Lionel Robbins Memorial Lectures

Economic Growth, Human Welfare and Inequality

Lord Turner
Chairman of the Financial Services Authority, the Climate Change Committee and the Overseas
Development Institute

Lord Layard
Chair, LSE
 Lionel Robbins Memorial Lectures
Objectives and means: Economics after the crisis

Lecture I
Economic Growth, Human Welfare and Inequality

Adair Turner

London School of Economics

11 October 2010

1
Starting Point: The Instrumental Conventional Wisdom
Free Allocative efficiency Growth Human happiness
markets
Free
markets Inequality: Justified because it helps deliver growth

Lecture I:
Objectives: Why growth should not be the objective in rich countries

Lecture II:
Means: Do free financial markets maximise efficiency, growth, or other
objectives?

Lecture III:
The case for economic freedom: implications for public policy: and for the
discipline of economics

2
 Satisfaction with life and growth of income in Japan

Source: Bruno Frey & Alois Stutzer, Happiness and Economics, Princeton University Press, 2002

32
 Happiness and income per capita in the USA

Source: Bruno Frey & Alois Stutzer, Happiness and Economics, Princeton University Press, 2002
4
 Income and happiness: Comparing countries

100
Ireland Netherlands
Denmark Canada Sw itzerland
New Zealand Sw eden Finland USA
90 Norw ay
Indonesia Mexico Singapore Australia Austria
Colombia Britain Belgium
El Salvador France
Nigeria Czech Republic
Venezuela Chile Germany
Average of % happy and % satisfied

Portugal Italy
80 Vietnam Argentina Japan
Brazil Spain
Uruguay Slovenia Israel
Philippines Croatia
Hungary Greece South Korea
Dominican Republic
China
Egypt South Africa
70 Algeria
Morocco Poland
Uganda Peru Slovakia
Jordan Iran Estonia
India Lithuania
60 Azerbaijan Turkey
Bangladesh Macedonia
Tanzania
Pakistan
Latvia
Georgia Albania Belarus
50 Bulgaria
Romania

Moldova Zimbabw e Russia

40 Ukraine

30
0 5000 10000 15000 20000 25000 30000 35000
Income per head ($ per year)
Source: Richard Layard, Happiness, Penguin, 2005

5
Average Income and Human Contentment:
Possible stylised pattern
Happiness / Wellbeing

Income

6
 Global Living Standards: A Millennial Perspective

Average per capita GDP (in 1990 $)

1000 AD 1500 1870 1998

Western Europe 400 775 1200 18000

Western off-shoots 400 400 1200 26000
Japan 420 500 670 20000
Asia (excl. Japan) 450 570 575 3000
Africa 400 400 400 1400

Source: Angus Maddison, The World Economy: A Millennial Perspective, OECD 2006

7
Income and Human Contentment:
Possible stylised pattern over time

Pre-industrial societies The Great Transformation

Income / Contentment

Income
Developed
economies

Human wellbeing
contentment / happiness

China

Africa

Economic and technological

progress

8
Life satisfaction and real GDP per capita

9
Changes in life satisfaction and economic growth in Europe

10
Decadal differences in life satisfaction and log GDP

11
Diminishing Marginal Utility

Utility

Consumption of specific good

12
Utility/Contentment and Aggregate Consumption:
The impact of new products and services

Product 3
Product 2
Contentment

Product 1

Aggregate Consumption

13
14
 Three distinct reasons why relative income matters

1. Rising
expenditure on Concern for relative
fashion and status in itself
branded goods Higher
relative
income
increases
Happiness
2. Increased competition Relative income happiness a function
for inherently limited influences absolute of others’
supply positional goods living standard income as
well as
own

Rising average incomes

3. Congestion externalities degrade quality of some
forms of consumption

15
 Income and wellbeing in the USA (1981-84)

42

40

38

36

34
20 40 60 80 100
Annual Income (Thousands)

Source: Bruno Frey and Alois Stutzer, Happiness and Economics, Princeton 2002

16
 “Distributive” versus “creative” activities

“Creative” Increasing the net real

income available for
consumption

“Distributive” Winning increasing

income at expense of
others

Source: See Roger Bootle, The Trouble with Markets, chapters 4 and 5

17
Two dimensions to rising inequality

Fall in lowest decile income relative to

median – particularly in the US

Rise in top decile income relative to median

– And top 1% relative to rest of top decile
– And top 0.1%...
– And top 0.01%...

18
Four Factors driving inequality at top end

1. Celebrity rents

2. Increasing potential for Inherentfactors

Inherent factorsdriven
drivenby
by
rapid private value creation changingpatterns
changing patterns

3. Highly remunerated
“distributive” activities

Sociological//political
Sociological political
4. Cross-comparisons,
processes––but
processes butinfluenced
influenced
changing social attitudes,
and the role of agents
byinherent
by inherentfactors
factors

19
 Two different perspectives on the growth of average US
income

80000

70000

60000 Arithmetic Mean income

Mean income

50000

40000

Geometric Mean income

30000

20000

10000

0
67

69

71

73

75

77

79

81

83

85

87

89

91

93

95

97

99

01

03

05

07

09
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20
Source: Tony Atkinson’s essay Economics as a moral science, Oxford University 2009

20
 Health and social problems

Income Inequality

Source: Wilkinson & Pickett, The Spirit Level , Penguin 2009

21
 Mental health and inequality

Income Inequality

Source: Wilkinson & Pickett, The Spirit Level , Penguin 2009

22
 Imprisonment and inequality

Income Inequality
Source: Wilkinson & Pickett, The Spirit Level , Penguin 2009
23
 Most people can be trusted

Income Inequality

Source: Wilkinson & Pickett, The Spirit Level , Penguin 2009

24
David Cameron, Hugo Young Lecture

“Research by Richard Wilkinson and Kate Pickett has shown

that among the richest countries, it’s the more unequal ones
that do worse according to almost every quality of life
indicator. In “The Spirit Level”, they show that per capita
GDP is much less significant to a country’s life expectancy,
crime levels, literacy and health than the size of the gaps
between the richest and poorest in the population. So the
best indicator of a country’s rank on these measures of
general wellbeing is not the difference in wealth between
them, but the difference in wealth within them”

(November 2009)

25
Diminishing Marginal Utility

Utility

Consumption of specific good

26
Utility/contentment and Aggregate Consumption:
The impact of new products and services

Product 3
Product 2
Contentment

Product 1

Aggregate Consumption

27
Aggregate diminishing marginal utility – driven by aggregate
satiation

Aggregate
Product n
Utility / Contentment

Product 3
Product 2
Product 1

Consumption

28
Happiness, income and changing aspirations

Aspiration 1

Aspiration 2
Happiness

2 3 Aspiration 3
1
Flat line of long-term happiness

Income

29
Happiness and already achieved income/wealth

Current position
Happiness

Income / Wealth

30
Happiness, already achieved income, and changing
aspirations

Plus:
Happiness

Happiness as
1 2 3 4
function of
relative as well as
absolute income

Income

31
Starting Point: The Instrumental Conventional Wisdom
Free Allocative efficiency Growth Human happiness
markets
Free
markets Inequality: Justified because it helps deliver growth

The journey matters, not the destination

Economic freedom as an end in itself

32
Income and Human Contentment:
Possible stylised pattern over time

Pre-industrial societies The Great Transformation

Income / Contentment

Income
Developed
economies

Human wellbeing
contentment / happiness

China

Africa

Economic and technological

progress

33
Starting Point: The Instrumental Conventional Wisdom
Free Allocative efficiency Growth Human happiness
markets
Free
markets Inequality: Justified because it helps deliver growth

The journey matters, not the destination

Economic freedom as an end in itself

34