We Still Haven't Figured Out How to Measure Prosperity

The previous chart on beer availability reminds me of an issue I have been thinking about for a while -- that we do no know how to measure prosperity.

GDP growth and unemployment reduction are terrible measures.  Just to give one example, these measures looked fabulous in WWII.  But the average person living in the US had access to almost nothing -- they couldn't buy anything under rationing, they couldn't travel for leisure, etc.   GDP looked great because we were building stuff and then blowing it up, the economic equivilent of digging a hole and filling it in (but worse, because people were dying).  And unemployment looked great because we had drafted everyone and sent them off to get shot.

But median income and net worth numbers fail to measure prosperity as well.  The reason was described in this post here way back in 2007.

The home on the left was owned by Mark Hopkins, railroad millionaire and one of the most powerful men of his age in California.  Hopkins had a mansion with zillions of rooms and servants to cook and clean for him, but he never saw a movie, never listened to music except when it was live, never crossed the country in less than a week.  And while he could afford numerous servants around the house, Hopkins (like his business associates) tended to work 6 and 7 day weeks of 70 hours or more, in part due to the total lack of business productivity tools (telephone, computer, air travel, etc.) we take for granted.  Hopkins likely never read after dark by any light other than a flame.

If Mark Hopkins or any of his family contracted cancer, TB, polio, heart disease, or even appendicitis, they would probably die.  All the rage today is to moan about people's access to health care, but Hopkins had less access to health care than the poorest resident of East St. Louis.  Hopkins died at 64, an old man in an era where the average life span was in the early forties.  He saw at least one of his children die young, as most others of his age did.  In fact, Stanford University owes its founding to the early death (at 15) of the son of Leland Stanford, Hopkin's business partner and neighbor.  The richest men of his age had more than a ten times greater chance of seeing at least one of their kids die young than the poorest person in the US does today.

How do we take into account that even if a person has the same income as someone in 1952, they are effectively wealthier in many ways due to access to medical procedures, travel, entertainment, electronic devices, etc?

Somehow we need to measure consumer capability -- not just how much raw money one has but what can one do with the money?  What is the horizon of possibilities?  Deirdre McCloskey tends to eschew the term capitalism in favor of "market-tested innovation."  I think that is a pretty powerful description of our system.  But if it is, we really are only measuring the impact of productivity and cost-reduction innovations.  How do we measure the wealth impact of consumer-empowerment innovations like iPhones?  Essentially, we don't.  Which, by the way, may be one reason our current crappy metrics say we have growing income inequality.  With our current metrics, Steve Jobs' increase in wealth is noted in the metrics, but the metrics don't show the rest of us getting any wealthier by the fact that we can now have iPhones (or the myriad of competitors the iPhone spawned).  The consumer surplus from iPhones undoubtedly dwarfs the money Jobs made, but it doesn't show up in any wealth calculations.

A few years ago I told a youth group that there were still many things left to discover in the mundane world -- by this I meant the everyday world we encounter and not just at the limits of the universe or at the scale of quarks.  The example I gave at the time is that there is a lot of room for better techniques to tease out causality in complex systems -- e.g. how much did the stimulus really affect the economy or how much does CO2 really affect temperatures.  I would add this question of measuring prosperity as a second item in this category.

  • tmitsss

    You can still tour Villa Vizcaya on Biscayne Bay in Coconut Grove Florida . A fabulous mansion in a marvelous location. James Deering filled it with magnificent art. What he could not buy in 1923 was a cure for his pernicious anemia which is now easily treated

  • bigmaq1980

    Ever visit Mount Vernon - George Washington's plantation?

    It is a great example to compare to today.

    For one of the wealthiest men of that era, you'd be hard pressed to think he lived as well off as we do today (no a/c, wood floor boards - with space between in some places, no refrigeration, outdoor commodes, etc, etc, etc.).

    Rather be "poor" in America today.

  • achillesheels

    What's misguided in your reasoning - and in the right-wing in general - is the intrinsic value of "status". There are some people in this world that can only be happy being the king of the hill, regardless of how antiquated and prehistoric said hill is. It is sad that they can only find happiness by comparing themselves to others and determining themselves superior. If they had a choice of all living equally in squalor or living well in a hierarchy, they would choose squalor - assuming they were not at the top of the pyramid.

  • obloodyhell

    Carpe Diem has a large array of posts about this kind of thing -- among other things, the percentage of a working week needed to simply pay for basic necessities -- food, clothing -- has dropped precipitously in the last century. People whine about $4 per gallon of milk, but that's a fraction of the human TIME it took to earn the money to pay for (or make) a gallon of milk 75 years ago.

    The time needed to work to pay for basic appliances, as well as non-essential appliances (TVs, Stereos) has also dropped in the same manner.

    The only measure of this that's risen in recent times is housing, which -- Gawrsh!! -- has been substantially effected by the housing bubble, and the cost of things dependent on corn production, like meat, which has been distorted by the Ethanol Mandate...

    Whodathunkit -- government policies are directly behind both of those problems...!!?!?

  • obloodyhell

    }}} There are some people in this world that can only be happy being the king of the hill, regardless of how antiquated and prehistoric said hill is.

    And there are a LOT of people who can only be happy if there's NO ONE at the top of ANY hill... regardless of how well off they themselves are. Everyone needs to be down in the valleys... preferably at the very bottom of them, in the muck and dirt of the runoff.

  • jon49

    The cost of smart phones has declined so much, and the cost of calling that there isn't much reason for the poorest of the poor to not have them. I bought an old, used smart phone from Freedom Pop for $30 and now have free calls when I'm around wifi and about 500 minutes a month call time for free using 3g/4g on the Sprint network (through Freedom Pop), I don't know how much the 500 mB of free data a month for texting amounts to, probably quite a bit. I use Google Hangouts for all the calls and texts. Seems to work pretty well so far. The phone only last about half the day before it needs to be charged again, but who cares, a one time cost of $30 for all that, you can't even find pre-pay phones for that good of a deal. I love modern technology!

  • Nimrod

    "capitalism" is a Marxist term, and the fact that we still use it is evidence of just how extensively Marxism has been allowed to frame or pollute economic discussions.

    What we really have should be called something like "marketism" and we should be looking to improve marketism. One of the significant problems is that we aren't very efficient at paying people according to what they do. An employee of Big Evil Company (Google) may, for example, come up with a technology that's worth millions but most likely never see any of that beyond their base salary.

  • Daniel Barger

    You can't measure happiness either.....prosperity is an intangible, the concept means different things to different people. Trying to measure such things is a fools errand.

  • irandom419

    I like that term. Got to take away or change the argument with the lefties.

  • bigmaq1980

    How about "prosperitism".

    Market and capital are trigger words that carry some baggage with the left.

    Who can disagree with "prosperity" for all?

  • bigmaq1980

    The purveyors of envy are typically those who want to be at the top of the hill telling others how they should "distribute" resources, all the while pointing fingers at the motivation of others for the same.

    “All animals are equal, but some animals are more equal than others.” ― George Orwell, Animal Farm

    “No one believes more firmly than Comrade Napoleon that all animals are equal. He would be only too happy to let you make your decisions for yourselves. But sometimes you might make the wrong decisions, comrades, and then where should we be?” ― George Orwell, Animal Farm

  • bigmaq1980

    Three related sites:

    http://www.aei.org/publication/blog/carpe-diem/
    http://www.aei.org/policy/carpe-diem/
    http://mjperry.blogspot.com/

    Presume this is "the site" you refer to...if so, excellent taste!

  • ErikTheRed

    The Austrian School of economics has a great deal to say about this and has many explanations for it, but they also claim that overall prosperity can't be measured because every person's value system is ordinal rather than cardinal. There is price difference between any pair of ordinal objects or services (for example, between an iPhone 6 and an iPhone 6 Plus), but even when prices are fixed (most low- to mid-cost consumer goods) those prices are themselves incidental to the way the individual values those objects or services and do not accurately capture the value differential. Or in my case, where I prefer a smaller phone regardless of cost, the price difference is inversely related to my individual perception of value.

    I make a great deal more money than most of my friends, but I also have only a tiny fraction of their leisure time. It sometimes occurs to me that the value of the additional leisure time may be more than the extra income. On the other hand, I enjoy my work far more than most of my friends do, and I also get a great deal more satisfaction as well. The mainstream economic models have nothing to say about this, even though from a quality of life standpoint it means a great deal.

    So what we wind up with is the Keynesian model that fixates on activity and cash flow, but as any business manager knows there's a world of difference between being busy and being productive (in the value sense). Politicians and economists have gamed big numbers like GDP and unemployment to the point where they literally have no meaning outside of "what would the political class like me to think?"

    And the biggest irony is that the nimrods on the left - who endlessly screech that money isn't everything - have so tightly embraced the economic theory that money *is* everything while violently rejecting the theory that is far more in line with their rhetoric. I guess enabling power means far more to them then being correct.

  • bigmaq1980

    And gamed inflation (they don't include asset price inflation - hence the housing bubble and now the equities bubble).

  • stanbrown

    Matt Ridley uses the amount of time the average worker has to work to provide one hour of light with which to read. http://www.ted.com/talks/matt_ridley_when_ideas_have_sex?language=en

  • Roy_Lofquist

    "While one who sings with his tongue on fireGargles in the rat race choir
    Bent out of shape from society’s pliers
    Cares not to come up any higher
    But rather get you down in the hole
    That he’s in"

    Bob Dylan, "It's Alright Ma"

  • TruthisaPeskyThing

    "GDP growth and unemployment are terrible measures. . . . these measures looked fabulous in WWII. But the average person living in the US had access to almost nothing . . . GDP looked great because we were building stuff and then blowing it up, the economic equivilent of digging a hole and filling it in (but worse, because people were dying). And unemployment looked great because we had drafted everyone and sent them off to get shot."
    As a professor of economics, I give you a standing ovation for this insight. Virtually all of my students come into college with the impression that WWII was great for our economy and sent us to prosperity. In fact, despite these type of explanations, many students cling to the mantra that Government spending in WWII is what got us out of the Great Depression. (By the way, the end of the Great Depression occurred at the end of 1939 when president Roosevelt told his cabinet to end the Administration's war on business; and he brought in business leaders to help shape his Administration's policies. As a result, the economy boomed for two years before we got into WWII.)

  • Nimrod

    "Progressives" can disagree with prosperity because they're obsessed with equal guaranteed outcome regardless of individual behavior. Prosperity isn't good enough for them, only their definition of progress.

    My problem with a term like "prosperism" is that it's another term like "progressivism" that assumes it's own result rather than stating exactly what should be done. For example, "progressive" once meant embracing government eugenics programs, so if you were against that then you were "against progress". The National Socialists were progressives with progressive policies like eugenics and institutional genocide.

    So if one is being honest then terms should describe how someone proposes to do something rather than what they're promising everyone that the result will be, especially when that result is extremely ill-defined.

    One of the biggest social problems we have, if you ask me, is a tendency to only care about the intended result of something rather than the actual result. If the morality of some action were judged based on actual vs intended results then proposals would get more honest analysis.

  • bigmaq1980

    Well thought out and fair remark. I can see how it gets twisted into an egalitarian outcome.

    In the spirit of describing how the system should work:

    "Reciprocalism"

    Thought of "Mutualism" too, but it has already been taken up by the "anarchist school of thought".
    http://en.wikipedia.org/wiki/Mutualism_%28economic_theory%29

    Anyway, it is probably more wishful thinking that a term would make a difference, as whatever label is made, it will probably get twisted around to mean something different. We see this happen all the time, and with greater frequency in this century, as if "1984" was a prophesy.

  • Hal Duston

    How about "Freedom"?

  • bigmaq1980

    Sadly, that gets twisted around too...need look no further than the debate right and left in Indiana.

  • Nimrod

    Here's an article (critique of some Noam Chomsky stuff) that talks about how that term gets twisted: http://archive.frontpagemag.com/readArticle.aspx?ARTID=20016

    As bigmaq says, any term can get twisted around in more than one direction. Few people would agree with something like "freedom to murder" or "freedom to lie on 10-Q reports". Unfortunateiy you'd probably get plenty of supporters for "freedom to get infinite free stuff from the Magic Government".

    Even a term like "market" could get twisted into "the 'market' of voters that 'controls' a bureaucratic command economy." Nothing will guarantee intellectual honesty.