairly positive attitude towards economic growth.

The measure of priority given to economic growth that I have been using comes from World Values Surveys (WVS) which asks people to choose from four options what they consider to be the most important aim for the country they live in over the next ten years.  The options are: a high level of economic growth; strong defence forces; people have more say about how things are done at their jobs and in their communities; and trying to make our cities and countryside more beautiful. I have used the percentage for whom economic growth is first choice as an indicator of priority given to economic growth.

The perception that non-economists have of economic growth may be a much more defensible concept than growth in per capita GDP as conventionally measured. I don’t have concrete evidence, but I suspect that when non-economists favour economic growth what they have in mind is expansion of economic opportunity, rather than a particular income concept.

Before looking at the evidence I thought that people who have strong emancipative values would tend to give relatively low priority to economic growth because “people have more say” is one of the items which Christian Welzel used in constructing his emancipative values index for his book, Freedom Rising. By definition, people who give highest priority to 'more say', give lower priority to economic growth.

My main focus is on the extent to which the priority given to economic growth by people who hold emancipative values differs from that of the population as a whole in wealthy countries. Except where indicated, I have selected indicators from the latest WVS round which correspond to components of Welzel’s index. Countries included in the analysis are those with relatively high incomes for which data is available in the latest round of surveys i.e. 2010-14. (New Zealand is excluded from the analysis because of a high non-response rate on the question relating to priority given to economic growth.)

As a preliminary exercise, Chart 1 compares the overall average priority given to economic growth in each country with that given by members of different demographic groups. There does not seem to be any consistent pattern of difference between various groups within countries, except perhaps a tendency for young people to give lower priority to economic growth.

Chart 2 compares the overall average with priority given to economic growth by people with different views on desirable attributes for children to learn at home. Independence and imagination reflect positive emancipative values, whereas obedience is considered as negative. Perhaps those who see imagination as a desirable quality may be slightly less enthusiastic about economic growth, but otherwise there does not appear to be a consistent pattern.

Chart 3 compares the overall average with those of groups expressing strong views on whether divorce, abortion and homosexuality are justifiable. Again, there does not seem to be any consistent pattern.

Chart 4 compares the overall average with the priority given to economic growth of people favouring gender equality. The chart shows some interesting facts e.g. people in Australia who strongly disagree that men make better political leaders than women are much less likely to view economic growth as having high priority than are other people in Australia. However, no consistent pattern of difference between the different groups in different countries is obvious.

Chart 5 compares the overall average with the priority given to economic growth of people who see protecting freedom of speech and giving people more say in government decisions as particularly important. In this instance a fairly clear pattern is evident – a lower percentage of those holding emancipative views give high priority to economic growth.

This chart also shows the growth priority of those who consider protecting the environment should be given priority, even if it causes slower economic growth and some loss of jobs. This item is not a component of Welzel’s emancipative values index, but it also worth considering the priorities of those who see environmental protection as having high priority. As would be expected given the wording of the question those who consider protecting the environment should have high priority are less likely to give high priority to economic growth. However, the difference is not as large as I thought it might be.

The general conclusion that I draw from this exercise is that there is not a consistent tendency for people with strong emancipative values to give lower priority to economic growth than is given by other members of the populations of wealthy countries. People who attach great importance to having “more say” seem to be less inclined than the rest of the community to see economic growth as having high priority, but that observation does not apply consistently to people who attach importance to individual autonomy, respect choices that individuals make in their personal lives and favour gender equality. As a general rule, the differences in economic growth priorities of people in different countries are more marked than the differences between different groups within countries.