The OECD has recently come out with this survey of well-being indicators in OECD countries.

We all know that GDP/head isn’t everything.  But it’s amusing to see governments in countries that are economic losers wanting to focus on other elements of well-being. Sarkozy in France with his happiness trope, aided and abetted by Joseph Stiglitz, is a case in point. Unfortunately for people like Sarkozy, the happiness literature suggests that happiness seems to correlate quite closely with income and wealth!

I’m somewhat underwhelmed by the OECD’s metrics.   The criteria touch on the importance of individual liberty, but only somewhat tangentially.   Consultation is regarded as more important than consent or compensation in matters of taxation and regulatory takings. Induced state dependency is apparently OK if the dependents feel happy and secure in their dependency. (This notion comes through again in the ‘Work-life balance’ section where too much work is more likely to be a bad thing than too much leisure in terms of OECD norms.)

No distinction seems to be drawn between satisfaction through achievement and satisfaction from stupor-inducing drugs, dissolute living, or armchair-TV sloth. There is a ‘feel good’ aspect to the OECD’s approach.

Australia comes out on top on governance – because it has such a high voter turnout.  Is this convincing when voting is compulsory in Australia?

I doubt that public policy making can be improved by the new measures. The imperative for political parties is to get re-elected. Providing them with a richer set of measures than GDP is not going to alter this imperative. They are still going to be in the game of using other people’s money to buy votes from their target constituencies.

I would prefer to use market measures rather than surveys to assess the relative attractiveness of countries. For example, indicators of actual and suppressed demand for residency, country by country, should provide useful information. The United States is the No 1 country in the world for immigrants.  The net migration flow is from New Zealand to Australia. Not everyone finds the United States or Australia attractive but migration patterns tell us something about the preferences of people at large. 

Others have poked holes in the OECD’s analysis. A comment on the Marginal Revolution blog reads as follows:

I did a Principal Component Analysis on the OECD’s model. Maybe unsurprisingly in the SWPL-based weights in this model, the United States only comes out on top if I prefer:

–   high income
–   no community
–   bad education
–   bad environment
–   high governance
–   poor health
–   no life satisfaction
–   poor safety
–   poor work life balance

However, after having lived in and worked for many years in four other OECD countries, on three different continents, my experience has been exactly the opposite.  So I decided to come and live in the fifth country, the United States.

The amount of hidden bias in these international organisations like OECD, WHO and UN is truly astounding.

Australian economist (and author of several Business Roundtable studies) Winton Bates has also blogged on the OECD’s well-being indicators here.

I am not sure the OECD’s better life index is meant to be fun. But I have had some fun playing with it. The index is interactive. The fun comes from giving different weight to 11 different criteria (or topics as they are described by the OECD) and then observing how this affects rankings of well-being of OECD countries.

Bates plays this game and concludes that New Zealand comes out quite well on all rankings, although consistently after Australia.  Then he concludes:

Having had some fun, the more serious question that comes to mind is whether a focus on the OECD’s well-being indicators (and other similar constructions) is likely to distract political attention away from much-needed economic reforms to improve the economic strength of some economies. For example, if well-being indicators suggest that people in some lovely country (New Zealand comes to mind) tend to enjoy living standards substantially higher than other countries with comparable per capita GDP levels, there may be a tendency for the government of that country to become complacent about establishing conditions more favourable to further improvement of living standards.

How true! As one expatriate wrote to me recently about New Zealand:

Things are just too easy, too comfortable; we are too isolated and too willing to leave important things to the government, even when their lack of competence is well understood.

It seems to be a combination of laziness and an unpreparedness to think things through (even when they’re not working). Being first class is not the Kiwi way (we prefer to muddle through and complain).

We’re not on our own. The big government disaster that is California is losing businesses and people to more dynamic, low-tax states such as Texas. But hey!, life’s a beach in California and dynamic industries like those in Silicon Valley survive against the odds.  A crisis may not happen soon. As Adam Smith famously put it, “There’s a lot of ruin in a nation.”

The Treasury has been playing a similar game.  I will blog on that soon.




What’s Wrong with Neoclassical Economics?

A new Occasional Paper on the Business Roundtable website should be a useful resource for teachers of economics and participants in economic policy debates.

Written by Wolfgang Kasper, emeritus professor of economics at the University of New South Wales, Australia, an earlier version was delivered to the joint conference of the New Zealand Association of Economists and the Law and Economics Association of New Zealand in June this year.

For years I had urged Wolfgang to write a paper spelling out the limitations of neoclassical economics in understanding how the world works.

He resisted the idea (“nobody believes in neoclassical ideas any more”).  I told him he was wrong: various economics educators in New Zealand continue to teach on the basis of defunct human capital, and politicians attack free-market policies on the false assumption that they are grounded in neoclassical economics.

Finally Wolfgang relented and wrote the paper.

Neoclassical economics can be traced back to the work of British economist Alfred Marshall and to some extent even further back to ‘classical’ economists such as Adam Smith.  It is characterised by a focus on static equilibrium conditions in markets and the economy – like how supply and demand are matched and at what prices.  It does not explore the dynamics of the economic system, and in particular has little to say about entrepreneurship and economic growth.

As Wolfgang says in his paper:

The poverty of neoclassical economics becomes evident when one realises that key concepts – such as competition, enterprise, profit, the costs of transacting business, the need for law and other rules of coordination (institutions) – have simply been ‘assumed away for simplicity’s sake’. It is also imbued with a wrong-headed pessimism, derived from nineteenth-century agricultural reality (law of diminishing returns).

Almost as though on cue, a classic example of the persistence of neoclassical misunderstandings came to light just as Professor Kasper’s paper was being printed.  The New Zealand Herald, which features a constant diet of op eds by anti-market critics such as Jane Kelsey and Bryan Gould, printed this article by Auckland secondary school economics teacher Peter Lyons, whose articles also appear frequently in Herald columns.

It was entitled ‘Mantra of free market ideology wearing thin’ and contained a familiar theme: “In the past 25 years New Zealand has embraced the free market ideology of of neoclassical economics.”

As someone involved in some of the reforms, I can certify that none of the economic advisers of the governments concerned were slaves of neoclassical economics.  While recognising its insights they were well aware of its limitations as identified by Wolfgang Kasper, and drew on a far wider and richer body of economic literature.  A reading of relevant official documents would make this immediately apparent.

Similarly, governments in the United States, Britain, Australia and many other countries that embarked on liberal economic reforms around the same time as New Zealand were not driven by narrow neoclassical economics.  Again a reading of official documents would quickly confirm this.

Professor Kasper responded to Peter Lyons in this article.  Regrettably, the Herald declined to publish it.

I worry about bad economics teaching in our classrooms and lecture rooms.  I worry too about the effect of bad economics on public understanding when newspapers do not publish critical responses.

Professor Kasper’s paper should demonstrate that those who attack liberal economic policies on the grounds that they are based on neoclassical economics are attacking a straw man.

Pathways to prosperity for indigenous people

The Business Roundtable was very fortunate to have Aboriginal leader and founder of the Cape York Institute Noel Pearson deliver the 2010 Sir Ronald Trotter Lecture Pathways to Prosperity for Indigenous People last Tuesday, 2 November.

Noel was an outstanding speaker and impressed the large audience with the scope of his talk – he covered a wide variety of policy issues including education, welfare, employment and other indigenous issues – and it was obvious he is a deep philosophical and economic thinker. I was particularly interested in how Noel drew on the work and principles of Adam Smith, and the impact that thinking has had on the inspiring work the Cape York Institute does for impoverished aboriginal communities.

The Business Roundtable was grateful to Tainui Group CEO Mike Pohio for a vote of thanks that reflected the audience’s appreciation for an exceptional speech.

The whole lecture, including Business Roundtable chairman Roger Partridge’s welcome and my introduction is on vimeo, or there are clips edited to just Noel’s talk below:

Part I

Part II

Part III

Part IV

A Wealth of Ideas

The Business Roundtable published a review of a new biography of Adam Smith as one of our regular Perspectives yesterday. Adam Smith is a man much revered by the Mont Pelerin Society and his enduring ideas and their striking relevance to the problems facing many economies today have been widely discussed at the Society’s general meeting in Sydney this week. Yet little is known about the man himself, as Jeffrey Collins explains in the Wall St Journal review:

Having dined with Adam Smith on a number of occasions, Samuel Johnson once described him “as dull a dog as he had ever met with.” Smith’s biographers might be inclined to agree. The most celebrated political economist in history led a remarkably quiet life. Born in the sleepy Scottish port of Kirkcaldy in 1723, he was raised by his widowed mother and lived with her for much of his life. He studied at the University of Glasgow (which he loved) and at Oxford (which he loathed). Only once in his life did he travel outside of Britain. He wrote few letters and burned his personal papers shortly before his death in 1790. Even his appearance is a mystery. The only contemporary likenesses of him are two small, carved medallions. We know Adam Smith as we know the ancients, in colorless stone.

It is a measure of Nicholas Phillipson’s gifts as a writer that he has, from this unpromising material, produced a fascinating book. Mr. Phillipson is the world’s leading historian of the Scottish Enlightenment. His “Adam Smith: An Enlightened Life” animates Smith’s prosaic personal history with an account of the eventful times through which he lived and the revolutionary ideas that inspired him. Adam Smith finally has the biography that he deserves, and it could not be more timely.

In shedding light on Adam Smith’s character Collins explains that his philosophical ambitions were much broader than the “Wealth of Nations” might suggest, and ranged over politics, law, ethics and aesthetics.

Inspired by his friend, the skeptic David Hume, Smith swept aside all timeless or divine notions of moral and political order. In his view, society emerged from the historical experience of a needy species driven to create conditions in which property, affection and opinions alike could be stably exchanged. Manners and morals, like goods, thus had an “economy.” The material and moral economies were, indeed, linked, in that a rising material prosperity helped to encourage civility and taste. Mr. Phillipson reconstructs Smith’s intricate system with erudition and imagination, often from student notes of Smith’s long-lost lectures, which he had delivered in both Glasgow and Edinburgh.

As many of today’s debt-laden countries search for new ways to reignite economic growth, it seems a read of Mr Phillipson’s “Wealth of Ideas” would be well worth while. 

Smith’s was a complex legacy, and in reading about it one is struck by its uncanny relevance. When the “Wealth of Nations” appeared, Britain staggered under massive war spending and a colossal national debt. Bad loans blighted banks across the country. Several had collapsed, leaving their investors ruined. Gold bugs abounded. In the face of international competition, well-connected manufacturing interests clamored for protective tariffs. The times called for Adam Smith, and his theories worked to stabilize and liberate the British economy as it entered the industrial age. If we need a reminder of his achievements, and of late it appears that we may, Mr. Phillipson has given us a superlative one.