There was an interesting blog post over at the Telegraph by Geoffrey Lean over the weekend. He asked if GDP is “past its sell by date”, noting that “the EU is due to publish a paper which will conclude that GDP is too limited a measurement.”

I agree with the view that GDP doesn’t tell you the whole picture. I have written before about the obsession that the media and others have with what this or that will “cost the economy”. These stories normally come along with some kind of figure of the effect some trend or other will have on GDP.

GDP is quite a useful measurement in a lot of ways. As a barometer of how things are ticking along, it isn’t bad. When GDP rises steadily things are ticking along quite nicely. When it decreases people generally feel it. In truth, no-one needed to wait for the GDP figures to come round to work out that things were bad. But GDP does give us a vaguely useful way to quantify how things are going.

However, it omits a lot of useful information that might help us to measure our quality of life. Perhaps most strikingly of all, it takes very little account of leisure — surely the best part of life.

You can be fairly certain that the economy is producing more between 8am and 8pm than it is between 8pm and 8am. The economy goes into recession every night! But in which part of the day is your quality of life higher? The part where you’re slaving away in a stuffy office, or the part where you’re relaxing with a cold beer?

Enjoying yourself and relaxing, whether it’s having your nightly kip or spending an afternoon in the park, often means removing yourself from economic activity. This in turn leads to a reduction in GDP. That is “the cost to the economy”. This is despite the fact that sleeping and having a stroll in the park are both very valuable activities.

I am currently reading The Armchair Economist by Steven E. Landsburg (I’m only 15 years late to the party). This book points out that GDP is also unable to account for the value of housework. If you pay someone to do your dishes, the value is counted in GDP figures. If you do them yourself, GDP is unaffected. But in both cases you have a rack of clean dishes of equal value.

Geoffrey Lean also points out that GDP fails to take the environment into consideration. An economist would say you need to internalise the externalities. But the question is how? (Pigovian taxes are a nice idea.) Some extreme environmentalists go further and advocate zero growth, an idea rightly lambasted by Adopted Domain.

I guess it all depends on what you want an indicator to tell you. GDP has become the one everyone talks about as a proxy for our standard of living, but clearly has deficiencies in that it leaves out important elements that contribute to our standard of living.

Unemployment figures are a possible alternative. On one level, it can be said that unemployment is the main thing that worries people. Despite the often-made point that unemployment is a lagging indicator, for many it is the bottom line.

But this has many of the same problems as using GDP. We look forward to our weekends, our holidays, and ultimately our retirement. Not working is actually a good thing. Few people want to work. They only want the money they earn from working. That brings us right back to GDP.

In recent years there has been a bit of hype about happiness economics (which I have previously written about). This field likes to measure Gross National Happiness. But this too is fraught with difficulties, not least the fact that it relies on shaky survey data based on people’s varying interpretations of what “happiness” is.

Perhaps you could stop paying attention to aggregate statistics in general. On one level, what really concerns me is my own personal well-being. How much I earn, how much disposable income I have, whether I have a job and how happy I am all concern me greatly. I am less concerned about other people’s well-being.

But that’s not quite right either. Even though I, like most people, am primarily worried about myself, I do care about the general well-being of other people.

It looks like we have to make do with GDP as the main measure to be concerned with. However, it does seem that it is creaking a bit with old age. No doubt there will be plenty of criticisms of GDP to come in the future, particularly from environmentalists.

Beware of the alternatives people advocate though. They will probably all be biased one way or another. Any proposed new measurements will probably be put forward by some interest group trying to manipulate the terms of the debate in its favour. Were that scenario to arise, I would rate myself 3 out of 10 happy.

Here it is: that post I’ve been sitting on for upwards of a year. Before I start, I am going to make a few introductory notes about what I do and don’t mean when I call democracy disturbing. I find that all too often debates about this subject are clouded by dogma, which leads to poor thinking and boilerplate arguments.

Before some cheesy person wheels out that Churchill quote about democracy being the worst system apart from all the other systems, yes of course I have heard it. And it is true. I am a democrat because I believe it brings about favourable conditions. For instance, there is the correlation between democratisation and higher GDP per capita. (Whether democracy is cause or effect does not matter. If the value of the higher GDP per capita is greater than the cost of democracy per head — as it almost certainly is — then democracy is a price worth paying.)

Furthermore, I should define more closely what I mean by democracy. Most of the flaws I will point out are actually problems with elections rather than democracy as a whole. Aspects of democracy such as civil liberties, human rights, freedom of speech, the rule of law, due process, and so on and so forth, are of course things that I am deeply supportive of. This will become clear in my first point.

I tackle the issue not from an anti-democratic perspective. Far from it. My problem is with the approach which sees democracy almost like a religion which ought not be questioned — what Bryan Caplan in his book The Myth of the Rational Voter called “democratic fundamentalists”:

Its purest expression is the cliché, attributed to failed 1928 presidential candidate Al Smith, that “All the ills of democracy can be cured by more democracy.” In other words, no matter what happens, the case for democracy remains untouched.

No case should remain untouched. That is why, for me, there is not enough scrutiny placed on democracy. There is a fear of investigating it, because the benefits of democracy are perceived to be so self-evident that anyone who stops to ask what the disadvantages are is instantly regarded as a fool. That must be dangerous. If we agree that the system is imperfect, the only way to improve the situation is to investigate it and have an awareness of what the problems are.

Just as a final point, much of my thinking in this area came about as a result of the research I did for my dissertation, which was about the “paradox of voting“. In case you want to read more about voting behaviour, I have uploaded my dissertation here.

Having got all of the caveats and explanations out of the way, it is time to move on to my five points.

1. Democracy is not guaranteed to uphold freedoms

This is more or less a rehash of The Devil’s Kitchen’s post which I referred to yesterday. Above I said that “aspects such as civil liberties, human rights, freedom of speech, the rule of law, due process” are important. Arguably, these have all taken a battering by recent democratically elected governments.

Wave goodbye to your right to peacefully protest, have a fair trial and take photographs in public. Say hello to ID cards, the database state, endless reams of CCTV footage, mass DNA collection, control orders, detention without charge and extraordinary rendition. Thanks, democracy!

2. Tyranny of the minority

Most people are familiar with the concept of the tyranny of the majority. Thanks to the system of democracy adopted in this country, it doesn’t even take a majority to construct a tyranny. In the 2005 General Election, 9,562,122 people voted for Labour candidates. Assuming a population of 60 million, this translates to around 16% of the population.

The votes of this small percentage of the UK’s citizens has given the Labour Party 55% of the seats in the House of Commons, a majority of 67 seats. What gives the government the right to rule the country with such dominance? Not the people, that’s for sure. Only 16% of the people expressed a preference for the current government. In fact it is the way the system is constructed, and nothing else, which gives Labour its “legitimacy”.

That brings me neatly on to…

3. The system can’t be fixed

Arrow’s Impossibility Theorem states that there can be no voting system which will be able to fulfil a number of desirable criteria:

• The Pareto principle — if everyone prefers x to y then y should not be elected
• Anonymity — every voter should be treated equally
• Neutrality — every candidate should be treated equally
• Independence of irrelevant alternatives — the ability of x and y to win an election should not be affected by the entrance of a candidate z
• Transitivity — if x is preferred to y and y is preferred to z then x should be preferred to z

Independence of irrelevant alternatives is the one that riles up proponents of electoral reform the most. Just think of Ralph Nader, or the farcical events of the 2002 French Presidential election. In this case, the voting system is far more important than the voters themselves. The fifth item on the list refers to Condorcet’s paradox, whereby attempts to find a winner of the election leads you on an endless circle.

We can argue among ourselves about which voting system should be adopted. But (and I’m not saying this will necessarily come as a surprise to anyone), you will never find a system that will please everyone. It will be a matter of choosing the least worst option, as every system has a fatal flaw of some kind. For what it’s worth, my preference is Single Transferable Vote — but that’s a matter for a different post in the future.

For more along these lines, read this post about a talk I attended a couple of years ago. It was given by economist Eric Maskin en route to collecting his Nobel Memorial Prize in Economics. He had some very interesting views on electoral reform.

4. An individual vote is almost worthless

If you are concerned with affecting the course of history by having your say on major political issues, going to cast your vote in an election is more or less a complete waste of your time and energy. It is said that you are more likely to be killed on your way to the polling station than to actually cast the deciding vote.

The probability the the outcome of an election will hinge on your vote is minuscule. Even under the fanciful assumption that in a two candidate US Presidential election each other person is likely vote for either candidate with a probability of 0.5, the probability that your vote will be the deciding vote is 0.00006.

Yet the costs of voting are actually rather large. You have to spend time and possibly money learning about each of the candidates and their policies. The time and money spent travelling to the polling booth is not exactly negligible in the context of the minuscule probability of your vote actually meaning a damn thing.

Of course, this doesn’t mean that voting is wrong. People don’t vote because they believe it will affect the outcome. They vote because it makes them feel good. But the fact that you need to resort to non-instrumental incentives in order to justify the act of voting leaves wide open the possibility that people with bad motives (or motives with bad effects) are more likely to vote…

5. Many who do vote base their decision on prejudices

In his very interesting book The Myth of the Rational Voter, Bryan Caplan said that the fact that people vote can be explained by the fact that they like to hold certain political beliefs. Let’s call our voter a sheep. He may hold suboptimal opinions and support policies that would actually make him worse off. This might be due to social pressures, a sense of self-image or whatever. It is, after all, all too common to meet someone who votes Labour just because their dad did.

It is precisely because a person’s vote is so worthless that sheep are encouraged to vote. They like to go and vote because it makes them feel good, reaffirms to themselves their ideological loyalty and so on. But sheep never stop to think if the policies they support would make them worse off. They don’t have to because their vote doesn’t matter anyway. The cost of ideological loyalty is low. Indeed, the benefits of it are enough to outweigh the costs of voting.

Those who hold no strong ideological loyalties, and who may therefore be expected to enter the polling booth ready to judge fairly based on all of the information they have gathered, are actually far less likely to vote. This is because they feel no warm glow from the act of voting for their favoured party.

As such, the traits of voters are the sort of traits you would normally expect to find on a football terrace. They will trudge along to express their tribal feelings, and will keep on doing so even in the driving rain, even if their football team is rubbish and the game is low-quality.

One might say that the political party you support is rubbish and the state of politics just now is low-quality. Who wants to buy a season ticket? Is it not better to leave that sort of behaviour on the football terraces?

Events in the world of finance over the past few weeks have focussed that ‘national conversation’ onto matters economic. Of course, the economy always features heavily in debates surrounding independence, but events have changed the tone and moved the debate up a gear.

In particular, the trouble that Iceland finds itself in has led Scottish Secretary Jim Murphy to jibe about how Alex Salmond’s “arc of prosperity” encompassing Ireland, Iceland and Norway has become an “arc of insolvency”. I also cheekily made a reference to Iceland last week.

Of course, supporters of independence rebut the notion of the “arc of insolvency”. The various arguments surrounding these issues will continue on until the cows come home. Whether it is really wise to compare Scotland to Iceland (being a country with a population of just 300,000) at all, whether or not Ireland will potentially be in similar bother, and so on.

I wonder, though, if too much attention is paid to economic indicators when it comes to the debate on independence. Sure, things like economic growth are nice and desirable in their own way. But they surely cannot be the be-all and end-all.

I’m thinking about happiness economics. This is a slightly controversial field for various reasons. Certainly, being a relatively new sub-field fraught with all kinds of hurdles that other disciplines don’t have to negotiate, its findings are pretty patchy.

A famous concept in happiness economics is the Easterlin Paradox. Part of the paradox is that after reaching a certain threshold, societies as a whole do not become happier as they become richer. What matters, apparently, is your wealth relative to others. So if everyone becomes richer and you stay the same place in the pecking order, you will be no happier. However, more recent research suggests that the Easterlin Paradox doesn’t actually exist.

The Freakonomics blog ran a series of interesting posts on this more recent research earlier this year. Because there is seemingly no easy way to navigate through them all I will link to them here: parts 1, 2, 3, 4, 5, 6.

Despite contradictory findings and the various problems involved in researching people’s happiness, I think it’s important nonetheless for economists to study what makes people better off in broader terms rather than just assuming that well-being is a function of income. Certainly, even the more recent findings suggest that the relationship between happiness and income is far from simple.

A couple of interesting examples are relevant to the debate surrounding Scottish independence because they are both small countries. If you look in part 5 of the Freakonomics series, you will see nine graphs depicting the relationship between happiness and GDP. Ireland (part of the “arc of prosperity”) was very slow to become happier as GDP increased, though it did so, slightly, in the end. Meanwhile, Belgium’s happiness actually went down as GDP increased.

Whatever the pros and cons of studying happiness, it seems reasonable to suggest that there is more to life than just money. Certainly, it is an interesting thought experiment when it comes to considering the case for Scottish independence.

Cabalamat wrote recently on a comment on his blog: “I would probably support Scottish independence if the people calling for it had any coherent idea how to make Scotland richer. But they haven’t.” As you can probably guess from what I have written so far, I think this is a bit harsh.

Even though you probably won’t catch many people saying it, I am sure there are people who would happily accept a (slight) decrease in Scotland’s GDP as long as Scotland was independent. You might criticise these people, but if, as I have posited, life is not all about the money, it is a perfectly valid position to take.

For instance, I have often heard it said (and not just by nationalists) that Scottish people in general have had more confidence, more of a spring in their step, since Labour were kicked out last year. I don’t know whether that is true or not. I can’t say, personally, that I have noticed much difference in people’s behaviour since the SNP came into power. I am certainly not the sort of person who would become more confident just because the Yellow Party is in government and the Red Party isn’t. But if others do, then that is their prerogative, and who am I to judge that?

Similarly, it is often said that independence would have a host of other benefits besides any economic benefits there might be. For instance, some say that the people Scotland as a whole would become more confident, happier, prouder.

Whether or not you agree with that (and I have to say, I have my doubts), you have to admit that these are desirable goals of themselves, just as much as increased GDP is. As such, I would argue that it is reasonable to accept a trade-off in income if it gives you enough happiness to compensate for it. For this reason alone, I think the argument surrounding independence should hinge less on economic factors.

We all recognise this idea in a way. If everyone just focussed narrowly on money, we would all work 24 hour days and 7 day weeks. And while there are some people who like to work more than others, most of us like to have our leisure time which can boost our happiness. In so doing, we lose money by foregoing the wages that we would otherwise earn. And if we spend money on our leisure activities by going out or even by doing something as simple as using electricity, we lose even more money. But because it makes us happier, we do it. Indeed, if someone concluded that it was worth foregoing all of their leisure activities so that they could earn more money, you would probably think they were a bit of a dunce.

It is worth noting that Scotland has its own little Easterlin Paradox. Happiness in Scotland is lower than it is in England and Wales despite the fact that income is not substantially lower according to this paper (PDF link) by David Bell and David Blanchflower (found via Stumbling and Mumbling while searching for posts on happiness economics).

The fact that Scots are still unhappy relative to their neighbours suggests that Scotland’s problem is not just a deficient economy — it is a deficient people. Of course, independence would not let Scotland shed its “sick man” label overnight.

But if independence can contribute to an increase in the happiness alone of Scottish people, then it will have been of benefit. I’m not saying that independence would. But it’s interesting to think about.

One of the most interesting things about libertarians is how quickly their devotion to free markets and capitalism disappear so quickly as soon as it involves those dirty foreigners getting a piece of the action.

The Devil’s Kitchen likes to describe himself as a libertarian (as he did in a self-congratulatory post today) and makes much of his support for free markets — albeit almost always in terms of how much tax he has to pay.

But yesterday all of that talk about free markets was thrown out of the window when he approvingly posted a video of Swivel Eyed Farage on Sunday AM.

DK says:

And, on current showing, there is simply no major party that supports the libertarian agenda (I believe that UKIP are the closest that we have, hence my support for them).

Ukip libertarian? I hardly think so. Here is Swivel Eyed Farage in action.

I read one person somewhere (sorry, I’ve forgotten who) complaining that the amount of time Ukip was given on Sunday AM wasn’t enough. Having now watched the clip, I can understand why. If it continued for much longer it probably would have counted as a Party Political Broadcast. How Farage could get away with making such glaringly inconsistent statements almost in the same breath without anything less than fawning deference from Huw Edwards is beyond me.

Farage said:

Should somebody who’s interviewed as a school teacher and then changes faith midway through be allowed to teach a class of children when they can’t see her face? I wouldn’t have thought so, no.

Immediately afterwards, when Huw Edwards asked about the British Airways worker who was asked to cover her cross, Farage’s response was the exact opposite! One rule for Muslims and another for Christians.

Well I find that amazing, I mean British Airways are one of those companies that have consistently been anti-British… So I’m not surprised at all by BA’s behaviour.

Later on he says:

The underlying philosophy that runs through every single Ukip policy is that we want less government interference in our lives.

But predictably, just one minute later, he advocates the view that governments should be able to tell people where they can and can’t live. The reason why? As DK says:

His point about differing GDPs is a good one, I think, and forms the basis of my reservations on the unfettered free trade of peoples between countries. It seems to me that, inevitably, should you allow this, many more people will flow from the lower GDP countries into the high GDP countries and, realistically, that there will be far fewer emigrating to those lower GDP countries.

The fact that different countries have different GDPs is not a good argument against “the unfettered free trade of peoples between countries”. GDP is a measure of all of the income earned in an economy. So if you say that a country has a lower (per capita) GDP than another, that just means that the average income of a citizen of that country is lower.

Different people have different incomes. That is a fact of life. These differences in income exist within Europe. They also exist within the UK. They also exist within Kirkcaldy.

If this is so much of a problem that the government has to set some kind of limit to immigration, then it must also be enough of a problem to set a limit to the amount that people move within a country. There would be quotas on the number of people who can move from the Highlands to the Home Counties. They would build a moat around Ferguslie Park.

But they haven’t. That’s because the economy can cope with people of different economic backgrounds moving around the country. It is a fact that Scots prepared to move to England and English people prepared to move to Scotland in search of work will make more money than if they just stayed where they were born.

The economy as a whole benefits from this free movement of people. If Mr S from Scotland is really good at making widget X which is made in England, Mr S will move to England to work in job X because that’s what he’s good at, so he’ll make the most money there. And because he’s really good at his job, he makes widget X more efficiently than the average Mr E from England would have. Because Mr S is better at his job, firm X’s costs are lower and the benefits are spread to the economy as a whole.

Just because the line on the map has moved doesn’t make this fact untrue. And this isn’t just some pie in the sky economic theory. I am sure that everybody can think of several people who have moved long distances to get a job because they could see the clear benefits of doing so. DK himself is an Englishman living in Edinburgh for crying out loud! Just imagine how much of an economic shithouse the world would be if nobody ever moved away from their place of birth.

I really don’t see how it can be consistent to support a free market within a country but then advocate that the free trade — which is supposedly so beneficial to all — should end at the line drawn on a map.

Given that DK is such a “libertarian”, I am sure he will be familiar with the section of libertarian poster boy Adam Smith’s The Wealth of Nations dealing with protectionism (Book IV, Ch II). Smith might be talking about goods, but I cannot see any reason why what he says does not apply to labour aswell. If anyone has any reasons I would love to hear them.

Saying that the fact that countries have differing GDPs is a problem for a free trade area is a bit like saying that having firms of differing sizes is a problem in an economy. It is not. DK is probably right when he says, “there will be far fewer emigrating to those lower GDP countries,” if free trade of peoples is allowed.

This kind of thing is usually celebrated by libertarians. It’s freedom of choice, you see. So when there is competition, firms that don’t match the expectations of their customers have to adapt in order to survive. It is exactly the same for countries. When people can pick and choose where they live, governments are forced to take a long, hard look at the way they are running their economies. Sometimes they might even reform.

If, as libertarians suggest, it is the case that cutting back on welfare benefits, lowering corporate tax and so on improves a country’s economy and living standards, then open borders will force governments to adopt these policies as they try to attract jobs to their economies.

I thought that was what DK wanted? But by opposing the “free trade of peoples”, he could well be supporting the continuation of the welfare state.