Measuring prosperity
Prosperity like other social constructs has the sense of a common universal understanding that eludes a precise, actionable description. Part of the challenge starts with how to deal with the dichotomy in economics between two kinds of goods - enumerable, material needs and infinite wants. While the aim to eliminate poverty and provide the enumerable needs to everyone may not be controversial, there is less confidence for the prospects of arriving at a consensus for how to make space for those innumerable wants and a definition for the line between the two.
In this section
A collection of multiple objectives
The aim of this section is to present a concise description of prosperity that incorporates the concepts of the imperfect, social aspects of human condition presented earlier, draws from contemporary approaches and can be readily translated into practical policy applications. There are several proposed methods to define a comprehensive measure of prosperity. Examples include the Legatum Prosperity Index (Legatum Institute, 2019), Genuine Progress Indicator (Kubiszewski, 2013), Social Progress Index (Social Progress Imperative, 2020). Each of them share in common five broad goals - human development, social and psychological well-being, environmental sustainability, economic activity and political freedoms. The first three goals can be considered primary outcomes and the later as enabling goals from the economic and political institutions that enable the coordination of societies in the problem solving process. The Economic Freedom Index report generally recognizes each of these goals both primary and enabling as representing prosperity and cites both the Social Progress Index and the Legatum Index as evidence that it’s universal solution of economic freedom achieves these ends (Miller, 2020). The rationale of using the positive psychology concept of “Subjective Well-Being” (SWB) is first that it is more closely matched with the scientific understanding of human behavior from anthropology, psychology and sociology. The second motivation is that for policy makers political legitimacy rests in the ability to consistently sustain the conditions that lead to high and or improving life satisfaction for a majority of society (Ward, 2015).
Subjective well-being
Given the subjective nature of SWB there are variations in how it is defined. According to the OECD it is defined as “Good mental states, including all of the various evaluations, positive and negative, that people make of their lives and the affective reactions of people to their experiences” (OECD, 2013). Based on reports by OECD (OECD, 2013) and the World Happiness report (Hilliwell, 2017) SWB is related first to an individual’s health and material needs, and next by the quality of their local social environment - social support of friends and family, whether they are employed, how generous they are, how free they feel and how trusting they are of others. Income does not appear as a strong explanatory factor after health and social considerations are accounted for (Hilliwell, 2017). The subjective reality experienced by the individual defines their sense of satisfaction. Local experiences appear to have a stronger direct influence compared to aggregate conditions for the whole economy and relative income within a society has a stronger influence than absolute levels of income across societies.
SWB is one’s own assessment of how well things are. SWB and “happiness” are sometimes considered as the same and in other reports happiness is defined more narrowly as a transient positive affect which may have reproducibility challenges be more subject to the conditions that the survey was taken such as time-of-date or day of the week (Cohen, 2018). For consistency in this report happiness will not be used and the terminology used will focus on SWB. The anterior cingulate cortex region of the brain is suspected to have a role in this function and schizophrenic patients with lower activity in this region also report lower SWB scores (Gilleen, 2015). There are multiple measurement techniques all of which use surveys such as the Cantril Ladder, Eurobarometer, World Values Survey (Hilliwell, 2017). It is considered as the aggregate of three unique dimensions :
Dimensions of Subjective Well Being (OECD, 2013)
Life evaluation—a reflective assessment on a person’s life or some specific aspect of it.
Affect—a person’s feelings or emotional states, typically measured with reference to a particular point in time.
Eudaimonia—a sense of meaning and purpose in life, or good psychological functioning
Doughnut prosperity
A model of prosperity “Doughnut prosperity” based on SWB is illustrated in Figure 4.4 with the following definition : Meaningful prosperity is achieved when all member of society inside and outside the borders share high levels of material, social and psychological well-being and this well-being is secured for many generations well into the future
This definition is not intended to be revolutionary or different from what is proposed in other texts, but rather a way of logically organizing multiple objectives. The framework shares aspirations of the UN Sustainable Development Goals. There are two main concepts - grounding well-being as the yardstick for individual prosperity and extending it in three dimensions to the rest of society. First, the measure of prosperity on an individual level is based on the concept of “well-being” from positive psychology, sub-divided into material, social and psychological dimensions. Second, this well-being is extended equitably both sub-nationally, internationally, and into the future. The differentiated feature of this framework from the approach by the Economic Freedom report to the similar set of metrics is the treatment of the innumerable wants.
Innumerable wants : Doughnut framework
Extend the definition of enumerable needs to include healthcare and education
Define the innumerable wants through positive psychology terms “well-being”
Apply the society-wide goals of equity and sustainability to set the boundary in which the innumerable wants are free to reign
The term “Doughnut” is inspired by the economic model presented by Economist Kate Raworth in her book “Doughnut Economics” (Raworth, 2017) and similar ideas expressed by Tim Jackson’s Prosperity without Growth (Jackson, 2017). The main idea is that rather than being infinite, prosperity operates within two sets of finite boundaries - the inner limits at the individual level of provision of basic needs and elimination of poverty and the outer limits are set by the finite resources and the rights and needs of neighbors. Freedom to pursue one’s personal subjective ambitions are then bound by what is able to be provided by the finite resources on the planet and that which does not come at the expense to someone else’s right to do the same. These ideas do not radically depart from basic values of liberalization, the main difference is the formal representation and acknowledgement of limits in the basic definition of the economic problem rather than leaving them to be discovered and resolved as an intermediate step in the market process.
The Economic freedom approach
The approach to innumerable wants by the Economic Freedom Index report in contrast deals with the innumerable wants more ambiguously leaving the questions open to the “free” choice of individuals and the dynamics of the market.
Innumerable wants under Economic Freedom
Empower individuals to improvise, acquire resources and decide their own needs, wants
Real factors of production - land, labor provide feedback of price signal to set constraints
Faith in the invisible hand to resolve the problems of equity and sustainability
The contrast between the two is the different treatment between “freedom” and “well-being”. The Doughnut framework treats “freedom” as one of several psychological components of well-being, and limited within the constraints of what society can afford. In contrast the Economic Freedom framework is centered on “freedom”, promoting it as the universal, fair means to achieving all other ends. Well-being is predicted as an inevitable outcome of this enigmatic quality of freedom.
The Economic Freedom framework uses an intermediate yardstick of GDP (income) growth as a leading indicator to verify that the program has achieved success on it’s own terms. It then applies the holistic indexes such as the Social Progress Index as lagging indicators to verify that the system is delivering on it’s promise of providing equitable and sustainable well-being. The relationship between GDP per capita and well-being can be explained through material improvements in essential needs for human developments, and in the subjective experience of having higher income than someone else in the same country. Evidence is poor that higher absolute incomes is related to well-being after controlling for material needs and other macroeconomic factors such as unemployment. Also absolute GDP growth does not generally improve inequality or environmental performance when transfers across borders are accounted for. Finally while generally the countries that have economic freedom do also have greater political freedoms, there are exceptions of both kinds and Singapore is a good case study of a country with high economic freedoms and low political freedom.
GDP : True North for the free market model
The positive benefits of Singapore’s development are easy to see. At US $60k in 2019 the mean per capita income is one of the highest in the world (Singapore Statistics Economy snapshot 2019). This income increase corresponded with increasing success rates in basic health and education measures of human development with a human development index (HD) of 0.932 where an HDI of >0.79 is considered highly developed (UNDP, 2018). Gross domestic product (GDP) and its growth rate are assumed often without question in political discourse as a measure of economic progress and this seems to be the case based on the reports on economic performance used by Singapore’s Ministry of Trade and Industry where GDP is implicitly assumed equivalent to “economic” growth (MTI, 2018).
Economic growth is explicitly defined as the mission of MTI and the Minister of MTI Chan Chun Sing reiterates this imperative by starting his response to the question of Singapore’s economic strategy that “we strive for economic growth to achieve..” Minister Chan further stated that the desired outcomes for individual Singaporeans - “better lives”, “fulfilling potential and aspirations” (Chan Chun Sing, 2020). This is consistent with the presumed Economic Freedom Index model that asserts that the leading indicator GDP growth will ultimately produce prosperity. The aspirations for Singaporeans mentioned by Minister Chan share similarities with SWB. So if SWB is a meaningful measure of whether Singaporeans are having “better lives” and “fulfilling their potential” then does GDP growth maximize general SWB improvement in the public? The analysis in this section will focus on this premise starting with the definition and measurement of SWB, it’s relationship to GDP and incomes and alternative proposals for meaningful measurement of prosperity.
Income and well-being
Does more income on aggregate result in a better sense of well being on aggregate?
One simplified assertion in a capitalism framework is that both firms and households respond to information in markets and behave out of rational self-interest to maximize profits, where profit is defined as revenues less expenses. Presumably households spend expenditures voluntarily in exchange for improvement in well-being. So the corollary of this assumption is that maximization of income is considered equivalent to the best possible means of creating the opportunity to increase well being. In the context of capitalism one question of interest is how well empirically SWB matches the model of human behavior and whether higher incomes predict higher overall SWB.
Relative social status
Two researchers which have analyzed this question are Inglehart and Easterlin. Inglehart observed a diminishing marginal return of SWB vs income (Inglehart, 2008), and Easterlin’s findings were that relative levels in income across time and within countries were more important for predicting SWB than absolute levels of income (Easterlin, 1995). This is known as the Easterlin paradox. The results of Inglehart’s analysis are presented in Figure 4.4 of multiple countries comparing their SWB and GDP per capita. The result showed a familiar curve of diminishing marginal returns similar to the shape observed in the relationship with the two components of the Human Development Index (HDI) - mean years of schooling and years of life expectancy at birth (Inglehart, 2008 ; OurWorldInData, 2015).
Two analyses in the 2017 World Happiness Report (Helliwell, 2017) provide more clues to the economic determinants with the strongest influence on subjective well-being - one by Helliwell et al which takes a look at the individual using survey data and the second at economy-wide aggregates by Easterlin et al using China during the period 1990-2015 (Helliwell, 2017). Consistent with the Maslow framework, social factors in survey results show up as stronger association with SWB than average per capita income such as generosity - whether the individual tended to give to charity and social support - whether they had friends they could depend on (Helliwell, 2017). Other psychologically important factors were sense of freedom and general sense of trust or perceptions of corruption. This observation suggests that SWB is more dependent on heterogeneous factors related to conditions in one’s local environment in short psychological distance than broad economy wide conditions.
Material needs, employment
On aggregate level data from China, the highest correlated factors (p <0.15) were unemployment and material needs - welfare coverage - pension, healthcare. The relationship of SWB with economic downturns measured in GDP growth or recession is observed in a study by De Neve, which reported a short term response of SWB to economic downturns, which is twice as potent as the response to an economic upturn (De Neve, 2018). The study also reports unemployment as a significant correlated factor although there were other residual relationships to income other than unemployment observed. Another observation was that the response is memory-less. This is similar to Easterlin’s observation that the response is to relative, short term dynamics and does not track as well with absolute levels of income over longer periods of time or absolute comparisons between countries (De Neve, 2018).
Social costs of GDP
Beyond SWB, the free market model of prosperity also argues that economic growth assures progress not only for aggregate SWB but also other goals in the Social Progress Index relating to inequality, environment and political freedoms. This claim is not supported by evidence universally and in particular for advanced economies. When socioeconomic inequality is accompanied with economic growth it’s costs can undermine both human development and psychological well-being (Pickett, 2017 ; Sapolsky, 2017). The emergent pattern of development in the 20th century has been that input of raw materials and energy to sustain and grow economic activity comes with an environmental cost (Kubiszewski, 2013). Furthermore Singapore is one of several counter-examples refuting the claim that Economic freedoms do not guarantee political freedoms. While Singapore ranks as #1 in Economic Freedom, it is near the bottom of advanced economies on measures of political freedoms. Singapore is rated by the Economist Intelligence Unit as a “flawed democracy” ranked 6.0 out of 10 (Economist Intelligence Unit, 2019). Out of 149 countries it receives low marks by the Social Progress Imperative on freedom of the press (#118), freedom of expression (#120), and equality of political power by social group (#134). (Social Progress Imperative, 2020).
Measuring prosperity
For an alternative model to be actionable for policy makers it should have a validation methodology that does at least as well as GDP. Four alternatives are described here - adjusted GDP using Genuine Progress Indicator (GPI), multi-indicator dashboard, most important outcomes, and a layered model.
Augmented GDP - Genuine Progress Indicator
GDP is an accounting of the national incomes and there are a number of attractive features for keeping this framework. One advantage is the ability to subdivide into components and isolated into parallel problem solving activities. Adjusting GDP for the components that it misses is one way of building on the existing body of knowledge built around GDP and using its strengths. This is the approach of the Genuine Progress Indicator (GPI). GPI accounts for the dimensions of prosperity - social, environmental that are missed in GDP by estimating their economic value and adds or subtracts them from GDP. Examples include informal work added as a service, and the cost of divorce subtracted as a social cost. Environmental pollution, air quality and depletion of resources are similarly accounted for and subtracted from the national inventory (Kubiszewski, 2013). This method had its limitations. Three in particular : (1) equity is not formally represented (2) the environmental accounting is within borders so it misses the largest share of footprint for advanced and urbanized economies and (3) the method is limited to where a meaningful price and unit definition can be determined.
Multi-indicator dashboard
Adopting any of the broad based indicators such as the Social Progress Indicator or the Legatum Prosperity Index would be a good start to measuring prosperity. All of these indicators when aggregated as a single number correlate highly with GDP per capita and traditional liberalization indicators but their sub-components may vary and in some circumstances are negatively correlated. These deviations may provide more insightful information to policy makers than comparing the broad indicator. To sufficiently differentiate from what is currently practiced with the liberalization model the goal should be a max(min) to avoid scoring low on any of the indicators, rather than feel satisfied so long as the total average index is a high number. There are a large number of indicators - 194 for the Legatum Prosperity Index so this may not seem as an appealing alternative to the simplicity of GDP. Not all of the parameters are independent of one another and likely the same set of 194 can be reduced to 20 12 or even 4 representative indicators without much lost information.
Most important outcomes
A simpler alternative could be to choose a small set - four representative parameters that capture the independent, competing features of the 194 parameter set such as Human Development (HDI), SWB (Cantril Ladder), Gini index and environmental footprint. These four represent the broad dimensions of prosperity starting with the two components of well-being - human development as the material, enumerable needs and SWB capturing the innumerable subjective qualities. The gini index and environmental footprint capture extension of well-being from the aggregate measure to its distribution both subnationally (Gini index) and the outside-border contributions (environmental footprint). The same analysis can be performed at higher levels of jurisdiction such as global or regional economic zones and an equivalent group gini index. This may be a more meaningful approach for cross-border considerations beyond the ecological perspective.
Layered
The drawback of limiting only to HDI-SWB for advanced economies is that HDI is mostly complete and a large source of variation in SWB at national scale may only be after-the-fact and less useful if it cannot be converted into a predictive model. A layered approach is proposed to provide the different control needs on different time scales. Based on the analysis data from China, variations in SWB track short term changes in the business cycle - inflation and unemployment (Helliwell, 2017). So inflation and unemployment could be useful monitoring indicators SWB that can be translated into specific policy considerations. There are unique considerations for economic health management for the short term business cycle and long term structural health, and in some cases they do conflict. For this reason long term measures such as productivity (labor productivity and/or total factor productivity) should also be monitored periodically on an annual and semi-annual basis.
For urban city-states like Singapore, net immigration is an important leading indicator. Immigration is both an indicator and also a degree of freedom. The resulting trend of immigration is the combined effect of immigration policy and the labor demand. Immigration not only is a general indicator of economic activity, it touches on many aspects that can feed into SWB from economic, political and resource dimensions. Immigration for Singapore provides a buffer for domestic unemployment to absorb more volatile short term fluctuations in the business cycle leaving a comparatively more mild ebb in the domestic unemployment trend.
Finally the multi-indicator dashboards - Social Progress Index, Legatum Prosperity Index - contain a mix of both lagging and leading indicators. The leading indicators could be useful in combination with these lagging indicators where policy makers have more direct influence in areas such as democratic freedoms, governance integrity, credit market regulation and property rights.
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