Listener: 23 November, 2011.

Keywords: History of Ideas, Methodology & Philosophy; Social Policy;

Economists always knew income was just one contributor to total well-being, but it was the only bit they could study. Later, as the databases became more comprehensive, new research enabled them to turn their minds to what else matters and to look at whether they might have anything to say about this.

This is well illustrated in the Treasury framework set out by the outgoing Secretary of the Treasury, John Whitehead, last May

There is a broad range of material and non-material determinants of living standards.

Individual freedoms and capabilities are very important.

The distribution of living standards across different groups in society is an ethical concern for the public, and a political one for governments.

The distribution of living standards over time is of high importance, both for equity concerns but also to make sure we are sustainably managing our resources.

Measuring living standards directly, using self-assessed subjective measures of well-being, provides a useful cross-check of what is important.

It’s a bit clunky, but crucially the framework is saying the Treasury is no longer exclusively focused on income (or GDP per capita, which is much the same thing). It is also a humbler account of the world than the arrogant one of the 1980s when so much of what was proclaimed true has since gone wrong. (Few of those who were in the Treasury then are there today.)

I mention this because many people have not forgotten the arrogance and think there has been no change. They are wrong. Let’s be honest: professionals tend to be arrogant and professional economists are not immune to that disease. But so, too, are most of their critics; they constantly tell me what economists think – typically, I don’t; most of us don’t.

What the critics often overlook is that there are thermodynamics-type laws in economics, too. Such as you cannot borrow unless there is a lender. Treasury officials repeatedly have to remind us there are no perpetual-motion machines. But doing this is quite different from giving the radical but wrong advice of the 1980s and 1990s.

The Treasury is changing – you might say it is getting back to normal. We need to respect that change and not assume it is repeating its loony elements from the past.

Rather, we need to tackle any doubts we have about Treasury thinking by assuming it is analytical not ideological. That is what Whitehead was covertly saying. So it should be. It is good to see the downgrading of income as an objective and the recognition of the importance of equity, capabilities, health and jobs. But there is much more to be said.

I have been doing research for the Massey University Centre for Social and Health Outcomes Research and Evaluation (Shore) on the social impacts of alcohol and gambling. When we measured the effect of higher incomes on well-being, we found there was some effect, but not much. More important are other economic variables, such as employment, and there are others that economists don’t have much to do with, such as family circumstances and mental health. Sometimes the economy can make a contribution, such as with resources for education and health delivery, but other factors, such as how education and health professionals use the resources, are probably more important.

Suppose someone promises to increase New Zealanders’ incomes but as a result education will be poorer and health worse. (Such promises may not be credible, and the promisers – having no competence to make the judgment – will claim that destroying the delivery systems will make us all better off.) Is that what you really want?

The research suggests we would require huge increases in income to justify such a trade-off. For instance, the Shore studies suggest alcohol abuse and gambling abuse directly reduce the welfare of the abusers and others far more than the loss of (effective) economic output.

We can’t be sure where this research will lead. It is often hard to interpret. That is why the Treasury needs to be a little behind the research frontier. But it is great to see the direction in which it is moving.