Real incomes in Australia have risen by around 300 per cent since the 1950s yet most
Australians do not believe that they can afford to buy everything that they need (Hamilton 2002). The
notion of ‘Howard’s battlers’ is broad enough to include people earning up
to $80,000 per annum and, according to the Australian Labor Party, average Australians are doing it tough.
The point that 10 years of strong economic growth has not been sufficient to solve the unemployment
crisis in Australia has been made on many occasions (Hamilton 2003). However rising real incomes,
and even faster growth in consumption expenditure, for those with jobs, has done
little to increase the perceived well-being of Australians. This point has
been made only recently (Hamilton 2002, 2003). In his book Growth Fetish, Clive Hamilton sets out the
wide range of evidence which demonstrates that there is no strong link between
rising consumption and rising well-being. Such an assertion is of course
anathema to economists and to both the major political parties, who believe
that maximising the rate of economic growth is the prime objective of Government
economic policy.
There are two ideas in economics which underpin the conclusion
that growth is always good, and importantly, both of these ideas are value
judgements. The first assumption is that of ‘non-satiety’, i.e., that more
consumption always leads to increased wellbeing. This assumption is tempered
by the idea of ‘diminishing marginal returns’, which allows for the marginal
increase in well-being associated with increased consumption to fall as consumption
rises. But increasing consumption is never allowed to reduce well-being.
The second idea is known as the ‘Kaldor-Hicks
compensation test’. While that might sound like a bit of a mouthful, it is
a straightforward value statement. According to the Kaldor-Hicks
compensation test, if a change in policy results in one group gaining and
another group losing then the change can be considered to be welfare enhancing
as long as those who do gain, gain by enough that they could compensate
the losers. It is important to note that the test does not require that such
compensation should take place. Kaldor and
Hicks therefore provided the ethical foundations for the argument that economic
growth is good, regardless of how it is achieved.
In considering the relationship between affluence, consumption
and progress it is useful to focus upon these two foundations on which the
contemporary view of the relationship between society and the economy is based.
The Australia Institute has conducted a wide range of research which sheds
light on the flaws associated with both of these arguments, in particular
the assumption of non-satiety.
According to the results of a Newspoll
survey commissioned by the Australia Institute, 23 per cent of Australians
aged between 30 and 59 have made a decision in the last 10 years which resulted
in a reduction in their income designed to improve their standard of living
(Hamilton & Mail 2003). This phenomenon is known as downshifting and
it has been observed also in the US(Schor1998) and the UK(Hamilton 2003).
Downshifting can take many forms including working fewer hours, switching
to part-time work or taking a less stressful and lower paying job.
The figures below provide data on the demographic composition ofDownshifters in
Australia
Figure 1 Proportion in each age group who are downshifters
(%)
Figure 2 Proportion of each income group who are downshifters
(%)
A moderate form of downshifting that is readily available to
most full-time employees is leave purchasing. Leave
purchasing allows employees to obtain increased annual leave by either sacrificing
some of their existing income or forgoing wage increases. As a rule of thumb,
two weeks additional leave costs approximately four per cent of gross annual
salary. The after tax cost of purchasing an addition two weeks annual leave
is even smaller.
In a recent Discussion Paper the Australia Institute once again
reported a Newspoll survey commissioned to determine
people’s attitudes to leave purchasing (Denniss
2003). The survey found that 52 per cent of full-time employees would prefer
an additional two weeks annual leave to a four per cent wage rise.>
This finding, while providing good evidence that money is not
the only thing that matters to Australians, raises the issue of why more people
do not participate in such schemes. I will return to this issue shortly in
an attempt to draw some policy conclusions.
Another Australia Institute Discussion Paper by Clive Hamilton
into ‘overconsumption’ in Australia provides
some evidence that supports the assumption that non-satiety is a useful assumption
for analysing the behaviour of Australians. In response to the statement
‘You can’t afford to buy everything you need’ 62 per cent of Australians agreed,
including 47 per cent of respondents from households earning more than $70,000
per year’ (Hamilton 2002, p.19).
Two conflicting conclusions can be drawn from such data. On
the one hand, it could be argued that it provides evidence that the obsession
with economic growth is well justified as even among Australia’s richest
households serious material deprivation can still be found.
On the other hand it could be concluded that if only around
half of the richest households in Australia, which is one of the richest countries
in the world, do not consider that their current levels of consumption are
sufficient to meet their needs then it is impossible to ever meet the material
needs of some citizens.
Average weekly wages for a full-time male in Australia are around
$45,000 per annum. If real incomes grew by two percent per year it would
take 23 years to reach $70,000 per annum, at which point only half of those
earning average or above wages would feel they could then afford everything
they needed.
It would appear then that, for around half the population at
least, non-satiety is a relevant assumption. However, it is important to
highlight that the reason for such behaviour is more likely to be related
to the interdependence of individuals rather than any inherent desire to consume
more of everything.
That is, in a developed economy such as Australia’s a large,
and probably growing, percentage of consumption is allocated towards ‘positional
goods’ or ‘conspicuous consumption’. Larger and larger cars and houses are,
therefore, not being purchased to satisfy long held desires. Rather, the
role of such consumption is to signal, both to the purchaser and those around
them, that they have ‘made it’.
Such a relativistic notion of ‘well-being’ is not only inconsistent
with the economic models of well-being on which neoclassical economic policy
is based, it is ultimately futile. It also imposes enormous and unnecessary
pressures on both the natural environment and our interpersonal relationships.
The creature known as ‘homo-economicus’,
on which the neoclassical theory of well-being is based, is assumed to have
inherent desires and preferences which are independent of those around him
or her. While such a creature is assumed to be insatiable, it is also assumed
to be immune to jealousy or pride. Unfortunately, such assumptions make homo-economicus a particularly dangerous creature around which
to design policy for humans whose tastes and preferences are socially constructed
and who have been known to exhibit jealousy and pride from time to time.
Advocates of continued economic growth as the sole path towards
increasing the wellbeing of mankind must come clean about the model
of human behaviour that underpins their belief. Do they believe that
our desires are inherent, and independent of the success of others?
If so they must concede that the likely result of another 25 years of
economic growth is that only around one third 1
of the population will have enough income to purchase everything they
‘need’.
Alternatively, do they believe that the material needs of human are relative? In which case increasing
incomes and consumption can do nothing to improve well-being, serving only
to use up scarce resources in the futile attempt to make everybody relatively
‘better off’ than everybody else.
Before we as a society can effectively focus policy formulation on our national objectives we must
first determine what those objectives are. We must be explicit about the kind
of world we are trying to build, and we must be explicit about the values
that underpin that world.
The material success of the post-war economy has delivered us at a cross roads. Economic policies
designed to maximise the rate of economic growth were designed explicitly
on the premise that material goods were in short supply. 50 years of technological
progress and innovation has resulted in the solution to the problems of the
post-war period. But as recent world events have shown, knowing what to do
after you win a war can be harder than knowing how to win the war.
Policy makers in developed countries on the whole have decided to press on with their old objectives,
unaware or unconcerned with the fact that they have already prevailed. There
are multiple explanations for such a reluctance to declare victory. First,
policy makers may genuinely have failed to notice that they have prevailed
in their quest to produce enough. As cited above, however, evidence of this
success abounds.
An alternative is that political leaders are not sure what to replace the growth objective with,
and are unwilling to appear ‘directionless’ while they determine for themselves
their preferred new direction. For some policies, however, appearing directionless
appears to be a strategy rather than something to be avoided.
The third possibility, and the explanation that has the most significant implications for a discussion
about population policy, is that the interests of those who profit from selling
more of anything require both the number of customers, and their disposable
income, to keep rising.
The disingenuous analysis about the impact of high rates of immigration on economic growth is a case
in point. Obviously high rates of immigration will lead to higher rates of
economic growth, but it is growth per capita that delivers increased material
well-being, not growth per se.
But for those who profit from growing consumption expenditure, economic growth is good, in and of itself.
But such consumption growth, with its associated impact on the natural environment,
cannot deliver on its promise of improving well-being, except for those who
profit from our collective insecurities.
The rhetoric of those advocating increased growth as the main national objective is usually pitched
in terms of increasing choices, including individuals’ choices about what
to buy and Government choices about what to invest in. But some choices come
at the expense of economic growth.
If 52 per cent of the full-time workforce chose to take an additional two weeks holidays instead
of a four per cent pay rise next year it would most likely result in a reduction
in economic growth. If they were to repeat that preference for the next four
years they would have the same take home pay they have today yet they would
have nearly three months annual leave each year!
Such a choice would certainly have an ‘adverse’ impact on economic growth. It would also have
a positive impact on the distribution of work, with lower unemployment and
less stress from overwork. The majority of the workforce would have incomes
similar to those they have today, yet they would have large amounts of time
to spend with their families, with their communities, or in the pursuit of
their passions.
The way we measure ‘progress’in Australia is fundamentally flawed. By design, Gross Domestic Product (GDP)
does not include, and therefore does not reflect, a wide range of significant
indicators of progress. Destruction of the natural environment is ignored,
the lengthening of the average work week is ignored, and the distribution
of income is ignored.
These omissions are not by accident, but by design. As the name suggests, GDP is concerned with
Production, not with progress. For the post war problems GDP was designed
to fix, it did a good job. For the problems faced by developed countries today
it is not just misguided, it is fundamentally flawed.
With this in mind the Australia Institute has developed the Genuine Progress Indicator, or GPI,
for Australia. The GPI considers a wide range of social and environmental
externalities as well as considering the distribution of national income,
not just the level.
The GPI is not a perfect indicator of well-being, but it is a much better indicator of well-being than
GDP. Without developing new indicators, it will be hard to develop new policies.
But it is hard to develop new indicators as they must accurately capture our
national objectives. In post-war Australia there was consensus about the need
for more material consumption. Communists and capitalists may have fought
about the best and fairest means for achieving it, but both sides of the great
struggle of the 20th Century were largely united when it came to the overall
objective.
We have started a new Century but we have not articulated new objectives. Children are rarely sure
of what they want to be when they grow up, and it appears that countries are
a bit the same. Today’s conference is about starting that conversation about
what kind of future Australia wants, and without such conversations there
can be no conclusions.
References
Hamilton, C. 2002, Overconsumption in Australia: The rise of the middle-class battler, Discussion Paper No. 49
(The Australia Institute, Canberra)
Hamilton, C. and Mail, E. 2003, Downshifting in Australia: A sea-change in the pursuit of happiness,
Discussion Paper No. 50 (The Australia Institute, Canberra)
Hamilton, C. 2003, Overconsumption in Britain: A culture of middle-class complaint, Discussion Paper No. 57 (The
Australia Institute, Canberra)
Hamilton C. 2003, Growth Fetish (Allen & Unwin, Crows Nest)
Schor, J. 1998, The Overspent American: Why we want what we don’t need (Harper Perennial,
New York)
1 If the average income rises
to $70,000 in 23 years time then 47 per cent of the population earning
over that amount will have enough income to cover their ‘needs’
assuming that needs do not change over time. However, if the average
income rises to $70,000 per annum, a substantial percentage of employees
will still earn less than that
