Arnold Kling  

Two from Will Wilkinson

Martin Wolf on Political Econo... Poverty, Math Assessments, and...

He suggests that there are no limits to growth.
In a special issue of the American Economic Review about thirty years ago, some physical chemists wrote that once the energy problem is solved, nothing is scarce. If material X is in short supply, you can just make it out of something else. But the process of making more X may require energy. They expected that at some point we would solve the energy problem, in the sense of finding an inexpensive way to harness energy.

The logic of this is that when energy becomes inexpensive, materials will become inexpensive. Ray Kurzweil says that the material component of our GDP will asymptotically approach zero. As ideas get better, materials become less scarce. But when materials are not scarce, then it's not clear what to charge for. Chris Anderson's article on Free as a business model, which arguably just rediscovers what John Perry Barlow wrote fifteen years ago, seems relevant.

Next, Will reports on the research of Justin Wolfers and Betsey Stevenson on happiness inequality. As usual, I am unhappy with happiness research.

When people are asked "Are you happy?" they have to think in comparative terms (even Bruno Frey says this). X says he is happy because he looks at his situation compared with other people he knows (including himself in the past) and decides he is in relatively good shape.

Suppose that we start with a situation in which people of all different incomes interact regularly with one another. Happiness inequality will be high, because the poor people will be upset seeing all rich people, and the rich people will feel really good that they're not poor.

Next, introduce segregation by income. Put rich people in enclaves and poor people in ghettos. Now, the rich people see mostly other rich people, and they don't don't feel quite so superior. By the same token, the poor people don't see so many rich people, and compared to the people around them they don't feel so bad. Congratulations--you've reduced happiness inequality. Are you proud of yourself? (I was going to say, are you happy?)

Think of measured happiness as a numerator in search of a denominator. Until you tell me what somebody is reporting their happiness is relative to, there is very little you can do with the data. It's sort of like telling me that somebody's income is 40 million kopeks a year, without telling me what the exchange rate is between kopeks and dollars or kopeks and goods.

COMMENTS (8 to date)
Ryan writes:

Dr. Kling, following on this notion of unlimited economic growth potential that Mr. Wilkinson writes about, what do you think are the implications for future retirement planning or just future life in general?

Taking the Kurzweilian prediction as valid, with the acceleration of technological progress, the standard of living on an absolute level would become unbelievably high. I am fairly young (22), so perhaps you have more of an idea on how much higher the standard of living (for most people) is today when compared to, say, the 1970s. But judging from your posts, I'm assuming you also believe that our standard of living today is vastly superior to those of people 20-30 years ago, and that the standard measures attempting to control for differences in living standards throughout time are incapable of accurately adjusting for economic progress. Certainly there have been hiccups in the prices for some human necessities (housing, food, energy), but the longer run trend has been of falling prices in real terms, and higher incomes in real terms. The products available for purchase have continued to be of superior qualities, some incredibly so (cd players to Ipods, 1970s best auto to today's best, Commodore 64 to the latest top computer). After taking care of the necessities, a future person in the Wilkinson-Kurzweilian world would be able to buy super cheap items that would be considered luxuries compared to the goods of today, and many of these goods are currently undreamt-of. Also, in the Wilkinson-Kurzweil world these real gains would only accelerate over time. (As is happening now, I think)

I think if people are able to suppress whatever jealous feelings they may have when considering their income level relative to others, then they will have an extremely pleasant existence relative to nearly everyone in all of human history. If you buy into the Wilkinson-Kurzweil thesis, then you cannot help but be extremely optimistic for the future, and should only truly be scared of the meta-concerns that you regularly write about, such as the potential for the US government to lose creditworthiness.

Snark writes:

Comrade Kling,

40 million kopeks is approximately $17,000, which (in salary terms) is almost 3x the national average. The cost of living (excluding Moscow) is almost 3x cheaper. If I were a resident of St. Petersburg, I suspect my happiness index would be very high. However, according to the Happy Planet Index (courtesy of New Economics Foundation), Russia ranks 172 out of 178 countries analyzed, proving once again that money can and can't buy happiness.

conchis writes:

"Until you tell me what somebody is reporting their happiness is relative to, there is very little you can do with the data."

Your reasoning here is spot on, but the implication that nobody bothers to answer this question is rather misleading - lots of people are quite explicit about it. In particular, answering the question: "relative to other points in their life" gives you intertemporal comparability, and means you can do rather a lot with the data. "Relative to how happy (they think) other people are" amounts to interpersonal comparability and also seems consistent with the data. But I've pointed this out before, and you never seem to listen, so I don't expect much change this time either.

Why discuss happiness and not take neuroscience into account?

Les writes:

Arnold writes: "Next, introduce segregation by income. Put rich people in enclaves and poor people in ghettos. Now, the rich people see mostly other rich people, and they don't don't feel quite so superior. By the same token, the poor people don't see so many rich people, and compared to the people around them they don't feel so bad."

There are real life analogues involving segregation: for example, Arabs in Saudi Arabia, Syria, and Egypt seem to hate Israelis - but none of these Arabs have ever seen or met any Israelis.

By the same token, in apartheid South Africa, whites and blacks hated one another and lived under total segregation.

The moral: separation increases mutual hostility, rather than reducing hostility.

Justin Ross writes:

Susane Daniels, a graduate student in the PhD program at West Virginia University, is working on this topic of "relative to who?" Her entire dissertation is on relative happiness using revealed preferences through the housing market (mainly your own house characteristics vs. your neighbors). The relative to who question is still working itself out in the econometrics because it uses a dual spatial autoregressive model (saw), but her results so far are that:
1. Relative status matters, but it carries on the margin less than 1/3rd of the importance of absolute status.
2. Relative status is important only to the middle. In fact, those at the bottom actually derive positive benefit from improvements in their neighbor's house. Those at the top derive no change from marginal changes in their neighbor's housing characteristics.

Mr. Econotarian writes:

Even if we move from a material to an information GDP, there are still thermodynamic bounds on the computing power of a physical device. Information is order, and just like in "conventional" thermodynamics, you can't get order for free, you have to spend energy to arrange things in order.

The upper bound on computing power of any device is:

f ≤ P/(10*k*ln2*Tn)

f = frequency in bits/sec
P = Power
k = Boltzmann's constant
Tn = Noise temperature

More info here:

Isaac K. writes:

First off, as a former student of yours and economist, I am thrilled to have found this.

Second, in response to Les, the cases of segregation leading to increased hostility can be attributed to many factors, few [if any] can be considered "economical" in nature. The most significant is the influence of propoganda to introduce a new emotional reality and discontent. The hatred of the Arabs isn't due directly to the economic success of Israel, as even wealthy individuals have chosen to partake in suicide bombings. Doctrine and habit are hard to break - economic disparity or no.

Factually, it is very hard to physically separate disparate socio-economic groups from each other physically, and nearly impossible to do so informationally. So while I agree with your assessment, Dr. Kling, ceteris paribus, it is ultimately infeasible.

Finally, I was presented with the following definition of economics in an introductory course by one of my favorite professors:
Economics is [ultimately] the study of happiness, and can be described by a simple equation:
Happiness is equivalent to an individuals Possesions divided by his Wants.
Most forms of economics focus on the P as a method for producing H, and money in particular as the most fluid physical medium. The denominator of the equation is typically seen to be in the domain of Religion or ideology.

In a system where P is arbitrarily high (there is only so much one can consume) H is increased most effectively by changing W (of which external comparisons are a factor). Might we then find that religious institutions will become the most significant factor affecting the economics of happiness? Will internal meditation replace fiscal preoccupation?

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