Category Archives: Happiness

More Grumpiness on Competitiveness

Yesterday, I was a grump over national competitiveness and, in particular, the World Economic Forum‘s Global Competitiveness Index. I remain a grump today. Why does this topic bring out the curmudgeon in me?

In short, because national competitiveness is like a shell game where you are shown one definition, and this is then secretly switched to another. Here is a part of a speech by Prime Minister David Cameron on the UK economy in March 2013:

But third, as I said, we are restoring our competitiveness. At the forefront of this is our bold plan to cut corporation tax to 21%. That will be the lowest in the G7. As the recent KPMG survey shows, in just over two years we’ve transformed business perceptions of our corporate tax system from one of the least competitive to one of the most competitive in the world. We’re introducing some of the most generous tax breaks for early investment start-ups of any developed economy on the planet. And, by stripping back the red tape that was smothering businesses, we’ve put Britain back in the World Economic Forum’s Top Ten for competitiveness.

We start with the use of the word ‘competitive’ in the traditional sense: something relative to another. The claim is that UK tax rates are more competitive because they are lower. But this is really a tautology. Put another way, Prime Minister Cameron says this state of affairs is good, because good is defined as being this state of affairs. The only external evidence for the goodness of this state of affairs is the fact that it helps “put Britain back in the World Economic Forum‘s Top Ten for Competitiveness”.

Then later in the speech we see the race metaphor raised:

But my message is simple, people should make no mistake, in this battle for the future of Britain and our competitiveness, I’m prepared to roll-up my sleeves and have a fight, if that’s what it takes. So that is our plan: fiscal responsibility, monetary activism and restoring our competitiveness to succeed in the global race.

And it’s a zero sum race, since if we don’t beat the Chinese and Indians our children won’t get good jobs:

My motives, my beliefs, my passion for sticking to this plan are exactly about doing the right thing to help families and to help businesses up and down our country, because the truth is this: because if we want good jobs for our children, we will not get them if we are burdened with debt and outcompeted by India and China.

And in case you don’t get the message, the speech finishes by battering you with the race metaphor again:

By sticking to the plan, we can together make Britain a great success story in this vital global race. Thank you.

In all, I counted 16 references to ‘competitiveness’ and ‘competing’ in the speech. Productivity: zero. Prosperity: zero. Well-being: Zero.

Quick refresher on the WEF‘s definition of competitiveness, from page 4 of the Global Competitiveness Report 2014 /15:

We define competitiveness as the set of institutions, policies and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the level of prosperity that can be reached by a country.

Note there are no sport or military metaphors to be seen. We neither appear to be in a race or a battle, just striving for a bit more boring productivity.

The report then sets out the twelve pillars that make up competitiveness, with these in turn determining productivity. The pillars are as follows:

  1. Institutions
  2. Infrastructure
  3. Macroeconomic environment
  4. Health and primary education
  5. Higher education and training
  6. Goods market efficiency
  7. Labor market efficiency
  8. Financial market development
  9. Technology readiness
  10. Market size
  11. Business sophistication
  12. Innovation

And a pretty chart (click for larger image):

Global Competitiveness Index jpeg

The calculation then gets more complex. Each pillar is subdivided into smaller categories, and each  category is given a weight and a score. Moreover, the weightings differ depending on a country’s level of development. The rationale behind the  particular weightings for each category is not revealed. Weightings appear to drop into the report like manna from heaven.

We now get wonkish as we delve into Appendix A titled “Statistically testing the validity of the Global Competitiveness Index as an estimate of the level of productivity of an economy” on page 46 of the report. In this part of the report, we are told that it is too difficult to measure productivity directly so GDP per head is used as a proxy. The following chart is then produced (click for larger image):

GCI and Level of Income jpeg

Hang on. What does this chart actually tell us? That rich nations have better institutions, education and so on. Do we really need a 500 page report to tell us that? And from statistics 101 we know that correlation doesn’t equal causation. And if there is causation, which way is it going. As we get richer, doesn’t that allow us to have better institutions and get more educated? Moreover, the accompanying text tells us that the GCI score accounts for only about two-thirds of GDP per capita anyway.

A second chart is then produced to give further credence to the GCI and productivity link. We have a little bit of sleight of hand here because we are jumping from a static to a dynamic measure: from GDP per head over a snapshot in time to GDP growth over a period of time. This is a little bit bizarre. We are saying that productivity should raise the long term growth rate. Yet the long-term growth rate is mostly driven by the change in productivity. So the idea is that if you are productive now, you will be more productive in the future. In short, innovation will continue–probably one of the most inane statements I have ever heard.

GCI and Growth jpeg

Note that in the above chart they have adjusted the growth number to take account of convergence (other things being equal, poor countries grow quicker than rich ones).

The other thing that jumps out at me from this chart (apart from all the correlation/causation problems) is that we are going backwards: the 2014/15 index score is being used as the determinant of growth from 1990-2012. Shouldn’t we really be taking the first GCI scores published in 2004 and then plotting them against the growth rates over the subsequent decade?

Despite all this, the WEF pats itself on the back and says job well done:

In conclusion, the results of both Figures 1 and 2 indicate that the GCI is a good estimate of the level of productivity. In other words, the GCI’s estimate of the determinants of competitiveness–which, in turn, fundamentally shape the (conditional) medium to long-run growth rate of an economy and its level of prosperity–is validated on a statistical level.

Between David Cameron and the WEF, we now appear in a hopeless muddle. The British prime minister bangs on about competitiveness using the metaphor of a global race. As such, Britain should rejoice that it has gone up the WEF’s Global Competitiveness Index league table. But the WEF says that the GCI is a measure of productivity, and since no-one can really measure productivity, it measures GDP per head (and it is a pretty crap measure of GDP per head at that). But if David Cameron goes along to the UK’s Office of National Statistics web page, he can read off Britain’s GDP per head statistics directly. So what is the bloody point of the GCI!

OK, in the final statistical results paragraph I quote above, an allusion is made to the GCI having some forward-looking predictive power. That is, if you raise your score today, you will become richer tomorrow. But where is the evidence in the WEF report to support this assertion? In truth, there is none.

Now within the index, there are a bunch of GCI pillars that if bolstered I am sure would lead to greater prosperity. Who doesn’t like innovation and higher education? But mixed in with this we have lower corporate tax rates, flexible labour markets (code for fewer labour rights), deregulation and privatisation. These factors are submerged within the GCI methodology like ingredients in a giant Irish stew. Do we know if any of these factors has a bearing on future productivity: no, we haven’t a clue.

In conclusion, appealing to competitiveness is often little more than a game of bait and switch, under which one kind of political agenda suddenly morphs into another. Be warned. Grump over.

What the Hell Does Competitiveness Mean and Why the Hell Should We Care?

Some advice: beware politicians talking about competitiveness.

In the socio-economic arena, you can find an index for this and an index for that. But the World Economic Forum‘s “Global Competitiveness Index” is one of the biggest beasts in this area.

From this index, we learn that Switzerland is the most competitive country in the world, followed by Singapore and the United States. But what does this mean? The WEF tries to help out:

We define competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the level of prosperity that can be reached by an economy. The productivity level also determines the rates of return obtained by investments in an economy, which in turn are the fundamental drivers of its growth rates. In other words, a more competitive economy is one that is likely to grow faster over time.

We immediately run into a host of problems. For example, China comes in at 28 and India at 71 in the index rankings. Yet these two economies are exemplary examples of economies that have been growing “faster over time”. So the link between competitiveness and growth appears tenuous at best.

Indeed, I would argue that those countries who are least competitive (using the WEF‘s competitiveness metrics) may offer the best growth opportunities, since they have the most painless potential for catch-up. If you are corrupt and your institutions suck, then just by becoming a little less corrupt and by making your institutions suck just a little bit less, then you can grow an awful lot.

Then there is the word “prosperity”, which crops up an awful lot in talk of competitiveness. Unfortunately, prosperity is not the same thing as well-being or happiness. So are competitive nations happy nations? The question isn’t asked.

And what the hell does prosperity mean? In the United States,  a Council on Competitiveness was established nearly 30 years ago. Back in March 2007, the Council issued a report called “Competitiveness Index: Where America Stands“. It was rather smug as reports go, but America’s competitive prowess didn’t stop the country walking into the buzz saw of the Great Recession.

The report also included an introduction by Michael Porter, the doyen of competitiveness studies. If anyone can tighten up the purpose behind competitiveness, then surly Porter could.

The ultimate goal of competitiveness is the prosperity of a nation’s people, or per capita living standards….

….Competitiveness is not about a low-cost labour force, the largest share of exports of even the fastest economic growth. It is about creating the conditions under which companies and citizens can be the most production so that wages and returns on investment can support an attractive standard of living.

For those of a certain age (and an interest in economics and finance), Michael Porter’s book “The Competitive Advantage of Nations” was a must-read. Palgrave describes is as one of the most influential business and management books of all time. For a synopsis of his thesis, read this 1990 Harvard Business Review article here. My younger self was impressed when I first read his book. Now, less so.

For a start, the focus on competitiveness has not helped support “an attractive standard of living”. In the late 1980s, when national competitiveness studies swept into fashion, real median household income was around $52,000–almost exactly where we are now.

Median Wages jpeg

Of course, I frequently point out on this blog that there is a disjoint between standard of living and well-being. But the competitiveness mantra has always ignored well-being. The mantra has told us that we should keep score by looking at growth and prosperity (aka per capita incomes) alone. In short, we are admonished to remain competitive, and in so doing we must reform X, Y an Z. But, by doing this, the average Joe gets nothing in return.

Moreover, measures of competitiveness appear to have absolutely no predictive power whatsoever. In the 1990 HBR article by Porter, Japan played a staring role. Ten years later, and no apology in sight, Porter wrote a book called “Can Japan Compete?

That book, itself, contains a call on Japan to reform its uncompetitive half (a half generally ignored 10 years earlier). And this call is still sounded regularly in the editorial pages of the Wall Street Journal, Financial Times and The Economist. Thank god they have not done it. If they had, I suggest that you would have seen a far greater decline in median incomes and a marked deterioration in well-being. It is the “uncompetitive” piece of the the economy that gives Japan its low unemployment, social coherence and overall resilience to what the world economy and nature (think earthquakes, tsunamis and typhoons) throws at it.

So to conclude, whenever you hear politicians clamour for national competitiveness, expect incoherent, ill-informed and unsupported garbage.

A Short Blog Post on a Very Big Question: Well-Being and Policy

Here in the UK, a general election looms. Key themes are common to every western democracy, albeit with a few local characteristics; that is, economic growth, prosperity (narrowly defined around income and wealth), inequality (median wage growth or the lack thereof) and, to a degree, well-being (in the UK’s case proxied by arguments over the NHS). Climate change and the environment will be foot-noted at best.

So could we do better? Emphatically, yes.

To commence with, every politician (and, in fact, everyone), regardless of political persuasion, should read the report “Well-Being and Policy” published by the Legatum Institute last year. The executive summary is here and the full report here. Note the report is written by a suite of top-ranked economists including Angus Deaton and Richard Layard.

The report makes a compelling case that the young discipline of ‘well-being and happiness’ has now matured sufficiently to drive policy. Following from this, my recommendation is that every party organises its manifesto around the three major types of happiness set out in the report (and for the last few years in this blog):

  1. Life satisfaction: how we evaluate our lives
  2. Affect: the daily positive feelings (happiness, joy, contentment) and negative feelings (anger, sadness, fear, depression and so on) we experience
  3. Eudaimonia: whether we feel our lives are meaningful

Where does GDP, income and wealth show up in the above trilogy? They show up quite a lot in life satisfaction, but not so much in affect and eudaimonia. So let’s just drill down into life satisfaction a bit more. We can see its principal components here (click for larger image):

Impact of Policy A upon Life Satisfaction jpeg

For simplicity, let us ignore the eudaimonia and affect forms of happiness and presuppose that policy was purely aimed at the life satisfaction and its determinants as detailed above.

Measured against this new metric, a government could embark on a green agenda that made the UK totally fossil fuel free by, say, 2030 as long as sufficient improvements were made with respect to well-being as it relates to employment, education, family, community, environment, physical heath and mental health such that this offsets any loss in well-being from income. If this were possible, then we would have made a net positive policy choice. In short, we can have our cake and eat it: a society with a higher level of well-being and a society that isn’t destroying the well-being of future generations.

Actually, it gets even easier than that. The entire system as it stands is built around valuing consumption as the main driver of happiness. How many adverts over the last month have you seen admonishing you to cultivate an allotment as opposed to buying an SUV? Yet the evidence in the happiness literature is quite specific: engaging in a community recreational pursuit has a far greater impact on happiness than, say, purchase of a new car (on the impact of auto purchases, see here). Indeed, it is somewhat miraculous that non-monetary forms of happiness have survived the onslaught of a system that values nothing that cannot be bought.

Traditionally, economics has gone with the maxim of revealed preference; that is, look at what people do, not what they say. In short, if they are doing it, by definition it is making them happier. But psychological studies (and more recently economic studies) show that the link between what people do and whether what they do makes them happy is far more tenuous.

Let’s take cigarettes. A study by Gruber and Mullainathan demonstrated that by taxing cigarettes, the government made smokers happier by forcing them to cut down or stop smoking. By extension, in a world where we are continually persuaded to consume, we may work excessively and incur too much debt. By constricting our consumption choices, the government could actually make us use our time to secure far superior sources of happiness than those just founded on the acquisition of consumer goods.

In conclusion, what every politician should be peddling is growth in well-being–everything else is irrelevant.

Chart of the Day, 1 Feb 2015: More Thoughts on Happiness, Tsipras and the Greeks

Yesterday, I referenced the OECD’s publication “How Was Life? Global Well-Being since 1820“. While it is still early days, it is encouraging that the OECD has started to treat GDP and well-being separately as seen in the OECD chart below (click for larger image):

OECD Framework for Measuring Well-Being jpeg

This is progress: for many year happiness studies and subjective well-being were viewed as being the domain of eccentrics and cranks, and certainly no subject for such a serious organisation as the OECD. One person who has done more than any other to help create the shift in perspective is Ruut Veenhoven of Erasmus University in Rotterdam.

Veenhoven is a vocal advocate of a rigorous evidence-based approach to happiness studies. Further, to encourage and help nurture the discipline, he founded the World Database of Happiness, which acts as a clearing house and repository for happiness data and its associated literature. For example, type in “Happiness in Greece” and you can find a time series like this (click for larger image):

Happiness in Greece jpeg

Veenhoven is the first to admit that his discipline is still young, and there are numerous blanks to be filled. Yet he feels that politicians can already find tentative answers as to what would make their electorates more happy–if they could be bothered to ask the right questions.

With this in mind, the rise of new non-mainstream parties across Europe can be seen as a reaction to the falling levels of happiness experienced by large sections of the population. And this, in turn, is not just a reflection of economic hardship. Rather, it also mirrors the loss of agency, or the ability to shape one’s life, felt by an increasing share of both the working and middle classes.

Alexis Tsipras of Syriza in Greece and Pablo Iglesias of Podemos in Spain have been tapping into this angst. My hope is that they then forge policies that underpin happiness. For example, insecurity is a happiness killer. The burgeoning precariat, created by 21st century technology coupled with 21st century capitalism, should have some predictability given back to their lives. Nonetheless, Veenhoven points out that hard left ideas produced some of the worst regimes possible in the 20th century happiness-wise. High happiness requires personal choice and control, not things necessarily fostered by interventionist states.

I wish an ideology would emerge that harnesses technology and markets to promote genuine human flourishing. Such an ideology would take a very nuanced approach to economic growth, but would not necessarily be labelled ‘left’. I find it extraordinary that post the Great Recession, most western democracies are still run by centre or centre-right neoliberal elites. Secular stagnation and falling medium wages would suggest that the present socio-economic model isn’t working very well.

Given these facts, I would have hoped that a vibrant ideological alternative would have emerged (or at least old parties would have started wearing new clothes). In the UK, the early coalition government, with its green agenda and community-based concept of the Big Society, looked like it was evolving (at least partly) to reflect the new economic and social realities. Unfortunately, such fresh thinking has been progressively dropped, leaving a party closer to a Thatcher-style political ideal more than anything else.

Meanwhile, in southern Europe, my fear is that what Tsipras and Iglesias end up offering is recycled 20th century socialism. As I see it, that ideology is no longer fit for purpose in tackling our challenges either.

Going back to Veenhoven, if you want to hear a state of play on what determines life satisfaction, watch a lecture given by him here:

Chart of the Day, 31 Jan 2015: Happy Danes, Sad Greeks

The Atlantic has just published a fabulous article entitled “The Danish Don’t Have the Secret to Happiness“.  It is a response to a myriad of charts that look like this (taken from a tongue in cheek article in the British Medical Journal that The Atlantic references):

Life Satisfaction jpeg

Michael Booth, the author of the Atlantic article, is a Danish happiness cynic, questioning the happy state of Denmark on three fronts. He posits that

1. Danish happiness is a false construct arising from low expectations,

2. the boring nature of Danes allows them to remain happy, and

3. their smugness will ultimately lead to the nation’s final demise.

The low expectations argument is a restatement of what the happiness economist Caroline Graham calls the ‘happy peasants and miserable millionaires’ paradox (see, for example, here). According to her, our happiness set point can be a function of our surroundings.

While the research confirms the stable patterns in the determinants of happiness worldwide, it also shows that there is a remarkable human capacity to adapt to both prosperity and adversity. Thus, people in Afghanistan are as happy as Latin Americans – above the world average – and Kenyans are as satisfied with their healthcare as Americans. Crime makes people unhappy, but it matters less to happiness when there is more of it; the same goes for both corruption and obesity. Freedom and democracy make people happy, but they matter less when these goods are less common. The bottom line is that people can adapt to tremendous adversity and retain their natural cheerfulness, while they can also have virtually everything – including good health – and be miserable.

Indeed, an individual’s happiness set point can not only be a function of relative health, wealth, beauty and so on relative to one’s peers but also the same yardsticks measured against one’s past life. So how about the Greeks? Are they adapting to their new straightened circumstances? According to OECD data, the answer must be “no” or at least “not yet”. From the “How’s Life in Greece, May 2014” survey, life satisfaction comes in at around 4.7 out of 10, which puts Greece at the bottom of the OECD (here).

Further, while life satisfaction can be dubbed a function of the remembering self (when I sit down in a chair and think of my life, am I satisfied), people’s happiness as also related to their experiencing self (using the Nobel prize winner Daniel Kahneman’s terminology– see my post here). In short, am I cold, hungry, stressed, anxious , sad and/or in pain; or am I warm, replete, joyful, relaxed, rested and/or content? The OECD reports that only 52% of Greeks report having more positive than negative experiences in an average day (the lowest in the OECD) compared with an average of 76%.

For Greece to live with long-term austerity, Angela Merkel and the Troika must believe that Greek happiness indicators must, in the course of time, reset upwards. Unfortunately, they haven’t been reading the happiness literature in sufficient depth. While life satisfaction can adapt, adaption is generally a reaction to a set of circumstances that you have grown up with. Such forms of satisfaction lack what Graham calls “agency” or “the capacity to pursue a fulfilling and purposeful life”.  And once you have tasted “agency” you don’t want to lose it.

The appeal of Syriza, and its slogan of “hope”, is its potential to restore a degree of agency to the Greek people. Whether they can deliver this agency is a different question. In reality, income and wealth bestow a high degree of agency since they give us the financial wherewithal to make choices. However, agency can still arise from non-financial means, such as having the ability to adopt a non-conventional lifestyle, move from one area to another, change career, better one’s education and gain access to art and culture.  To stop disillusionment setting in, Syriza will have to put much effort into the fostering of such sources of low cost agency.

Happiness can be viewed from other vantage points too. Many scholars of happiness have identified eudaimonia as a source of happiness. This is sometimes described as human flourishing, but I prefer to view it as the sense of participating in and contributing to something greater than one’s own life. Past political movements have tapped into eudaimonia to give their followers a sense of shared propose and even destiny–sometimes, of course, to disastrous effect. However, at its best, it can be a fuel for transformational social movements that enthuse and enrich those advancing the cause as much as the final beneficiaries. Alexis Tsipras has certainly given Greeks a vision of change that could stimulate eudaimonia, but whether this can morph into a philosophy or ideal that has some staying power beyond the post-election honeymoon is a different question.

Meanwhile, for Danes seeking eudaimonia, a temporary move to Greece would not be a bad idea. But remember that the Danes always have the option of returning to Denmark and restocking on more mundane sources of happiness. The Greeks don’t.