Measurement Maladies

The conundrum of measuring progress

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It’s worth pausing our discussion about wealth and material progress to ask: Does any of this matter anyway, and is any of this truly measurable? There are different approaches and various metrics for measuring progress. Economic growth, which we now understand to be a reflection of the expansion of human knowledge, is most often tracked using the metric called Gross Domestic Product or GDP. Few among us, however, have stopped to ask how reliable this metric is and what implications there are for GDP growth as we currently measure it. It turns out that GDP is an imperfect but reasonably good indicator of material progress and human capability.

A Brief History of GDP

GDP is a metric born out of a World War 2 need to determine the total productive capacity of an economy to support a war effort. The metric was never intended to be a measure of well-being for the inhabitants of that economy. Nonetheless, its cousin, GDP per capita, or the GDP divided by the total population, has become a commonly used measure of well-being. There are three approaches to calculating Gross Domestic Product. You can calculate the total output of the economy, the total expenditures within the economy, or all of the incomes. For most of us, measuring total expenditures is the most familiar and understandable method. This calculation follows the formula below:

GDP = Consumer Spending + Investment Spending + Government Spending + (Exports-Imports)

Other relatively uncomplicated on its face, in practice, this simple calculation is fraught with fuzziness and room for error. Adding up the sales of tangible goods, for example, is relatively easy, but intangible services are notoriously difficult to calculate. This is salient because, as we have seen, our economies are gradually dematerializing, requiring fewer material inputs as an ever-greater share of the productive capacity is devoted to intangible services. This makes calculations of economic growth increasingly difficult as economies develop and mature.

Additionally, criminal business activity, such as illicit drug sales, has to be indirectly estimated by reviewing police reports and crime statistics. Meanwhile, household services, such as child-rearing by parents, are entirely ignored by statisticians. Partly, this is a matter of convenience because there is no agreement about how to measure the value of those services. A famous paradox of GDP exemplifies this problem: a widower lowers GDP when he marries his former housekeeper because he no longer needs to pay her a wage. Nevertheless, the OECD estimates that unpaid and uncounted household services account for an average of 15 percent of GDP.

GDP, like metrics of inflation and even our so-called “time cost” metrics, also fail to fully capture quality and technological improvements of goods and services over time. Televisions, as we discussed, have trended larger, lighter, are more energy efficient, have higher resolution, and better colors. None of these material benefits, however, will show up in GDP data. Nor do statisticians capture the value of that which is free. The free access to information on Wikipedia or the cornucopia of websites, apps, videos, and music made by creators online certainly has value, but little or none of it will be captured in economic data.

The Easterlin Paradox

Given the fuzziness of the calculation, should we consider GDP a reliable indicator of growth or progress? First, let’s examine whether GDP growth leads to greater well-being or contentment. Researcher Richard Easterlin attempted to answer this question with survey data taken from people around the world. His findings were paradoxical. He found that at a point in time, general happiness varies with income between and within countries, but over time, happiness does not trend upward as incomes rise. This means that while higher-income individuals are typically happier than lower-income individuals, higher incomes don't produce greater happiness over time. The contradiction between the point-in-time and time-series findings in the research has become known as the Easterlin Paradox.

Attempting to explain this contradiction, researchers have suggested that perhaps beyond a certain level of GDP per capita, enough to satisfy the basic material needs of clothing, housing, and food, additional “growth” does not improve well-being. Instead, beyond this level, respondents looked past their absolute income and instead toward their relative income when answering surveys about life satisfaction. This suggestion has profound implications. If rising incomes do not raise subjective well-being, there may be no purpose in economic growth at all. Indeed, this idea has already become ingrained in the public psyche. Many today believe that, past a basic level of material satisfaction, continued growth only serves to feed the greed of the wealthy. This explanation, however, doesn’t sufficiently explain the paradox.

Others have challenged Easterlin. Researchers Betsey Stevenson and Justin Wolfers conclude that the relationship between material progress and well-being is quite robust. Stevenson and Wolfers compared respondents’ answers to questions of subjective well-being to the log of GDP per capita using data from 131 countries. They found a positive correlation exceeding 0.8 and no evidence of a satiation point beyond the GDP per capita needed to satisfy basic material needs. Their research also revealed apparent errors in survey questions used by Easterlin. For example, while surveys from Japan initially appeared to confirm the Easterlin Paradox, they found that survey response categories were changed multiple times in the 1960s, distorting the results. When they accounted for that change, reported life satisfaction rose sharply in the 1950s and 1960s, then more slowly in the 1970s and 1980s, before beginning to fall in the 1990s, roughly mirroring the performance of the Japanese economy.

Their analysis disputing the Easterline Paradox, however, appears fundamentally flawed. It relied on a log scale for GDP per capita. As discussed by

Lionel Page

, “a constant increase on that scale gives exactly the type of curve represented on the graph of the Easterlin paradox." Indeed, rather than disputing it, Stevenson and Wolfers confirmed Easterlin’s findings. The reason the paradox is so difficult to explain is that it’s not a true paradox at all. Easterlin’s conclusions conform well with what we know about human psychology. As Page discusses:

Feelings of happiness are signals guiding our everyday decisions, both big and small. Our hedonic system—the cognitive processes that generate these feelings—has been shaped by evolution to help us make decisions that enhance our survival and reproduction.⁵ A key feature of these signals is that they only reflect deviations relative to expectations. Positive surprises produce good feelings, while negative surprises result in bad feelings.

What we describe as “happiness” can only be fleeting as satisfaction inevitably resets to a new baseline. The literature supports the concept of the “hedonic treadmill,” as psychologists Brickman and Campbell coined it. A study comparing the surveyed happiness of paraplegics with lottery winners and a control group, for instance, revealed little difference in relative happiness. Our expectations are continuously resetting and refreshing, such that satisfaction and happiness can only be temporary. Indeed, despite huge increases in material well-being for most Americans since the 1940s, reported happiness and satisfaction have remained relatively stable.

Paradoxically, Page notes that economic growth can sometimes make people feel less satisfied. When East Germany reunified with the West, for instance, the material well-being of the East soared, but it also revealed the yawning gap with the West. As Easterners began to compare themselves with the West, they reported lower life satisfaction. This confirms the conclusion that satisfaction and happiness reflect deviations from expectations and are purely psychological. Surveys of subjective well-being, life satisfaction, and happiness, therefore, are poor indicators of growth or progress anyway. Certainly, this is not a metric we should give much weight to.

The Human Development Index

Some thinkers like Amartya Sen, believe that we ought to measure growth and human progress using a “capabilities approach,” which emphasizes the ends (a decent standard of living) over the means (GDP per capita). Under this framework, poverty is not the deprivation of financial resources but rather the deprivation of the capability to live a good life. A person who is fasting, for example, has the same nutritional state as one who is starving, but we would not treat them equally disadvantaged. The latter has no capability to eat; the former does. “Growth,” therefore, is understood to be the expansion of the opportunities and capabilities available to individuals. In response to Sen, the UN developed the Human Development Index or HDI, which compiles several proxies for human capabilities, including life expectancy, school enrollment, literacy, and GDP per capita. This, some believe, better accounts for actual human progress than a rough measure of raw economic production or subjective surveys.

HDI closely tracks GDP per capita, a fact that shouldn’t be surprising because GDP forms a component of the index. But what happens when we remove GDP per capita and focus solely on non-financial components of the index? Surprisingly, even when we do this, GDP per capita and HDI are still robustly correlated. Thus, for all its shortcomings, GDP appears to be a reasonably good measure of growth, and GDP per capita, a reasonably good measure of individual prosperity and capability. This is due to the virtuous cycle of progress, a positive feedback loop between human capability and material growth. Material growth, the growth in the total stock of human knowledge, begets greater human capability, which is then seized by individuals who beget additional growth, and so on. As Diane Coyle wrote in her book, GDP: A Brief but Affectionate History:

To be poor is to have little choice available, and the increase in possibility is the most important aspect of escaping from poverty. On this view, economic development is a combination of increasing individual capacities…and increasing range of opportunities…Economic development is an increase in freedom.

These findings shatter what otherwise seems like a comfortable narrative. At first blush, GDP, an imperfect measure of raw economic output, would seem to be a poor judge of growth and even poorer means of measuring individual prosperity or capability. Easterlin’s Paradox appears to confirm this, that continued growth only fuels greed and fails to improve subjective well-being. Yet, this comfortable myth falls flat. Easterlin’s findings are not a true paradox. Surveys of happiness are poor indicators of well-being, and alternative measures of human progress almost always track alongside GDP per capita anyway. Nonetheless, GDP still fails to fully capture the full scope of human progress, especially across long time scales. To truly measure progress, we must turn to more fundamental metrics.

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