Conventional economists usually use the Gross Domestic Product (GDP) as a measure of the standard of living or 'progress' of people living in a developed country. GDP is a measurement of all the new goods and services bought by households in the course of a year. It is also equal to the wages rents and profits made by firms supplying the market.

Until quite recently, GDP has been equated with 'quality of life' or 'standard of living'. By and large, this measurement has been broadly true throughout history. Give any individual or group of individuals the chance to acquire more goods and services, and they'll snatch your hand off and pronounce themselves to be happier afterwards than before.

However, various 'happiness polls' in recent years may be are suggesting that something has been going wrong with the quality of life in developed countries since about the 1970s. Vague though many of these polls are, they are obviously pointing to something serious and many top-flight economists, such as Andrew Oswald of Warwick Univeristy, have been trying to clarify the 'happiness factor'.

At the same time, economists have been more critical about GDP. They say it suffers from two main faults. Firstly, it includes expenditure on the incomes and equipment of people such as the police, social service, prison warders, pollution and food analysts, etc which reflect a great deal of what is going wrong in developed society -- and is increasing from year to year. Secondly, it excludes any sort of measure of the fun and satisfactions that people gain from social activities -- and these are decreasing from year to year as communities and families become increasingly fractured into the ideal specialised sort of individual that a customer market aims for.

In a graph which accompanies the following article from the Financial Times, a GDP curve rises fairly steadily from 1950 to the present time at a rate of about 2.5% per annum. At the same time, a curve representing what is called the Measure of Domestic Progress (MDP) rose more slowly to a peak in 1976, then dips down to about 1990, rises again for a few years and has been steady for the last three or four years.

This is a serious dilemma for conventional economists. Consumers have obviously been happy to buy increasing quantities of goods even though, at the same time, they are lsoing quality of life and social satisfactions. This should not happen. But it is happening.

The diverging split between GDP and MDP is not a dilemma for my evolutionary economic hypothesis. In my view, when consumers buy goods they have never been buying happiness, they have been buying status. Most goods they buy are for reasons of 'keeping up with the Joneses' -- that is, to consolidate their present status in society, or 'social inclusion' in the fashionable term of the modern politician. Or, when a consumer sees a brand new consumer good which higher status people are buying -- what I call a 'stratum good' -- he feels his status is being diminished and so he goes for that, too. His striving for status overcomes any computation in his head that he may be losing some part of the social satisfactions that he had previously.

But what happens if and when the supply of stratum goods dries up? Accompanying the chart are statistics about three consumer goods which undoubtedly fall into my definitions of stratum goods -- namely cars, washing machines, telephones. In 1975 they were possessed by 57%, 72% and 52% of households respectively and by 74%, 94% and 94% in 2003.

Have there been any stratum goods since then? The answer is: none. In previous postings I've described the personal computer as a "half-stratum good" because it seems to have steadied-out by being bought and used by only about half the households in a developed country. Relative to many other products we buy, the price of the PC has been low for some years and is thus unlikely to be bought by a higher proportion in future years. In this sense it fails one of the criteria I use to define a stratum good -- that it is ultimately bought by everybody or all households. Looking at the PC more closely than I have hitherto, it also fails the other test -- that it should have been initially bought by well-off high status consumers. The PC was mainly bought and used by younger computer nerds and only slowly made its way both upwards and sideways, rather than downwards in the usual way of stratum goods.

In fact, for the last 20 or 30 years there have been no stratum goods equivalent to those of the last century. And this coincides with a large, queasey feeling that we are losing out in happeness. My evolutionary economic hypothesis therefore gives an explanation for the increasing gap between GDP and MDP. When and if the availability of stratum goods dries up then the overwhelming temptation to increase status is no longer there. There is no more sense of 'progress' beckoning us onwards like a siren. It is only then that we realise that, in the pursuit of status and stratum goods, a great deal else had slipped through our fingers -- namely the real status and social satisfactions that only a community can give us.

In the future, if no more stratum goods come along -- which I suggest is likely -- then the entrepreneur who will really make a killing will not be the one with a wonderful new product or service. He will be the one who can offer a social package in which work and community can co-exist in a way that has disappeared over the past century.

The last paragraph doesn't marry with the rest of the article and I suspect that something went awry at the sub-editing stage.

Keith Hudson

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INDEX PINS DOWN 'THE GOOD OLD DAYS' TO 1976

Ed Crooks

The year 1976 was the best on record for the quality of life in Britain according to

an index of economic, social and environmental progress published today by the New

Economics Foundation, a think-tank.

The index is the latest attempt to adjust the official measure of gross domestic product (GDP) to give a more accurate view of the country's well-being. Its conclusion -- likely to surprise anyone who can remember the seventies -- is that the middle years of that decade were a golden age that, even after some reasonable progress during the. 1990s, the country has yet to recapture.

Unlike the standard GDP figure the measure of domestic progress (MDP) devised by Professor Tim Jackson of Surrey University, takes into account social and environmental costs, including the damage done by crime, the depletion of natural resourcies, and pollution such as emissions of greenhouse gases.

Britain in the seventies, with less crime and lower energy consumption because there were fewer cars and centrally-heated houses, was better-off than it is today.

The MDP has barely risen since the 1980s in spite of a three-fold increase in the real value of GDP per head.

The index rose to a peak in the mid-1970s because of a fall in income equality and a rise in the national capital stock thanks to a boom in public sector investment: two other MDP measures.

The year of Harold Wilson's resignation, Britain's bail-out by the International Monetary Fund and the birth of punk, is not generally remembered as a time of unequalled economic success. But Prof Jackson said the impression of progress since 1976 was deceptive.

"If we are relying for growth on an economy with rising crime, growing inequality, and the destruction of the environment, that's not a very good way to proceed," he said.

Surveys of reported satisfaction with life show no increase in average happiness since the 1970s: further evidence that the country is no better off than it was three decades ago, he added.

However, although many economists would share Prof Jackson's doubts about the GDP figures, they would challenge the details of his index. For instance, economists generally draw a distinction between measures of national income and questions about how that income is divided: an issue blurred in the MDP.

Nicholas Crafts of the London School of Economics said measures of well-being ought also to take into account improvements in living standards, such as rising life expectancy, and opportunities offered by technological progress: neither is included in the MDP.

"It is perfectly fair and right to say GDP is not a very good measure of living standards, but it sounds as if this index is being incredibly selective about what it includes," he said.

Although reported happiness has not risen, people say they are happier than they were in the past. A bid to go back to the seventies might not find favour.

Financial Times -- 17 March 2004

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