Lionel Robbins Memorial Lectures Economic Growth, Human Welfare and Inequality Lord Turner Chairman of the Financial Services Authority, the Climate Change Committee and the Overseas Development Institute Lord Layard Chair, LSE
Lionel Robbins Memorial Lectures Objectives and means: Economics after the crisis Lecture I Economic Growth, Human Welfare and Inequality Adair Turner London School of Economics 11 October 2010 1
Starting Point: The Instrumental Conventional Wisdom Free markets Free markets Allocative efficiency Growth Human happiness Inequality: Justified because it helps deliver growth Lecture I: Objectives: Why growth should not be the objective in rich countries Lecture II: Means: Do free financial markets maximise efficiency, growth, or other objectives? Lecture III: The case for economic freedom: implications for public policy: and for the discipline of economics 2
Satisfaction with life and growth of income in Japan Source: Bruno Frey & Alois Stutzer, Happiness and Economics, Princeton University Press, 2002 3 2
Happiness and income per capita in the USA Source: Bruno Frey & Alois Stutzer, Happiness and Economics, Princeton University Press, 2002 4
Income and happiness: Comparing countries 100 Average of % happy and % satisfied 90 80 70 60 50 Ireland Netherlands Denmark Canada New Zealand Sw eden Finland Indonesia Mexico Singapore Australia Austria Colombia Britain Belgium El Salvador France Nigeria Chile Czech Republic Venezuela Germany Portugal Argentina Italy Vietnam Japan Brazil Spain Uruguay Slovenia Croatia Israel Philippines Hungary Greece Dominican Republic South Korea China Egypt South Africa Algeria Morocco Poland Uganda Peru Jordan Slovakia Iran Estonia India Lithuania Azerbaijan Turkey Bangladesh Tanzania Macedonia Pakistan Latvia Georgia Albania Belarus Bulgaria Romania Sw itzerland Norw ay USA 40 Moldova Zimbabw e Ukraine Russia 30 0 5000 10000 15000 20000 25000 30000 35000 Income per head ($ per year) Source: Richard Layard, Happiness, Penguin, 2005 5
Average Income and Human Contentment: Possible stylised pattern Happiness / Wellbeing Income 6
Global Living Standards: A Millennial Perspective Average per capita GDP (in 1990 $) 1000 AD 1500 1870 1998 Western Europe 400 775 1200 18000 Western off-shoots 400 400 1200 26000 Japan 420 500 670 20000 Asia (excl. Japan) 450 570 575 3000 Africa 400 400 400 1400 Source: Angus Maddison, The World Economy: A Millennial Perspective, OECD 2006 7
Income and Human Contentment: Possible stylised pattern over time Pre-industrial societies The Great Transformation Income / Contentment Developed economies China Income Human wellbeing contentment / happiness Africa Economic and technological progress 8
Life satisfaction and real GDP per capita 9
Changes in life satisfaction and economic growth in Europe 10
Decadal differences in life satisfaction and log GDP 11
Diminishing Marginal Utility Utility Consumption of specific good 12
Utility/Contentment and Aggregate Consumption: The impact of new products and services Product 3 Product 2 Contentment Product 1 Aggregate Consumption 13
14
Three distinct reasons why relative income matters 1. Rising expenditure on fashion and branded goods 2. Increased competition for inherently limited supply positional goods Concern for relative status in itself Relative income influences absolute living standard Higher relative income increases happiness Happiness a function of others income as well as own 3. Congestion externalities Rising average incomes degrade quality of some forms of consumption 15
Income and wellbeing in the USA (1981-84) 42 40 38 36 34 20 40 60 80 100 Annual Income (Thousands) Source: Bruno Frey and Alois Stutzer, Happiness and Economics, Princeton 2002 16
Distributive versus creative activities Creative Increasing the net real income available for consumption Distributive Winning increasing income at expense of others Source: See Roger Bootle, The Trouble with Markets, chapters 4 and 5 17
Two dimensions to rising inequality Fall in lowest decile income relative to median particularly in the US Rise in top decile income relative to median And top 1% relative to rest of top decile And top 0.1%... And top 0.01%... 18
Four Factors driving inequality at top end 1. Celebrity rents 2. Increasing potential for rapid private value creation Inherent factors driven by by changing patterns 3. Highly remunerated distributive activities 4. Cross-comparisons, changing social attitudes, and the role of agents Sociological // political processes but but influenced by by inherent factors 19
Two different perspectives on the growth of average US income 80000 70000 60000 Arithmetic Mean income Mean income 50000 40000 30000 20000 Geometric Mean income 10000 0 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Source: Tony Atkinson s essay Economics as a moral science, Oxford University 2009 20
Health and social problems Income Inequality Source: Wilkinson & Pickett, The Spirit Level, Penguin 2009 21
Mental health and inequality Income Inequality Source: Wilkinson & Pickett, The Spirit Level, Penguin 2009 22
Imprisonment and inequality Income Inequality Source: Wilkinson & Pickett, The Spirit Level, Penguin 2009 23
Most people can be trusted Income Inequality Source: Wilkinson & Pickett, The Spirit Level, Penguin 2009 24
David Cameron, Hugo Young Lecture Research by Richard Wilkinson and Kate Pickett has shown that among the richest countries, it s the more unequal ones that do worse according to almost every quality of life indicator. In The Spirit Level, they show that per capita GDP is much less significant to a country s life expectancy, crime levels, literacy and health than the size of the gaps between the richest and poorest in the population. So the best indicator of a country s rank on these measures of general wellbeing is not the difference in wealth between them, but the difference in wealth within them (November 2009) 25
Diminishing Marginal Utility Utility Consumption of specific good 26
Utility/contentment and Aggregate Consumption: The impact of new products and services Product 3 Product 2 Contentment Product 1 Aggregate Consumption 27
Aggregate diminishing marginal utility driven by aggregate satiation Aggregate Product n Utility / Contentment Product 3 Product 2 Product 1 Consumption 28
Happiness, income and changing aspirations Aspiration 1 Aspiration 2 Happiness 1 2 3 Aspiration 3 Flat line of long-term happiness Income 29
Happiness and already achieved income/wealth Current position Happiness Income / Wealth 30
Happiness, already achieved income, and changing aspirations Happiness 1 2 3 4 Plus: Happiness as function of relative as well as absolute income Income 31
Starting Point: The Instrumental Conventional Wisdom Free markets Free markets Allocative efficiency Growth Human happiness Inequality: Justified because it helps deliver growth The journey matters, not the destination Economic freedom as an end in itself 32
Income and Human Contentment: Possible stylised pattern over time Pre-industrial societies The Great Transformation Income / Contentment Developed economies China Income Human wellbeing contentment / happiness Africa Economic and technological progress 33
Starting Point: The Instrumental Conventional Wisdom Free markets Free markets Allocative efficiency Growth Human happiness Inequality: Justified because it helps deliver growth The journey matters, not the destination Economic freedom as an end in itself 34