Free Case Study
Bhutan's Gross National Happiness:An Economic Reality or Wishful Thinking ?
Logic for the Traditional Yardstick Cont..
Prof. Bergson propounded that social welfare curves7 could be constructed based on explicit value judgments of an unbiased authority. This can be best represented by democratic process of majority rule. However, the majority rule, as proved by Prof. Kenneth K. Arrow in his Nobel winning concept ‘Impossibility Theorem'8, may lead to inconsistent and inconclusive value judgments when individuals are asked to make choices from among more than two alternatives. For example, of the three individuals A ,B and C constituting the society, A and B may prefer alternative X to Y; B and C may prefer alternative Y to Z; and A and C may prefer alternative Z to X instead of X to Z. The principle of transitivity does not work here because the majority in each case does not comprise the same set of people.
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Because of these shortcomings in measuring national well-being, attention was focused on the means from which well-being was derived. Goods and services being such means, and GNP being their unambiguous national numeric measure,it served as a handy proxy for national well-being. Therefore, GNP or the recently more popular Gross Domestic Product (GDP), or a few other variants such as Net National Product (NNP), Net Domestic Product (NDP), etc.have routinely been used to depict the well-being of nations. Since GDP is the summation of all the final products and since apples and oranges per se cannot be added, prices of the products are multiplied with their respective quantities to achieve homogenisation that enables summation. Thus, GDP=P1Q1 + P2Q2 + P3Q3 +...+ PnQn, where P stands for price, Q for quantity, and subscripts 1,2,3...n for various final products. Depending upon the use of base year and current year prices, a country terms its GDP as real and nominal. Besides this product-flow approach, countries assess their GDP in two other ways too on the logic that the value of products equals the expenditure on products, which, in turn, equals earnings of the factors of production. Equation between GDP and GNP rests on the net factor earnings from abroad while the wear and tear of capital has the role in depreciating GDP and GNP into NDP and NNP respectively. |
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Odds with the Traditional Yardstick
GDP has, however, many blind spots. It does not count many positives in life like childcare, do-it-yourself home activities, voluntary community services, leisure, etc. Nor does it take into account many negatives like pollution of atmosphere, depletion of natural resources, degradation of environment, disruption of social life, etc. Moreover, GDP makes no consideration of the state of income distribution. Thus, GDP is an inadequate and misleading measure of a country's true progress.
Adam Smith's celebrated doctrine of the invisible hand of the market was supposed to guide individual well-being automatically towards social well-being. However, it fails to wash in those cases where externalities drive a wedge between privately reckoned cost and social cost. Production of goods will go on till marginal private cost strikes balance with marginal benefit derived, even though marginal social cost overshoots the marginal social benefit. When the existence of externalities is overlooked, ‘the invisible hand' indeed turns into ‘invisible feet' and begins to trample the society. GDP, thus, fails to reflect social welfare aright.
