Wednesday, 25 May 2011

Economics retreat?

At least since Adam Smith, welfare economists have been aware of the limitations of their science to measure wealth. However, they have done very little to overcome the limitations of measures such as GDP, except in relation to price adjustments through the so-called purchasing power parities.

Not surprisingly, some have come up with complementary/ alternative measures such as the UN Human Development Index. However, these are often a mixed-bag of vague concepts that many scientists disregard as not serious science.

However, now the OECD, once a stronghold of serious economics, has joined the crowd with a Better Life Index (see: OECD), intent on finding “out what people want and need and what government is giving them”. This seems a lot of wishful thinking that will fail the quantitative test required by economic science.

To understand how difficult is to measure the way people value some non- traded goods and services it is easy. For instance, some people are happy to live in dirty and congested cities and would be bored to death if forced to live in perfected landscaped and organized towns, while others feel the other way around. So, how do you aggregate the preferences of these two people to come up with a national valuation of their welfare?

So the real challenge to economics will not come from this new OECD index.

Instead, it might come from the emerging science of happiness initiated by Prof. Richard Layard and others. However, this is only in its infancy and it will take many years before it deserves the title of science.

Meanwhile, may be economists will decide to descend from their pedestal of an axiomatic science based exclusively on positive economics.

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