The regime changes in Egypt and Tunisia have been hailed as victories for democracy, as proof of the liberalizing power of social networking media, as testimony to the power of nonviolent political action. All of that they may indeed be; but the events in Egypt and Tunisia also illustrate a major defect in our economic thinking, one from which we should draw a very different and much more cautionary conclusion.
The flaw in neoclassical economic theory that’s behind the Middle East’s winter of discontent is the acceptance of gross domestic product (GDP) as an indicator of citizen well-being. A recent poll by the Gallup organization, reported in early February, found that despite significant gains in per capita GDP in both Egypt and Tunisia, the level of well-being of their citizens has been falling over the past decade. This decline in well-being certainly played a role in the unrest that put citizens in the streets, challenging their governments.
In Egypt, between 2005 and 2010 per capita GDP rose from $4,762 per year to $6,367. In Tunisia it rose from $7,182 to $9,489. But both countries saw a significant decline in the percentage of the population that is classified as thriving according to a standard, well established measure.
That measure is the Cantril Self-Anchoring Striving Scale, developed by researcher Hadley Cantril. It’s a survey research tool, and asks respondents to answer a few simple questions:
Please imagine a ladder with steps numbered from zero at the bottom to ten at the top. The top of the ladder represents the best possible life for you and the bottom represents the worst possible life for you. On which step of the ladder would you say you personally feel you are standing at the present time? On which step of the ladder do you think you will stand about five years from now?
To rank as “thriving,” respondents have to have positive views of their current place on the ladder (seven or higher) and positive expectations about the future (eight or higher). Below that, respondents are ranked as “struggling”—their “ladder-future” expectation is lower than the present, or both values fall below the thriving range. Below struggling is “suffering,” people who report their place on the ladder at four or below.
The Cantril Scale correlates with objective markers of well-being. Thrivers have fewer health problems and fewer sick days, while reporting less worry, stress, and anxiety and more enjoyment, happiness, and respect. Those in the struggling category report more daily stress and worry about money than the “thriving” respondents, and more than double the amount of sick days. Those in the “suffering” category are more likely to report that they lack basics like food and shelter, more likely to report physical pain, and more likely to experience higher levels of stress, worry, sadness, and anger. They have more than double the rate of diseases compared to “thriving” respondents—and a lower life expectancy.
In both countries, as GDP rose steadily, the number of citizens categorized as “thriving” fell. In Egypt, 29% of people reported themselves as thriving in 2005, but that number fell to just 11% in 2010. In Tunisia, Cantril Scale data are unavailable prior to 2008, when 24% of the population could be classified as thriving; that number fell to 14% in 2010, a 40% decline.
The nonviolent revolutions in both countries may have been motivated less by abstract commitment to democratic freedom than by widespread experience of a declining standard of living and increased economic insecurity, even in the face of rising GDP. This result is paradoxical within neoclassical theory: a rising GDP is supposed to signal rising levels of well-being.
But there are several sources of disconnect between GDP and well-being. One possible disconnect is grounded in the methodology of the Cantril Scale: it measures expectation, and as incomes rise, expectations may rise more rapidly, leading to a decrease in subjectively reported well being. To this there are two avenues of response. First, the Cantril Scale correlates with objective measures of well-being, like health (physical and mental), as measured objectively by doctor visits, sick days, earlier mortality. Second, well being or its absence, like poverty and wealth, are experienced as relative, not objective, values. You are happier with what you’ve got if no one else in the system has got significantly more. It does no good to tell someone who is below the poverty line in the U.S. that they are better off than the impoverished of an underdeveloped country—we experience our well-being in relation to the norms and averages we see around us, not in comparison to distant others. Well-being belongs to that class of phenomena for which the perception is the reality.
Two other factors are more relevant to explaining this result that seems paradoxical within the standard model of economic thinking: (1) increasing inequality in income and (2) increasing food prices.
Thanks in part to the Soviet-built Aswan Dam, which interrupted the regular cycle by which Nile delta farmlands were re-nourished by annual flooding, Egypt has been in recent decades the single largest importer of grain in the world. When Russia announced an embargo on grain exports (the result of unprecedented, climate-change-driven weather that scorched into ruin nearly half of Russia’s usual annual harvest), the price of food shot up. Even before the embargo, the average Egyptian family spent 38% of its income on food (compared to 7% in the U.S.). Most simply couldn’t afford the higher prices, and hunger and food insecurity spread through the middle class. Higher food prices registered as an increase in the monetary value of all goods and services bought and sold in the economy; thus, perversely, GDP counted higher food prices as a positive contribution to well-being.
Because of that basic flaw, a rising GDP did not mean a rising standard of living. And even if GDP were a more accurate measure of material well-being, it would still be mathematically possible for a majority of people to become worse off economically as per capita GDP rises. This happens when increasing income inequality denies gains to the majority—when the increased material well-being accrues to those at the top. In Egypt and Tunisia, that mathematical possibility became an economic fact—and a politically charged social condition.
Declining standards of well-being are politically destabilizing, and lead naturally enough to sweeping support for regime change. In Egypt and Tunisia the regimes happened to be despotic, and the call for change came as a commitment to democracy, an end to corruption, and demands for civil liberties. But within democracies, declining standards of living can have the opposite effect. Open and institutionalized systems of regime change—voting—will absorb the discontent for a time, but if the decline lasts too long, or can’t successfully be blamed on a particular party in power, pressure grows for stepping outside established parties for new, radical, revolutionary approaches.
History shows that democratic forms are no proof against a slide into repressive forms. In Germany in the 1930’s, a declining standard of living contributed to the rise of the Nazi party; Hitler was democratically elected to the office of Chancellor (and then proceeded to establish himself as Fuehrer).
As America’s perpetual-growth economy faces the reality of ecological limits, as climate change imposes costs and decreased well-being on us, as food and energy and other resource prices increase because of the inexorable logic of a declining Energy Return on Energy Invested at the physical foundation of our economy, we face the prospect of a widespread decline in our standard of living. This dynamic lies at the root of this fact: Americans coming of age today are among the first generation who can’t be confident that they will be better off than their parents. By one widely used measure of well-being (the genuine progress indicator, which deducts loss of ecosystem services and other “disamenities” from the national accounts), the American standard of living has flatlined since the 1970s, despite continued strong growth in GDP.
Thus the cautionary lessons from Egypt and Tunisia. GDP is a measure of the commotion of money in an economy, not a measure of delivered well-being. If sustained or rising well-being is what is economically and politically desirable, we should measure it directly, instead of counting on GDP to do the job. And if we accept the idea of popular sovereignty—that governments rule with “the just consent of the governed,” as Jefferson put it in our Declaration of Independence—we must recognize that as the middle class goes, so goes the legitimacy of the regime in power. No system of government—despotic or democratic—fares well when the majority of its citizens experiences a declining standard of living.
This thought must trouble anyone who values civil liberties and democratic freedoms: when increasing the standard of living depends on continual expansion of the economy’s ecological footprint, that increase must at some point come to an end. The examples of Egypt and Tunisia invite us to ask: what then?
You say early on, ” The flaw in neoclassical economic theory that’s behind the Middle East’s winter of discontent is the acceptance of gross domestic product (GDP) as an indicator of citizen well-being.”
Then you go on to say, “within neoclassical theory: a rising GDP is supposed to signal rising levels of well-being.”
All you’re doing is disproving a ridiculous idea—that GDP is *comprehensive* indicator of citizen well-being. No neoclassical economist would say that GDP is the *only* measurement of a nation’s well-being. Neoclassical economists are hardly ignorant that at a certain level, most people can become poorer even as the GDP increases if inequality is increasing.
This is a perfect example of a straw man.
The problems with GDP go deeper than its failure to measure happiness or even progress; it doesn’t even measure the GDP, and it often confuses a growth in expenses with a growth in output.
For starters, GDP measures only half of the economy. We all live in two economies, the economy of exchange and the economy of use; GDP measures the first and ignores the second. We work to get money to buy meat and potatoes; this is the exchange economy. We then take them home and cook them into dinner; this is the use economy. Cooking dinner is a real output of the economy, but it is not measured, and indeed it would be difficult to do so. But think of this. In the 70’s and 80’s, there was a mass movement of women from the home into the workplace; that is, from the use economy to the exchange economy. Functions previously done in the home were now monetized. Meals that were previously taken in the family dining room were now taken at the MacDonald’s drive-thru; children nurtured by their mothers were now turned over to the tender mercies of minimum wage baby-sitters in the mis-named “child care” industry. All of these registered as increases in GDP. But were any more meals cooked or babies minded? No, it was just a monetization of functions that had previously been part of the non-monetary use economy. The “growth” was an illusion.
We also record increases in expenses as growth. For example, society deteriorates and crime increases. We must hire more policeman, prison guards, security firms, etc. This is recorded as an increase in GDP when it is merely an increase in the cost of security.
There is nothing wrong with GDP measuring what it measures; there is everything wrong with taking that measurement as having anything whatsoever to do with well-being or even progress.
This failure to understand what the measure measures and the distinction between monetized and non-monetized sectors of an economy leads to some tremendous confusion in the development of economies. The IMF will issue silly reports “proving” that a billion people who used to live on $1/day now make $3/day. The problem is that many of these people were in largely non-monetized economies, where $1/day might have meant relative prosperity, whereas after the move to a monetized economy (usually by being forced off the land and into the cities) the $3/day represents absolute poverty.
I second John Médaille’s points and would merely add that similar conceptual difficulties apply to various indexes of ‘economic freedom’ that come out annually. They seem to rest on the assumption that as long as there’s a good investment climate in country X, all is well and the people are ‘free’ — a dubious proposition. Chile under the Pinochet dictatorship might have ranked high in those terms. A torture and disappearance index would have yielded different results. Cf. Kevin Carson, “What Economic Freedom Indexes Leave Out,” http://www.thefreemanonline.org/featured/what-economic-freedom-indexes-leave-out/ .
Kevin is my favorite Libertarian; what he says almost always has value.
Thank you for your article. With all due respect (and, as Stephen notes), your point is a bit dramatic–“limitation” would probably have been better-suited to the title of the piece than “failure.” (I understand that announcing the failure of neoclassical economic theory must have been pretty fun.)
GDP is only a proxy measure for contentment, meaning it is imperfect and yet important. Put differently–and with crucial factors such as inequality nonetheless in view–GDP does not “signal” contentment for the poor as much as it anticipates it, since growth does eventually trickle down. Moreover, a bigger economic pie is a good thing. That Middle Easterners at this very moment have reported lower perceived levels of well-being should not come as any shock. It is not proof for anything. The view ten years from now as we look back on this tumultuous period will be more telling.
That said, your reminder about the limits to growth is a good one. I fear we will not really believe that soon enough: that limitless growth is impossible with limited resources and an “unlimited” worldview.
The view that “wealth eventually trickles down” doesn’t seem to be supported by events. In fact, it would be more accurate to say that “wealth eventually trickles up.” One doesn’t have to announce the “death” of neoclassical economics; the theory never functioned well enough to describe any actual economy, which is why events always outrun the theory. 90% of economists missed the coming of the current disaster, and the one before that, and the one before that, etc. The “professional” is as surprised by actual events as is the layman. Clearly, this is, at best, an incomplete theory.
When the public employee unions in Wisconsin and other states abandon the idea of a perpetual-growth economy, we will have made significant progress in accepting the reality of limits.
First, apologies for not being on this thread sooner. I sent the piece in, but didn’t get a heads up about it being posted, and in the rush of other stuff didn’t check in to look.
I too second all the criticisms that John Medaille offers of GDP. I’ve tackled, or at least made note of, some of them in other things I’ve written about GDP.
I can’t flat out second the criticisms made of my piece, though I want to acknowledge that Stephen has a point–no economist, neoclassical or otherwise, is ignorant of the shortcomings of GDP as a measure of well-being. (All the intro texts cover it.)
I could retreat a bit and say that reliance on GDP is a failure of neoclassical practice rather than neoclassical theory, since in their theorizing the neoclassicists universally acknowledge the shortcomings of GDP, even while the vast majorty continue to accept it and rely on it as the basic measure of the size of the economy, which size is readily taken to be a measure of our economy’s capacity to satisfy wants (at least as they are expressed in markets.) And satisfying wants is, with some footnoted cautions that are no sooner made than ignored, taken to be the point of the economy.
But I don’t think retreat is necessary (for I don’t think am I offering a Straw Man argument.) I hear no clarion call issuing from neoclasical economists to abandon GDP as a measure of well being–and it is certainly not the case that they lack the means and media to do so. I do not hear neoclassical economists chastising politicians–Obama included–for implicitly and explicitly accepting GDP as the indicator that policy aims to affect. When elected and appointed officials speak of aiming at “”more growth” or “restoring growth” or “getting the economy growing again,” it’s widely understood that GDP will be the measure of the success of that effort, and by and large neoclassical economists offer no cautions about nor any criticism of that understanding. Would that they did.
Why the silence? Asking that is to ask, why do neoclassical economists accept a disconnect between their economic theory and our economic reality? And part of the answer is, I believe, that the neoclassical model abstracts from reality so completely and so thoroughly in large matters that this relatively small disconnect passes with little more than a murmur. The disconnect between GDP and economic reality is a relatively minor one, given the major disconnect by which the matter and energy that enter into the economy are, “in theory,” produced by households (which are treated as source-contributors of ‘factors of production” like ores and energy). Matter and energy most emphatically do not originate in households. If you’re going to abstract from reality enough to deny the application of the laws of thermodynics to economic processes, then the practice of taking exception to GDP in what amounts to a footnote or two to your theory, while accepting its continued use as a valid measure of well-being, seems like intellectual integrity. Well, let’s just say that the disconnect between GDP theory and practice doesn’t produce any cognitive dissonance for economists; why strain at swallowing rats when you’ve claimed you can eat an elephant?
The complete unwillingness to incorporate thermodynamic science into the metaphysical foundations of economics accounts for another reason GDP continues to be widely accepted (even as its theoretic limitations are known). The exceptions and problems with GDP, eloquently catalogued by John Medaille in his comment, once seemed minor matters compared to the huge economic project of building productive capacity. Use values we had galore (as did, perhaps, the residents of un- and underdeveloped economies in which an income of $1 a day could signal wealth; a pertinant and important observation, that). The chief economic problem (it seemed from the vantage of the 18th and 19th centuries) was to increase the activities that brought exchange values, and by and large that meant increasing the amount of capital equipment. At the time the metaphysical foundations of economics were established, one use value we had in such plentiful abundance that its maltreatment by GDP could readily be ignored: ecosystem services. Any particular decrement of them (though, say, clear-cutting a forest) seemed to leave “enough and as good” ecosystem services in its wake, since humans on the face the planet were relatively few and far between, and their ambitions had not yet been so fully amplifed by the trick we learned of turning past solar income, stored as petroleum, into nature-transforming work in the present. The laws of thermodynamics tell you that you can’t make something from nothing, nor nothing from something; and that any use of matter and energy necessarily entails the degradation of matter and energy (the production of waste, i.e. ecosystem-damaging pollution). Neoclassical economics continues to resist this modelling, choosing instead to keep faith with the infinite-planet precepts of its essentially Newtonian, mechanistic modelling, in which actions are always reversible and there is no one-way (entropic) flow. (In brief, and somewhat simplified, the law of entropy tells us that the pockets of order we create through exertion and economic processing are overmatched by the increased disorder we create elsewhere in the system–disorder we imp0se on the “sink,” Nature. Until fairly recently Nature was evidently large enough to absorb our effluents, and support our extractive industries, without undergoing anything more troubling than some local ecosystem failures.)
And so, neoclassical economics remains innocent of thermodynamics; it hasn’t had its version of the thermodynamic revolution that hit Newtonian physics in the late 19th century (as evidenced in the work of Einstein) and that re-organized the discipline of biology in the 1920s into the developing science of ecology (as evidenced in the work of A. G. Tansley and others).
It would be an interesting historic0-philosophical-political inquiry to search for the answer to the question; why has the thermodynamic revolution in economics hung fire for so long?
And it would be gratifying to know: how much longer can the discipline hold out against it?
Ah well. Just as every economist knows that “there is no such thing as a free market,” but most continue to advocate free market theory as the best approximation to reality, neoclassical economists know that GDP is flawed but continue to accept its use, mostly, I’m suggesting, because the habit of counter-factual abstraction is deeply ingrained in the discipline. (Sometimes, when reading neoclassical economists, I’m reminded of that Queenly character from Alice in Wonderland who makes a practice of believing several ridiculous things before breakfast.)
Eric, your comments point to an even deeper irony. Economists, it has been said, suffer from “physics envy,” the desire to turn an humane science into a physical science. Yet insofar as economics concerns the conversion of matter and energy into exchange values, it is a physical science, yet economists will not go there.
Yeah, go figure.
The entropy process, Nicholas Georgescu-Roegen wrote, “is the taproot of economic scarcity.” So the entropy law is why we even have a (supposed) science of scarcity; entropy is what makes economists useful. So far, most of them haven’t returned the favor. (And yet, with a bit of unearned swagger, they continue to style themselves as the “dismal science.” More properly, they’re the permissive parent science: “you can have all the candy you want, just not all at once.”)
As he thought about the ways in which the career investment made by physicists led them to resist the post-Newtonian revolution (because to some physicists Einstein’s theories said, in effect, “you’ve wasted your life”), Max Planck (I think it was) was led to muse, “science progresses through funerals.” The next generation of economists–ones studying in schools right now–increaasingly have the opportunity to choose between Newtonian economic theory and thermodynamically enlightened economic theory. I’m confident that in the marketplace of ideas reason and sanity eventually will win out. So, we might see some change in the discipline as youth moves in and up. I hope the planet can continue to provide a sufficient flow of ecosystem services as we wait for that demographic dynamic to do its work.
Eric, It is good to see a mention of Georgescu-Roegen. I have an anthology in Romanian, and it is through my Romanian contacts that I came across his work (although most of it is in English.) He should certainly be better known in this country than he is.
I wish I could share your confidence about the “marketplace of ideas.”
Neoclassical economics supports a system of low wages and usury that transfers wealth upward; no increase in GDP can overcome the built-in flaws of such a system (never mind Egypt or Tunisia – look at the USA)!
More and more I’m coming to think that Islamic economics is better for the ordinary man than modern Western economics. And these Arabs seem to have reached the same conclusion.
Before 1980 we were closer to the Islamic setup, with closed loops of profit connecting businessmen to their customers. With the triumph of Wall Street, share prices and securitization, businesses no longer ‘read’ the feedback from customers. Relationships may still exist on the personal level, but they no longer matter economically.
GDP = Goldman’s Deep Pockets
It’s not about GDP. it’s about the National Accounts. These measure the circular flow of income: income is used for expenditure which leads to production which enables the payment of income.
Is this neo classical. I doubt it. Neo classical theory measures utility, an ill defined concept which, as yet, nobody has ever measured and which, for reasons of convenience, is equated to the the price of items purchased.
The central concept of the National Accounts is however value added – a concept which is well defined. It’s the National Accounts which enable us to track income inequality. And modern National Accounts not only give data on income and expenses but also on balance sheet items and liquidity.
This is, indeed, just the monetary side of our economy (though income in kind from owner occupied houses is included). But I do think that side is important. When you want to analyse an economy, you do not just want to know the wage rate, but also total wages. And total profits.
Nobody ever stated that GDP is any kind of measure of true welfare (whatever that is). However – in real life, nominal GDP is equal to total production, and to total expenditure, and to total income – that’s how our monetary economy works. Might be nice to measure what’s happening to it, using well defined variables which do connect to the real world in stead of the phoney neo-classical concept of utility. How many people do have a job, how much do they earn, how many self employed people are working, are profits increasing or declining, how about net exports, what’s happening to investments. That’s what the national accounts measure.
Merijn says: “Nobody ever stated that GDP is any kind of measure of true welfare”.
Actions (or in the case of economists, lack of them) speak louder than words. And National Accounts are no truer, putting the City of London (or Berlin, or Wall Street) rather than God (beginning Creation with a big bang) at the centre of an entropic universe; measuring marginal Added Value (if indeed they do) by means of the same phoney price valuations that Gross Domestic Product relies on; leaving out the real paths down which money more or less fails to circulate – and the illegitimate ones through which it does and shouldn’t – just as surely as GDP (measuring everything and evaluating nothing) leaves out the real variations and relativities to need in existing wealth and Net Personal Incomes .
I’m sad to be so at odds with you over this, Merijn. I suppose the difference between us is between a Baconian and a Humean understanding of science; between wanting to take real things to pieces to understand they work in order to make inhuman things work better in future, and Hume seeking his fortune in making “facts” out of diverse measurements of reality by reducing them statistically to numbers and “laws” expressible in Cartesian algebra: the new mathematics of the 1740’s. We having subsequently become in a position to understand what Hume couldn’t – everything from Kantian interpretation, non-Euclidian mathematics, non-Aristotelian logics, sub-atomic structures and quanta, encoded information and technological demonstrations of how physical guidance, communication, control, evolutionary adaptation and error correction systems work – it seems to me absurd how social scientists (and not a few others) still blind themselves to the relevance of this more fundamental science by taking for granted Hume’s unverifiable assumptions.
I find the assertions that the economy (as practially worked out in real life) is some category of a “closed system” and this adheres to the laws of thermodynamics. Sure, when trees are burned (or fall to the forest floor and rot), their carbon, hydrogen, oxygen do not disappear… no, they are transformed merely into other forms of those same elements.
This is decidedly NOT the case in any economic system that is left alone. The millions of daily decisions made in a given marketplace will, inevitably, lead to an overall increase. This is one of the laws of creation… “INCREASE and multiply”…. man has within him, hard wired, if you will, the impetus to increase, to convert his labour to improvement, multiplying his force, time, creativity, toward increase. It is government manipulation, regulation, deception, theft, that results in something more accurately described as a “closed system”. When more than the half of what we labour to produce is consumed to feed the government leviathan, what increase might remain is minimal, and at times, so minuscule as to appear that we all labour within a closed system.
Someone mentioned the increase in crime in result of deteriorating society. This “necessitates” the hiring of more law enforcement, courts, jails, “rehabilitation” programmes, all at, yes, you have that right, taxpayer/citizen expense. This is the perfect solution a meddlesome and ever-increasing government would impose…. under cover of the omnipotent mantra “its for your safety”. And this “increase” (in reality a DECREASE in useful production, at the expense of TRULY useful production) is at the expense of REAL production. There is no new “product” at the end of this day. The product of millions of citizens is destroyed, consumed in this unnecessary “system” for our “safety”.
A far better solution would be to allow those who produde devices well suited to PREVENT the increasingly common crimes against persons and property to prodeuct those “tools”, and those citizens desiring them could then be unfettered, uninfringed, in their ability to turn some of their “increase” toward the acquisition of those “tools”. It is a well known and proven fact that criminals’ greatest fear is that their next intended victim would possess the means to defend hmself against the untoward intentions of said criminals. In fact, a recent housebreaker in Ohio, when confronted with the unplanned return of the homeowner, locked himself in the bathroom of the house he had broken in to to rob, called 911 on his cell phone and begged for police to come and save him from the surely armed homeowner whose house he had violated. He held the certain prospect of prison in greater esteem than looking down the barrel of a firearm as the flash and lead projectile headed his way.
No, we do NOT exist in a truly free market, though we could… and surely should. For a homeowner to invest a few hundred dollars in “personal protection”, thus driving crime near to extinction, would obviate the justification for nearly the whole of our “criminal justice system:, (which name is only partially correct.. it IS truly criminal, but lacking in justice in the broadest sense) by putting the “safety” of every individual back into his own hands, and so infusing the criminal element with fear for their OWN safety the present levels of crime would all but disappear. Nearly the whole of our tax dollars (and insurance premiums, not to mention lost time as a culture) presently being consumed by dealing with this single issue could then be liberated and returned to means of TRUE production and increase…. not to mention the radical increase in the sense of “”well being” of the average citizen, now free to go about his business without the constant fear of loss or injury to himself and his possessions. We do NOT live in a “closed system:, merely one that has been so perverted and corrupted is appears so to be. Unburden individuals and we will see how open a system a free economy can become.
Glad indeed to see Georgescu-Roegen mentioned as his insights are not limited to ecology (or bioeconomics) but also speak to development, innovation and policy decisions in the sphere of the (partial) economic process itself.
Particularly pertinent to the GDP discussion in his view are at least the following two ideas:
First, an idea dear to the hearts of front-porchers, that economics should be “local” in a certain sense. Namely, that it should and, indeed, must include the particularities of the economy under consideration, a notion closely linked to city/county/state/country, etc. Particularly in less-than-strictly-urban economies, ophelimity (utility) could continue to be described hedonistically, but not strictly hedonistically—what others do and how much they make (or don’t) would certainly count in matters of distribution and that information is more easily available in non-urban settings, for instance. In that sense, even using a Walrasian view on general equilibrium, the components of national income for distribution purposes (using the income definition/sum of factors calculation for GDP) would be *different* for industrialized economies and for developing ones, for instance. The maximization of welfare in the economy requires a maximization of Walras’ national income (Barone), which derives from the goal of maximizing factor incomes. Specifically, for example, in an overpopulated economy, national income would be given only by numeraire as consumed labor and capital tend to be zero.
Second, and linked to Walras’ insights in the the first, is the composition of a national income calculation, e.g., GDP. Walras’ included leisure in his definition. Neoclassicals do not. True, this value is zero in some economies (developing, overpopulated, etc.) but significantly different from zero in advanced economies: “[T]he [Neoclassical] approach reflects the businessman’s viewpoint: wages are a part of his cost but do not represent a cost counterpart in the life enjoyment of the worker… By comparison [with Marx and Ricardo], the philosophical barrenness of the Neoclassical school becomes all the more conspicuous. Perhaps a pronounced pragmatical bent is responsible for the fact that this school, while paying attention to that part of a worker’s time sold for wages, has completely ignored the value of the leisure time… The necessity of including the value of leisure time (under some form or another) into the pseudo measure of welfare becomes all the more imperative in the case of international comparisons and in that of comparing the situations of the same community at distant times.”
That Neoclassicism is feeling the “pinch of relevancy” may be gleaned from the recent efforts to redefine a measure of welfare beyond GDP, e.g., in the Sarkozy-sponsored work of Stiglitz, Sen and Fitoussi, *Mismeasuring Our Lives: Why GDP Doesn’t Add Up*. But long before that, Simon Kuznets himself, the adviser to the US government for the standardization of the measurement of GNP, indicated in his first report to Congress (1934) regarding national income that “economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of [gross domestic product].”
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