Does Australia also have a ruling class?

In his article, ‘America’s ruling class – and the perils of revolution’, Angelo Codevilla suggests that Democrat and Republican office-holders in recent governments in the United States ‘show a similar presumption to dominate and fewer differences in tastes, habits and opinions ... than between both and the rest of the community’. He claims: ‘They think, look, and act like a class’ (‘The American Spectator, July-August 2010).


I think the article provides a good explanation of why Americans who normally support the Republican Party are currently so disenchanted with it. Perhaps Australians should be thinking about possible implications for politics in this country.

Characteristics of this class identified by Codevilla include the following:
• ‘Its first tenet is that “we” are the best and brightest while the rest of Americans are retrograde, racist, and dysfunctional unless properly constrained’.
• Its only standard of truth is consensus among its members. It does not take seriously the views of anyone - irrespective of professional competence, academic achievement, wealth or office held – unless they are members of the class. Like a fraternity, the ruling class requires its members to share the manners and tastes of the class.
• It views the common people’s words as ‘like grunts, mere signs of pain, pleasure and frustration’.
• It stakes its claim to power through intellectual-moral pretence but holds power through patronage – increasing the power of government to increase its own power and reward its supporters.
• It includes among its number people who have been chosen by government to be the true representatives of various sectors of society and who have been empowered to represent those sectors in elaborating laws and administrative rules.
• It seeks to make itself the arbiter of wealth and poverty by making economic rules dependent on the discretion of office holders who are members of the ruling class.
• It redirects the people’s energies away from satisfying their own desires – toward living more densely and closer to work, driving smaller cars, using less energy, improving their diet etc.
• It assumes that what it mandates with regard to education and welfare of children must be correct ipso facto, while what parents do is potentially abusive.
• ‘Its principal article of faith, its claim to the right to decide for others, is precisely that it knows things and operates by standards beyond others’ comprehension’.
• It identifies science and reason with itself and pronounces definitive scientific judgment on whatever it chooses. Aggressive, intolerant secularism is the moral basis of its claim to rule.
• It interferes in the affairs of foreign governments that are not the enemies of America.
• It favours ever higher taxes and expanding government.

Before I go further, I think a confession may be in order. Some of those points describe attitudes I held 40 years ago. I’m not proud of that, but at the time I thought that Commonwealth public servants were the best and the brightest in the land and that they should have more power.

Another point I should make is that it is important to distinguish between opposition to ruling class attitudes and support for populist attitudes. In my view the words of non-experts on complex economic issues do have little more value than a grunt. Whether we are talking about economic policy, brain surgery or plumbing, I think it should be self-evident that the views of experts count for more than those of non-experts. The problem with the ruling class is not its lack of regard for the views of non-experts, but its lack of regard for the views of experts who do not accept that it has a right to interfere in the way citizens live their lives.

Coming to the question I posed at the beginning, it is obvious from what I have already written that I think Australia does have a self-appointed ruling class as described above. This ruling class is identified most closely with the public service and the political left, including the Greens as well as the Labor Party.

However, I don’t think the conservative side of Australian politics is as closely identified with the ruling class as in the US. When he came to office, John Howard was viewed as an outsider by the ruling class. This antipathy remained until his government was voted out of office, even though his policies were by then virtually indistinguishable from those of the ruling class. Tony Abbott, the current leader of opposition, seems to want to maintain distance himself from the ruling class rather than to disempower it. His recent book, discussed here, is a strange mixture of support for traditional family values, classical liberalism and espousal of ruling class attitudes toward centralization of power in Canberra.

What distribution principle would you choose behind a veil of ignorance?

In his book, ‘A Theory of Justice’, John Rawls considered what principles of justice would be agreed upon by all behind a veil of ignorance in which no one knows their place in society - their wealth, their class position or social status, their intelligence, strength, state of health etc. One of the principles that Rawls argued would be agreed upon is the ‘difference principle’ – that social and economic inequalities should exist only insofar as they benefit the least well off members of society.

I think the veil of ignorance thought experiment is useful to consider public policy issues from a perspective that is broader than my own perceived interests. When I do this thought experiment, however, I don’t endorse the difference principle (sometimes referred to as the maximin principle). The principle I come up with is to maximize the opportunities of any person chosen at random, subject to provision of a safety net to protect the well-being of the least well off members of society. I expect that some critics would say, however, that I get this outcome because I am not doing the thought experiment properly.

A study undertaken by Hörisch Hannah a couple of years ago does not seem to have the same potential for personal bias to influence the results obtained. Hannah implemented the Rawlsian veil of ignorance in a laboratory experiment using variants of the dictator game (see: ‘Is the veil of ignorance only a concept about risk? An experiment’, Munich Discussion Paper No 2007-4). In the first experiment, one player, the dictator, decides how much of the pie will be received by the other player, given an efficiency loss of 50 percent for units that are transferred from the dictator to the receiver. The veil of ignorance is implemented by requiring each player to decide how much to give to the other player before being assigned the role of dictator or receiver (with equal probability). The second experiment is the same as the first except that the role of receiver is not actually assigned to a person so the outcome can be interpreted as a self-interested response to risk.

Only a minority of subjects opted for the maximin principle under either experiment. The vast majority of male participants perceived the veil of ignorance as introducing only risk. Among women participants, however, impartial social preferences were a second significant motivation that induces stronger concern for equality.

Although I think the results of the study are extremely interesting, they can hardly be presumed to reflect universal values. The study is quite small, with only 167 participants (all university students). There may be potential for bias because about two-thirds of respondents have studied some economics. It would be interesting to see results for similar studies, for people of different ages and backgrounds in different countries.

It would also be interesting to know whether there is any link between the values that people display when they play this game and their political views. Are the views of individual voters strongly influenced by principles that they support irrespective of their own perceived interests? If so, then perhaps politicians are whistling the wrong tune (or whistling to the wrong dog) when they are seen all the time to be responding to rent-seeking by narrow interest groups.

Difficult questions Part V: How effective is anti-drugs advertising?

In a recent post I discussed the question of whether identity economics might help to improve understanding of teenage drug use. I have been discussing this question with Ruth, a nurse who has cared for drug users in psych wards. In this post Ruth comments on the effectiveness of anti-drugs advertising.


I kicked off the discussion by suggesting that one possible implication of identity economics is that anti-drugs advertising would not be likely to make much of an impression on kids unless they see the story it is telling as being relevant to people like themselves.

Ruth comments:

Anti drug advertising has failed miserably and may have been counter-productive. I say this because many teens see these ads and it simply reminds them of what they imagine their friends to be doing right now and sets up the desire to be with those friends and partaking in their shared drug taking – a mostly enjoyable activity. It's like advertising positively for things like chocolate or a holiday destination – you see it, you want it.

The words are heard as nagging noises and are ignored. The images incite memories that are attractive.

No-one sees an ugly person suffering on TV and relates the image to themselves – kids see the ugly person as a looser, not like themselves at all. This is particularly so when the ad comes on TV, interrupting unpleasant thoughts or conversations previously going on for the teen.

The Australian anti-drug advertising that Ruth is talking about can easily be found by searching on Google for ‘anti-drugs advertising Australia’. Such a search also provides references to research supporting Ruth’s view that anti-drugs advertising may have been counter-productive.

When I looked again at the advertising my first thought was that showing kids the bad things that could happen if they take drugs must have some impact. The message, ‘You don’t know what drugs will do to you’ is the kind of message I would like teenagers to think about. I must admit, however, that I would not be discouraged from drinking alcohol by the message, ‘You don’t know what alcohol will do to you’, accompanied by images of alcoholics. The message would conflict with what I perceive from my own experience to be likely to happen to me if I continue to engage in moderate drinking.

Ruth concludes:

I've never found a drug user – social user or not – who relates to the characters in those ads, nor have I found anyone who sees themselves as a potential for the advertised risk. Even if they are in it over their heads already. Those who cite the ads as incentives for getting off the drugs state things like 'I saw that happen to my friend and I want to get off for his sake' or 'I know they say that could happen to me, but it won't. I'm smarter than that'. I've always found it interesting that drug users (and dealers) use terminology about their intelligence when defending their position.

The discussion continues here.

Difficult questions Part IV: Do people suffering from DIP have identity issues?

In the preceding post I suggested that identity economics may help us to understand teenage drug use. Ruth, a nurse who has worked in psych wards has responded with some encouraging comments about the potential for identity economics to help in exploring the drug-using phenomenon.


Ruth writes:

In my experience there are different aspects involved.

Some use drugs to escape their thoughts. (I suspect this is the largest group.) Those thoughts invariably include memory (what went before) and fantasy (what may come). The nature of those thoughts are hugely varied and may or not be based on shared experiences. They are not the same as delusions. Instead they are the result of a person trying to explain where he fits in his world, within the (limited) knowledge he has accrued in his life thus far. And the results are a distorted view of what's so, of where they fit, of what they mean to others, of how the world around them works, of the possibilities still awaiting them in life. The younger kids are when they start taking drugs, the more limited this knowledge is likely to be. The thoughts these people experience are particularly painful and cannot be mitigated easily through the usual counselling techniques.

A second group identifies their personalities as predominantly risk taking and therefore actually experience the need to arouse angst in those closest to them. This provides the sense of being cared about by those people. The more they upset the people around them the more evidence they have that they are loved - which of course sets up the adrenaline response very frequently (with every associated thought). Adrenaline in itself is a highly addictive drug - one that many very healthy non drug users like me are quite unashamedly addicted to.

Another group simply start experimenting with 'soft drugs' and end up with physical addictions requiring servicing at every opportunity. These people are the easiest to help as they are generally most motivated at the emotional level.

Ruth continues:

I think it's easy to get mistaken between the view looking in and the view looking out. Those close to the problem emotionally don't see through the same lens as those with an objective (professional) filter. The greatest mistake I see day in and day out is people - sufferers, family, researchers, medics, friends, observers - categorising the problem and therefore the sufferer.

The real answer - in my experience - is to take one person at a time and simply listen to them for quite some time before even attempting to think or consider what to do to help. The person themself inevitably can reveal the true cause of the problem and only then can a useful - long term effective - solution be proposed.

Short term solutions that deal with immediate symptoms such as aggression, depression

and side effects of drugs must of course be dealt with. But it is in the listening that the true cause of the problems are found. And listening is such an underrated skill; it hardly features amongst the more 'sophisticated' skills.

True therapeutic listening puts the practitioner in a place of nothingness, conscious only what is occurring in the room in each moment as it transpires. As the person speaks, the truly listening 'other' feels the person's psyche and is able to communicate in such a way that the person actually experiences a healing feeling without any recommendations or solutions or questions being offered. This is the beginning point for the journey to wellbeing for everyone. It is especially important for kids using drugs.

Ruth obviously feels passionately about therapeutic listening. Her views on this seem to me to make a lot a sense (but I can’t claim any expertise in that area). I would like to round off this discussion by pointing to possible implications of Ruth’s observations for use of identity economics to understand teenage drug use. The important point is that the people who end up in hospital as a result of drug taking do seem to have some particular identity characteristics that may help to explain why they got involved with drug taking in the first place. Ruth sees people making mistakes when they look in from the outside and attempt to categorize individuals. This suggests to me that there may be a need for better research instruments that will enable researchers to get a better understanding of individual behaviour by learning how individuals categorize themselves. In other words, if we are to understand the choices that the person makes it might help to know why the person perceives himself or herself as the kind of person who would obtain satisfaction from that kind of behaviour.

To be continued.



Difficult questions Part III: Can identity economics help us to understand teenage drug use?

This post continues the discussion in some previous posts about understanding teenage drug use. In the first post Ruth, a nurse who has worked in psych wards and prisons, illustrated the nature of the problem by telling the sad story of a man who has been suffering from drug induced psychosis (DIP) over a long period following an incident just before his 18th birthday. In the second post we explored whether viewing drug taking as a rational choice helped us to understand the problem. I concluded that it tended to put the problem back into the too hard basket.

I think the best way to try to understand complex issues is to begin by asking naive questions that help to define the problem. (The down-side of this approach is that it reveals my ignorance.) What kind of problem is this? Is it primarily genetic/neurological, psychological, sociological or economic?

Some papers suggest that genetics and neurology may be important. DIP is linked to childhood experience of attention deficit/ hyperactivity disorder and a family history of psychiatric illness. Ruth’s response on the basis of her experience in psych wards is that there is no family history of mental illness for the great majority of those with DIP.

I think there are also problems with both psychological and sociological explanations of why some teenagers are take the risks associated with drug use. It is reasonably clear that psychological issues e.g. self esteem are often involved. Yet, some kids who get involved seem to popular among their peers and achieve to a high level academically or on the sporting field.

Similarly, while incidence of drug abuse is higher among some socio-economic groups, some kids don’t adopt the culture of the socio-economic groups to which they belong. In any case, it isn’t very enlightening to answer questions about why individuals behave the way by saying, ‘Well, how would you expect someone with that cultural or environmental background to behave’. If we are attempting to explain individual behaviour we need to recognize that individuals make choices.

That brings us back to economics. The field of economics that seems to me to be most relevant is identity economics, which has recently developed by George Akerlof and Rachel Kranton (who have recently written a book about it). The basic idea is that individuals gain satisfaction when their actions conform to the norms and ideals of their identity as well as from their consumption of goods and services. Identity can be considered as an objective social category (e.g. gender, race, social class, age group) but in this instance I think it makes more sense to view it as a subjective identification with a particular group (e.g. insiders or outsiders; conformists or non-conformists) or with a particular set of attitudes. (I have previously written about identity economics in different contexts, here and here.)

So, if you want to understand why people behave the way the do it may help to know how this behaviour relates to the way they think of themselves. Kids who engage in particularly risky thrill-seeking or escapist behaviour possibly obtain some satisfaction from thinking of themselves as the kinds of people who do that kind of thing.

Ruth has responded with some encouraging comments about the potential for identity economics to help in exploring the drug-using phenomenon. Her response is in the following post.

Is free choice an illusion?

I am sometimes asked questions like: What is so wonderful about the free market? My answer is that the free market is about choice. You choose what you want to buy. The choices you make send signals through the market to huge numbers of people involved in retailing, manufacturing and production of raw materials. A lot of these people live in different parts of the world. They don’t even know each other – they are just responding to market opportunities. It is inspiring to think that this whole system responds to individual choice.

However, some people argue that free choice is just an illusion. These people include some famous economists, such a J K Galbraith, who wrote ‘The Affluent Society’ in the 1950s. He argued that your choices are manipulated by advertisers, who sell you things that you may not really need. Others argue that modern economies are geared to selling things that are bad for us – food full of fat and sugar; fuel guzzling cars; new fashions in clothes that serve no obvious purpose – often funded with credit that consumers have difficulty repaying.

How has the economics profession responded to this challenge? Over most of the last 50 or so years I think it is fair to say that the profession has largely ignored the challenge. That was easy to do because there was never any serious suggestion that advertising should be banned. Advertising of some addictive products that are harmful to health has been restricted and there has been some regulation to shield children from exposure. Everyone agrees, however, that it would be silly to discourage informational advertising about store locations, products sold and prices. As for more subtle forms of advertising, it is difficult to define activities that should be discouraged without infringing the rights of individuals to engage in persuasive communication with each other.

Much of the economic research that has been undertaken on the effects of advertising has suggested that they are small and do not last long. However, such findings raise more questions than they have answered. Why would firms spend large amounts on advertising if it has little effect on sales?

The findings of some recent studies on the evolution of brand preferences are consistent with Israel Kirzner’s view that it is the entrepreneur’s function not only to make the product available, but also to ensure that the consumer’s attention is attracted to the opportunities that the product provides (‘Perception, Opportunity and Profit’, 1983, p 10). These studies have shown that:
• brand loyalty tends to be a very important factor - many people prefer to buy a leading brand product, even though a less expensive product is indistinguishable when packaging is not visible;
• the first brand that becomes established in a market tends to maintain a substantial advantage over those that come later; and
• this advantage is greatest for products that are heavily advertised.
(For example, see “The marmite effect’, ‘The Economist’, Sept. 23 2010 and Bart Bronnenburg, Jean-Pierre Dubé and Matthew Gentzkow, ‘The evolution of brand preferences’, NBER Working Paper 16267.)

Marketing experts have a great deal to say about how brand loyalty is established. Conventional branding models assume that the purpose of advertising is to influence consumer perceptions about the brand (e.g., associations tied to quality, benefits, personality, and aspirational user imagery). In cultural branding, however, advertisers seek to establish a story about the kind of people who buy the product they are selling and how it fits into their lives. The product is simply a conduit through which customers can experience the stories that the brand tells. (see: Douglas Holt, ‘How Brands Become Icons’, chapter 2). Some people identify strongly with the brand’s story, some may see it as saying something relevant to themselves, others see it as irrelevant.

One of the most interesting marketing exercises in Australia is the advertising of Victoria Bitter. For a long time the story was about ‘Vic’ as a reward for a hard days work - the ‘hard-earned thirst’. It was the working man’s beer. Over the last couple of years the advertising has moved up market. Last year, the story suggested that VB was every man’s beer. The most recent advertising seems to be aimed at young men who sees themselves as a ‘authentic Aussie blokes’. (The latest ad is here). If you buy the story, you may buy the product and make a statement about how you see yourself and how you want to be seen by others.

How can an understanding of the role of story-telling in marketing be incorporated into economics? There is a relatively new brand of economics developed by George Akerlof and Rachel Kranton that is helpful. Identity economics recognizes that people gain satisfaction from acting in accordance with their identity – how they perceive themselves – as well from the goods and services they consume. This explains why some people would prefer to buy the branded product they usually buy rather another product that is a lot cheaper and is indistinguishable in all respects when taken out of its packaging. They get satisfaction from being the kinds of people who use that brand. The satisfaction they get from acting in accordance with their identity – the story associated with the brand – may exceed the satisfaction they would get from paying a lower price.

Summing up then, advertising does not make consumer choice an illusion. Advertisers are often trying to sell you a story. If you don’t identify with the story they are telling, you don’t buy their product. It’s your choice.

Note: This post is based on a speech I gave recently at Nowra Toastmasters.

Why don't the anti-Collingwood mob lighten up?

I’m not a football fanatic. I watch a game on TV now and then during the season, but I don’t really get interested until the finals are on.


After watching both the AFL and Rugby League grand finals this weekend I couldn’t help notice that the losers of both contests looked as though they were about to go to the gallows. Perhaps they were worried about how their fans would react. Why don’t they – the players and fans - just lighten up? After all, football is only a game!

There is research suggesting that a lot of fans take losing very seriously. Researchers discovered that fans of a men’s basket ball team were more depressed after a loss than happy after a win. Compared to the winners, those who watched their team lose had darker moods, they were more pessimistic when rating their mental ability; and they predicted that an attractive person would be more likely to reject them.

I can’t help feeling a bit sorry for the St Kilda and Roosters supporters who had high hopes for the victory of their teams. But I admit to some schadenfreude about the other people who wanted Collingwood to lose. This year supporters of Collingwood’s traditional rivals, Carlton and Essendon, seem to have been joined by a motley crew of supporters of other clubs to form an ABC (Anyone But Collingwood) brigade, consisting of people who have nothing in common except their desire for Collingwood to lose the grand final.

One example of the attitude I am writing about will suffice. For reasons best known to herself, Judith Sloan began an otherwise sensible article published on Saturday in ‘The Australian’ about the ABC (Australian Broadcasting Commission) by suggesting that Collingwood supporters have a psychopathology which causes them to be one-eyed, irrational and rabid. Perhaps she thought that all Collingwood supporters had already cancelled their subscriptions to ‘The Australian’ after reading the attempt at humour at Collingwood’s expense in the lead article on page one the previous Saturday.

I find it difficult to understand why Collingwood supporters arouse so much antipathy. It can’t be because we win too often. After all, our last premiership was 20 years ago. Perhaps it has to do with the ability of supporters to remain enthusiastic despite all the defeats of the past couple of decades. But who could resist being enthusiastic about a young team that plays as though they really want possession of the ball and whose hand-passing leaves opponents flat-footed.

Winners are grinners. Photo by Sebastian Costanzo published in ‘The Age’, here.

Some might suggest that the anti-Collingwood mob don’t like us because they think we like being disliked. Ugh! That doesn’t make sense to me. But Collingwood supporters can sometimes appreciate a joke against themselves. This is probably because we get plenty of practice. The best anti-Collingwood joke I heard this week is this one. Question: ‘What do you call a Collingwood supporter in a suit?’ Answer: the defendant.

Will the elderly poor fare better under pensions means tests?

I ended my last post suggesting that it is absurd to provide pensions that are not subject to means tests because this involves taxing people of working age more heavily in order to add unnecessarily to the incomes of wealthy retirees. This raised the question of whether the elderly poor are likely to fare better in the context of the looming pensions crisis in OECD countries under means tested pensions or universal benefits.

This question is most relevant in countries that have not already adopted some form of pay-as-you-go universal aged pensions. Path dependency is involved. Once a country goes down the universal pensions path there are substantial political difficulties in back-tracking because this system encourages each generation of retirees to expect rewards for the taxes they have paid to support the preceding generations of retirees.

I expect that the political economy of how the elderly poor are likely to fare under alternative systems has been researched previously, but I haven’t yet found any papers that are directly relevant. So I will attempt to sketch out some preliminary ideas, based heavily on Australian experience.

One factor that will influence how the elderly poor fare under alternative pension arrangements will be their own political power as a group. This seems to vary greatly between countries depending on such factors as their use of voting rights. The presence or absence of means-testing could make an additional difference to the political power of this group since it identifies pensioners as a particular group of elderly people who have a common interest in lobbying for higher pensions. In that respect, means testing causes the interests of the elderly poor to differ from those of other elderly people.

Pension levels of the elderly poor are also likely to be influenced by the way the political objectives of other elderly people (and of middle-aged people who are planning for retirement) evolve under different systems. Peter Lindert’s analysis of the political economy of the public pension crisis seems to provide a good starting point to consider this. He summarises as follows:

‘At first, up to the 1980s, the rise of the elderly population gave the elderly more political clout in the industrialized OECD countries. The rise in their political strength was one reason why the relative generosity of pensions rose and budgets switched from fully funded pension systems to pay-as-you-go systems, giving one lucky generation higher pensions paid for in part by the younger generation. By the 1980s, the pressure on government budgets had become acute.

From that point on, the further rise in the elderly share of population began to undermine their political strength. True, pension budgets are not declining and are projected to rise a bit more as a share of GDP. Yet, the level of pension support per elderly person is destined to go on dropping as a percentage of the average income of the whole population’ (‘Growing Public’, Vol. 1: 208).

As the number of retirees rises relative to numbers of people in the workforce, their interests are increasingly aligned with those of the community at large in maintaining incentives for the goose to continue laying golden eggs. If excessive demands by retirees result in higher tax rates the adverse consequences for economic growth will be reflected back in their future pension levels.

The demographic transition stemming from lower birth rates and increased longevity is far more advanced in some countries (e.g. Sweden) than in others (e.g. Australia). Signs that the increase in the elderly share of the population may be beginning to undermine their political strength are only now beginning to appear in Australia, with a foreshadowed increase in the age of eligibility for pensions.

Australian experience suggests that when the aging middle classes have political clout they can exercise it to look after their own interests despite means tests for aged pensions. The relaxation of means tests, combined with tax concessions to encourage investment in private superannuation, has resulted in total government support for retirees being remarkably similar across a wide range of income levels (shown here). This suggests that total government support for retirees would be much the same under a flat rate universal system without incentives for private superannuation. Complicating matters further, however, the government has allowed people to access tax-privileged superannuation funds in lump sums prior to pension age. This has provided an added incentive for people to retire early, splurging lump sums and living off accumulated wealth until they become eligible for the aged pension.

As the increase in proportion of elderly people in the population in Australia reduces the per voter political power of this group, I would expect the per voter political power of the elderly poor to diminish to a smaller extent than that of the much larger group who hope to benefit from the private superannuation tax and pension means test rorts. I expect incentives for early retirement implicit in the superannuation arrangements will be an early casualty as attempts are made to contain government spending on retirees. If a choice has to be made at some time in the future between, say, maintaining the current level of the aged pension in real terms and maintaining superannuation tax concessions, I expect that maintaining the aged pension levels would be likely to win the political debate. Similarly, given a decline in grey power on a per voter basis I doubt whether superannuation tax concession would win the political debate if a choice has to be made at some time in the future between maintaining these tax concessions and an overall lowering in income tax rates to promote economic growth.

I suspect that the elderly poor would be less able to protect their interests under a universal pension because the support arrangements would not enable them to distinguish themselves as a group whose economic interests differ from those of other elderly people.

Does Wagner's law make sense?

Wagner’s law refers to the proposition of Adolph Wagner (1893) that there is a positive relationship between the level of economic development and the size of government. The underlying idea seems to have been that the demand for services provided by government tends to rise strongly as average incomes rise.

I think Wagner’s law still has a huge influence on the thinking of many economists. This influence is evident in the tendency of many economists to view big government as the norm for high-income countries. For example, it explains why economists pose questions like: Why doesn’t the US have a European-style welfare system? This is an odd question because there is considerable variation in the size of welfare states even within Europe and Swedish-style welfare systems are certainly not common among high-income countries outside of Europe.

The influence of Wagner’s law on the modern thinking of economists seems to rest on it being an empirical regularity or stylized fact. If you overlook the wide variation in size of government in high income countries, Wagner’s law does appear to fit some of the facts. Looking back at the recent history of individual OECD countries, most of them clearly had smaller governments 50 years ago when their average incomes were much lower. Yet, a recent study for the UK and Sweden from the beginning of industrialization until the present (a period of 177 years for the UK) found that Wagner’s law does not hold in the long run. The data are inconsistent with Wagner’s law in the initial industrialization phase (prior to 1860) and since the 1970s (Dick Durevall and Magnus Henrekson, ‘The futile quest for a grand explanation of long-run government expenditure’, INF Working Paper 818, 2010).

The Durevall and Henrekson paper also rejects a rival theory – the ratchet theory – that government spending ratchets up in times of crisis (wars, social upheavals, recessions) and then tends to remain at the new higher level. The expansion of government spending in the 25-35 years following WW2 cannot be explained in terms of a ratchet effect.

Some people might try to rescue Wagner’s law by arguing that it always applies at some stage during the process of industrialization. Thus it might be argued, for example, that Wagner’s law will result eventually in the development of big governments in jurisdictions such as Hong Kong and Singapore that have been able to restrain growth in government, even though they now have relatively high average incomes. However, there do not seem to be any reasons why governments of high income countries would necessarily find it harder than governments of medium to low income countries to resist political pressures to become more heavily involved in activities such as funding of retirement incomes and provision of education and health services. Nor would they necessarily find it harder to resist arguments for the social welfare safety net funded by taxpayers to rise more than proportionately as incomes rise.

If we were desperate to rescue Wagner’s law perhaps we could argue that bigger government is an inevitable response to political pressures associated with the demographic transition - declining birth rates and aging population age structures – associated with economic growth. On this basis Peter Lindert argues that we should expect an expansion of the welfare states in East-Asian countries ‘as they age and prosper’. In OECD countries, including Japan, political systems responded to an increase in the proportion of old people in the populations by providing pensions for aged persons. The further aging of populations has led to increased government spending on pensions - a major factor associated with the growth of government spending in high income countries. Lindert asks: ‘Do we really know that China, Singapore and other East Asians will be more resistant to rising transfer budgets than Japan has been, when they approach Japan’s income level and age structure?’ (‘Growing Public’, Vol 1: 221).

My answer to Peter Lindert’s question is that I don’t know how East Asian governments will respond to an increase in grey power. Perhaps they will see what lessons they can learn from the experience of the big government welfare states of Europe and decide that there is a better way to fund retirement incomes. They might even decide that the compulsory savings approach that has applied in Singapore since 1955 is preferable to the absurdity of providing pensions that are not subject to means tests. Why should people of working age be taxed more heavily in order to add unnecessarily to the incomes of wealthy retirees?

Are some questions too difficult? Part II: How can we understand teenage drug use?

This post continues my discussion with Ruth about teenage drug use. In the last post Ruth, a nurse who has worked in psych wards and prisons, illustrated the nature of the problem by telling the sad story of a man who has been suffering from drug induced psychosis (DIP) over a long period following an incident just before his 18th birthday.
Ruth continued:

It is well established that the human brain does not finish physiological development until well into the 20's, and that smoking one cone (none before and none after) alters brain wave functioning for up to 7 years. Together, these 2 facts paint a dire outlook for teens taking drugs of any sort.

Just as an aside, much of the cannabis available on the streets these days is lined with heroine as a 'good business measure' on the dealers part. No wonder most big time suppliers don't take drugs of any sort. For them, the cost is too great as they see first hand the longer-term effects of their drugs on their clients. Maybe that is a clue for helping - that the dealers are some of the few non-health workers who see these same people year after year. Most of us loose touch with people around us after just a couple of years, which is not long enough to see the long term effects of drug taking. These 'big guys' of the drug world understand the cost of drug taking, especially the cannabis suppliers. They have said to me as their intake nurse in the prison system over and over "I'm smart miss; I sell it, I don't smoke it".

On another note, the use of cocaine in the legal and corporate worlds is astounding - a colleague of mine who works as a consultant in this industry and who has a counselling background estimates that nearly 1/3 of these professionals are taking cocaine just to get their work done in the time allocated. These people do not tend to end up in mental health wards though, but those who take a lot of cannabis do. As a result, we are dealing with the impact of cannabis much more commonly than with cocaine for example. Which leads to the next question, What affect will the lifestyle and workstyle we currently assume to be acceptable have on our society and on our youth? And are we prepared to address it?

In our initial discussion Ruth and I agreed that the problem cannot be solved by just warning young people about the consequences of drug use. Young people are warned already about the mental health risks associated with drug use. Yet a lot of them don’t heed the warnings.

Ruth’s asked: ‘What is all that about?’ I said that I thought that was the right question. We shouldn’t just jump to the conclusion that this is a law and order problem. It might be possible to reduce levels of cannabis use among young people by putting more of them in jail, but that would hardly enhance their lives.

Ruth responded:

Nice point! In fact, there are those who prefer to live in a prison than on the streets, but the real issue is getting more of those people into care when they need it and into mainstream society when they don't. And that's the real issue we face in the western world - there is simply not enough resources to address the overwhelming problem of acute mental health issues in our youth. Not enough money, not enough staff, not enough vision. Especially not enough vision. The solution has to come from the opposite side of the spectrum - enticing people to want to hold onto their reality instead of giving their reality to their dealer, or their doctor. Which is definitely not a law and order problem.

My starting point in thinking about why some young people might use cannabis despite mental health warnings was Gary Becker’s rational addiction model. We are talking about DIP, schizophrenia and depression rather than addiction, but the principles are the same. The point is that the behaviour may be consistent with maximizing the discounted value of future happiness as perceived by the individuals concerned. In observing their behaviour we might observe that their discount rates are high and their assessments of the probability of being affected by mental illness are low. Well, economists say that kind of thing. Other people would be more likely to say that they are being short-sighted and excessively optimistic in their assessments of the risks involved. Nevertheless, it is possible that those assessments are quite rational.

When I put this to Ruth she replied:

Despite addictions and hallucinations and even delusions, those with mental illness retain the ability to make rational decisions about their own welfare in light of resources available to them and their experience of reality. Young people in particular take drugs in order to escape their reality. Those without a functional psychosis - read schizophrenia and 'traditional' type mental illnesses - who experience acute addictive / psychotic phenomena induced by drug taking spend a good deal of their lives straight, going about their work, their relationships in the usual manner. These are often people who own their own business, hold well paid responsible jobs and otherwise live perfectly acceptable and rewarding lives. And yet they have a real need to escape the reality of their lives - the cost of living within normal reality seems to outweigh the risk of loosing their cognitive autonomy. And this is what concerns me most of all.

Have we not created a world our youth want to live in? Rational theory must tell us that we have to act, that the cost of not acting far outweighs the cost of thinking, of postulating, of delaying what one day must be done. If our youth want to find another reality then surely we are charged with the responsibility of providing a liveable reality for them and for us. And for their children.

My feeling is that Ruth and I are both putting the problem back into the too hard basket. Rational addiction theory tends to put the onus on young people to make good choices even though adults must share responsibility with school age children for the choices they make. Yet, if we see the problem in terms of creating a world that our youth would not want to escape from, we may put real world solutions beyond reach. Perhaps it is a normal part of human nature to seek temporary escape from the reality of our own lives, no matter how good that reality might be. There is no problem in seeking temporary escape by reading novels or going to the movies. The problem is that some people seek forms of escape that may ruin their lives or the lives of others.

The discussion is continued here.

Are some questions just too difficult? Part I: Should I blog about DIP?

The other day I was talking to Ruth about this blog. Ruth is a nurse who has worked in psych wards and prisons. So she has an interesting range of experiences to talk about and she's interested in economics.


I mentioned that there were some issues that I steered clear of in my blog because they were just too difficult. Ruth objected strongly to this approach on the grounds that ‘someone should be writing about the difficult issues’. I’m not sure why that someone should be me, but I can see the point she was making.

The first example that Ruth gave of what she was talking about was the high incidence of mental illness among young people that has been linked to drug use. She said that this had increased to a huge extent, since the 1990's. We talked around the problem for a while and later exchanged emails about it. The story that Ruth tells below is one of the saddest stories I have ever read.

Ruth says that the most prevalent mental health diagnosis in acute mental heath facilities these days is a relatively new one - Drug Induced Psychosis (DIP). People are only admitted to acute mental health facilities if they are in danger to themselves or someone else (not simply suffering extreme effects of illness as was the case prior to the onset of the drug problem). DIP is now recognized in the DSM4 manual - the diagnosis tool used by all western mental health medics. A major difference between DIP and schizophrenia is the level of associated violence and treatability. Schizophrenia is treated reasonably well with psychotropic medications as the primary treatment regime whereas DIP is treated mostly through drying out and containment (of extreme violence) with medications used as secondary measures.

Ruth tells me that she has chosen not to study a great deal of the theory about the relationship between drug use and mental illness because she wants to stay in touch with the reality on the wards. She writes:

Can I tell a story? It's the story of a young man, well, a boy about to be a man. He was out with his friends celebrating early, his 18th birthday which was to fall during the next week. So this weekend he and his friends went partying to celebrate. During the night one of his friends slipped him a tablet - slyly into his drink. The young man woke the next day still tripping. He was happy as can be, but by the Tuesday, his parents were very worried and took him to the doctor; he was still tripping - having a laugh. He celebrated his 18th birthday in an acute mental health ward, thinking he was still tripping, but was now fed up with being unable to tie his shoe laces, unable to get the fork into his mouth and having to eat with his hands. He was now hating this experience and getting angry with himself for not 'straightening out'. He began to cry in desperation. He cried over and over again, day in day out, while the medics tried in vain to help. After a couple of weeks, his parents wanted to take him home - they wanted to get him out of hospital thinking that maybe it was the hospital causing their son's problem. They took him home and he stopped crying. He still could not tie his shoe laces, or dress himself if there were buttons to be managed. But his parents were happy he'd stopped crying. After all, this fine young man was looking down the barrel of a great career as expected dux of his school, and a fine life. They were devastated at this turn of events. After a few days they brought him back to the hospital. They had not helped him and were even more devastated than they were before. This young man spent nearly a year in hospital, unable to 'get off his trip' as he so beautifully put it.

I was one of his nurses at the time. I was 22 years old, just 4 years his senior. Eventually both he and I left that hospital. But our paths met again in another hospital, another city even, about 6 years later. He told me he had never had a job for more than a few days, he still couldn't do up his buttons - he didn't wear buttoned garments - and that he was still having his 18th birthday trip. He still wanted to study economics (ironically enough) at university. He could still quote and discuss GDP / inflation / employment figures, monetary and fiscal policies, but old figures, those he'd learned for the HSC he still wanted to sit. And yet that young man has no mental health issues in his family, had all the academic potential in the world and a caring, present family. His parents had never divorced, his siblings all got along ok, his relationship with his girlfriend was going well. And there were no identifiable early warning signs of a mental illness about to strike. This man has DIP. He has never been diagnosed with schizophrenia, or any other mental illness.

Ruth concluded:

I wish I was telling the story of just one man, but I'm not. I've seen this same story and similar others so many times. Are some questions too difficult? Yes Winton, absolutely some questions are too difficult and too costly to avoid asking AND finding answers for.

The discussion continues in the next post.

Do global problems require domestic solutions?

‘Overall the best governments seek to extend the freedom of their citizens; we should not want them to wither away but to maximize individual choice while standing guard over a sturdy infrastructure of institutions and services. What they do within their (permeable) borders is reflected in what they should seek to do outside, increasing the range of free choices that people can make. Far from there being a clear choice between domestic and foreign policy, they are now frequently one and the same’ (Chris Patten, ‘What Next?’, Penguin 2009: 443).

It might seem to be a challenge for me to agree with the sentiments in that quote so soon after writing about the desirability of community self-regulation - governance without government. Those who want more self regulation must want government to ‘wither away’ to some extent to make room for this to happen. Yet I doubt whether it would be possible for people to prosper for long in a self regulating community without some kind of government to organize defence against external predators. I think Chris Pattern is right that we need governments to stand guard. I also think that if we had a government that was seeking to extend the freedom of its citizens, as Patten suggests, it would promote more community self regulation as a substitute for government regulation.

I’m not sure whether or not Patten would agree with me on that last point. Perhaps he would. He was not noted as a fan of statism when he was the last governor of Hong Kong and this book shows that he has retained many views favourable to individual freedom and free markets, despite having served as a European Commissioner.

One of the points that Patten makes in this book is that, despite globalization, nation states remain ‘the principal arbiters of politics’ (p.7). However, he questions how much states can do or achieve on their own:

‘Can they secure the welfare and safety of their citizens, policing borders, regulating economic activity, preventing financial ruin, protecting public health, avoiding environmental catastrophe? As the vocabulary of state aspirations becomes more ambitious, with political leaders promising almost every sort of fulfilled happiness, the capacity of states to deliver on these promises appears to become ever more suspect. A peaceful life, let alone a happy one, often seems more problematic than rhetoric suggests should be the case’ (p.9).

At the end of the book Patten tells us that his intention when he started to write it was ‘to demonstrate that nation states had to work together to cope effectively with the problems that crowd in on us all’. The point he ends up making is that ‘more effective domestic policies and better government at home are often needed to deal with global problems’ (p. 443). Three examples he gives are drugs (domestic policies in rich countries keep warlords in business in Afghanistan), epidemic diseases (breeding grounds in poor countries are sustained by inadequate public health facilities) and global financial crises (bad policies in individual nation states have effects that spread to other countries like an epidemic).

In my view there is another important example that Patten could have given of how domestic and foreign policy are frequently one and the same. This is particularly evident in international trade negotiations in which governments come together to talk about reducing trade barriers without any chance of achieving worthwhile outcomes because they are acting as the agents of the domestic interests which benefit from trade barriers. It is not possible for any government to take a sensible negotiating strategy to international negotiations unless it is supported by public understanding of the damage that its own trade barriers impose on its domestic economy.

However, I must be becoming a grumpy old man to complain that this book should have discussed any issue more thoroughly. This is one of the most perceptive books about global problems that I have ever read. The book shows that it is possible for a politician to acquire wisdom even though the incentives faced by people who choose that profession tend to work in the opposite direction.

Is reasonable regulation compatible with democracy?

Peter Boettke recently wrote a paper entitled: ‘Is the only form of “reasonable regulation” self regulation?’ (GMU Economics Paper 10-05).

This paper draws attention to the potential for self-regulating communities (governance without government) to achieve benefits of social cooperation even in unpromising situations. The subtitle describes the contents of the paper: ‘Lessons from Lin Ostrom on regulating the commons and cultivating citizens’.

Boettke attributes the concept of reasonable regulation to Anne Krueger. He tells us that Krueger got him thinking about the concept when she said at some conference that rather than central planning or unfettered markets we need reasonable regulation – regulation that is not capturable by special interests. Having read some of what Krueger has written about rent-seeking societies I imagine she put forward the concept of reasonable regulation as an ideal worth striving for rather than as something that could easily be achieved.

Boettke argues that self-regulation systems apply reasonable regulation. He suggests that since self-regulating systems are operating outside the formal realm of politics they do not face the problem of protecting against the unwarranted influence of politically empowered special interest groups.

I think that is a good point, but it may be over-stated a little. Community organizations do have to cope with the problem of protecting against the unwarranted influence of special interest groups among their members. They also have to deal with free-rider problems. The main difference is that when decisions are made within such organizations opportunistic behaviour is more easily seen to be opportunistic. It is more difficult for any individual or group to argue for unwarranted preferential treatment when the people who have to pay for this are members of the same community. It is also easier for the opportunistic tendencies of individual members to be restrained by subtle (or not so subtle) threats of retaliation by other members. It would be more defensible to argue that self-regulating systems are able to deal more effectively with the unwarranted influence of special interest groups.

Self-regulation systems seem to have some attractions for everyone opposed to statism, including self-styled commie libertarians and anarcho-capitalists (as well as sensible people like myself :-) . Such systems would presumably also be attractive to Burkean conservatives who emphasize the importance of the ‘little platoons’ i.e. the spontaneous social groups that arise in society.

Yet self-regulation may appear to be too utopian to play a major role in modern democracies. Everyone can understand that tribal groups were able to self-regulate to ensure that forests and fisheries were sustainable. They can understand that their ancestors were able to run schools and hospitals through local community organisations without help from governments. But I expect that many people would feel that there are powerful reasons why self regulation of many areas of life has been displaced by the regulatory apparatus of the democratic state. Is there something about democracy that leads inevitably to taking decisions out of the hands of local communities and placing them into the hands of governments, and then centralizing those decisions at the highest level of government?

This is a big question that I don’t think I can answer adequately at the moment. But I will make a few relevant points.

First, I think it is inevitable that a lot of people will look to politicians to offer solutions to local problems and that politicians will offer such solutions. Politicians do not win many votes by telling voters that they aren’t interested in local problems.

Second, I think that most people are aware that when a politician offers to solve problems by displacing self regulation, then someone has to pay for the costs involved. When people weigh up the benefits of regulation that will take the trouble out of things (to borrow a phrase from Charles Murray) against the additional taxes involved, there doesn’t seem to be any a priori reason why they should choose regulation. Perhaps the problem is that they think other people will pay – which could stem from confusion over tax incidence.

Third, to borrow another thought from Charles Murray (which he may have borrowed from Friedrich Hayek) I think the tendency for government regulation to displace self regulation is related to a tendency for people to see problems from an engineering perspective rather than a healing perspective. There is a tendency to try to solve problems by designing new systems to replace self regulating systems, rather than to think in terms of solutions that will enable self regulating systems to work better. I don’t think there is any fundamental reason why politicians should see themselves as engineers rather than healers.

These considerations provide grounds for optimism that reasonable regulation might be sustainable in a democracy.

Postscript:

The references to Charles Murray are from his book, ‘In Pursuit of Happiness and Good Government’, which I wrote about here and here.

Are Americans pessimistic about the prospects for the next generation?

Gary Becker has recently written an interesting article on the Becker-Posner blog about polls suggesting that the majority of parents in the United States are not confident that their children will be better off economically than they are. He suggests that the best way to counter such pessimism is to promote faster economic growth.


The article made me feel slightly uneasy because I wrote something a few months ago suggesting that the poll results actually conflict with the view that Americans are pessimistic about the future for their children. Have I mis-read the poll results? How much have the poll results changed over the last year or so?

Scott Winship has recently considered the evidence of a variety of polls on his blog: here and here. In brief, the polls indicate that the proportion of Americans who think that their children will have better standards of living than themselves consistently exceeds the proportion who think their children will have worse standards of living. The margin tends to narrow during recessions but, even this year, the polls suggest that optimism is no lower than in the mid-1990s (see Pew Research Center poll results here).

Rather than trying to explain why Americans have become more pessimistic perhaps researchers should be trying to explain why Americans are still so optimistic.

Is a hung parliament a good election outcome?

It seems that neither Labor nor the Coalition have won a clear majority of seats in the House of Representatives in last week’s federal election, so Australia is to have a hung parliament. This means that a group of independents will decide which of the major parties forms government.


The message that some people are taking from the result, or lack of result, is that the electorate has become disenchanted with the major political parties. There are good reasons for people to be disenchanted with the major parties, but the electorate does not have a single mind that can become disenchanted. Even if a higher proportion of voters have voted for minor parties, it is possible to have a substantial proportion of the vote going to minor parties without a hung parliament. The hung parliament reflects the closeness of the votes for the major parties.

I think a hung parliament is the worst possible outcome we could have obtained. As I explained in an earlier post, it is difficult for electors to hold governments accountable for outcomes when parties go to the polls to seek endorsement of their policies and then, after the election, enter into negotiations to decide what policies the government will actually implement. It is possible that independents will use their power to obtain improvements in parliamentary procedures. It will be surprising, however, if we do not also see policies being adopted to advantage narrow interests – favouring regional groups or groups with particular environmental concerns – at the expense of the wider community.

Fortunately, a hung parliament happens rarely under the system of single member electorates that we have in the House of Representatives. This situation is unlikely to change even if independents take more seats from the National Party in future elections. The National Party – as a regionally based party – chooses to remain in a long-term coalition with the Liberals because it can pursue the objectives of its supporters more effectively that way rather than by exercising the balance of power. Even if the National Party was completely replaced by independents the voters who support them would generally expect their representative to favour the conservative side of politics.

It is normal for minor parties to hold the balance of power in the Senate because of the proportional representation system of voting for that chamber. This does not matter so much because of the strong tradition that governments are formed in the House of Representatives. Although minor parties that hold the balance of power in the Senate may be able to bring down governments by blocking budgets, they usually have reason to be fearful of the electoral consequences of doing this.

There is a fair chance that the next parliament will appear to work reasonably well even though the governing party does not have a clear majority. The independents and party leaders have strong incentives to appear to be trying to work well together to avoid an early election. Even the costly compromises that emerge may seem reasonable under the circumstances.

Some people may even suggest that the political system should be changed to bring about this kind of outcome all the time, as under the MMP system in New Zealand. Don’t be fooled. A hung parliament is like bad weather – it is something we have to put up with from time to time. We don’t have to like it!

Did the Labor Party own 'the light on the hill'?

Over the last few years quite a few political commentators have been saying that no-one really knows any more what the Australian Labor Party stands for. Some of them contrast modern Labor’s apparent absence of philosophical underpinnings with ‘the light on the hill’ that former prime minister, Ben Chifley, spoke of in 1949.


I imagined that Chifley must have been talking about the socialist objective – nationalisation of the means of production, distribution and exchange – that Australian Labor dispensed with a long time ago.

However, when I looked, what Chifley actually said about the ‘light on the hill’ seems to have much more contemporary relevance:

‘I try to think of the Labour movement, not as putting an extra sixpence into somebody's pocket, or making somebody Prime Minister or Premier, but as a movement bringing something better to the people, better standards of living, greater happiness to the mass of the people. We have a great objective - the light on the hill - which we aim to reach by working the betterment of mankind not only here but anywhere we may give a helping hand. If it were not for that, the Labour movement would not be worth fighting for’ (Speech by Ben Chifley at the ALP conference in 1949).

Now, if you leave out the mention of the ‘Labour movement’, that statement doesn’t seem to me to define anything peculiar to the Labor Party. If anything, it seems to have a Benthamite liberal flavour to it. I can’t see how the meaning of ‘greater happiness to the mass of the people’ could differ much from ‘the greatest happiness of the greatest number’. The ‘betterment of mankind’ sounds like a phrase that John Stuart Mill might have used. The internationalist flavour of ‘anywhere we may give a helping hand’ does not seem to me to express a sentiment that is peculiar to the Labor Party.

I don't think that Labor ever had sole ownership of Chifley’s light on the hill. Chifley made a great speech but it didn’t define what Labor stood for in the way that Menzies ‘forgotten people’ speech a few years earlier still defines a lot of what the Liberal Party stands for. The idea of ‘bringing something better to the people’ was just as much a Menzies objective as a Chifley objective. Today, it is just as relevant to Tony Abbott as to Julia Gillard.

When a political party doesn’t have a guiding philosophy voters are largely left in the dark about how it is likely to respond to the problems it will face in government, other than that it is unlikely to bite the hand that feeds it (trade unions in the case of the Labor Party). The policies that the parties take to an election tell only a very small part of the story of what they are likely to do in government. Tony Abbott has written books about his guiding philosophy (his latest was reviewed on this blog last year). Like him or loathe him, voters do at least know where Abbott is coming from.

I think Julia Gillard could probably give Labor something distinctive to stand for – something to move forward to – if she sets her mind to it either as prime minister or leader of the opposition. There could be the germ of a distinctive objective for a social democratic party in moving toward more equal opportunity for children in some of the things that Gillard has been saying about education. But those ideals, if they exist, remain hidden beneath endless outpourings of meaningless verbiage.

Does the law of diminishing returns apply to a sense of achievement?

The law of diminishing returns is, of course, the famous economic law that as you add additional units of one factor of production, holding other factors constant, then the additional increments of output produced tend to decline. The original story was about how much additional food could be produced by adding additional units of labour to a constant amount of land, other things being equal. It has been possible, of course, to avoid the Malthusian consequences of diminishing returns by making more use of capital equipment and using more efficient technology etc.


The law of diminishing returns was probably hardwired into my brain when I was studying economics as an undergraduate over 40 years ago. In any case, when I first saw a data set providing ratings of life satisfaction and of seven domains (standard of living, health, achieving, personal relationships, safety, community connectedness and future security) it seemed natural to expect that the law of diminishing returns would apply to each of those domains. So, for example, I expected the additional life satisfaction that accompanied an increase in rating on ‘achieving in life’ from 7 to 8 would be greater than that accompanying an increase in rating from 8 to 9. It turns out, however, that my expectations were wide of the mark - at least for the data set I was using (the Australian Unity quality of life data set, Survey 13, 2005, with useable data for 1,956 respondents). The relationships between the various domains of life satisfaction aren't actually much like the relationships between fertilizer applications and crop yields.

Some time last year I decided to try to use regression to find a simple production function (there I go again) that provided a good explanation of life satisfaction in terms of the seven domains. The estimated coefficients for factors other than ‘achieving in life’ were then used to hold the influence of these factors constant at their average values in order to examine how life satisfaction varies with changes in the ‘achieving in life’ rating.

I thought a Cobb-Douglas production function, which is probably the simplest form of production function incorporating diminishing returns, would probably be appropriate. But a simple linear production function better fitted the data. The functional form that I eventually settled on is a simple linear relationship that is anchored at the top end of the scale, so that if there is a rating of 10 on all 7 domains the predicted rating for life satisfaction must also be 10. The estimated coefficients for this restricted least squares regression were similar to those for ordinary least squares, but the restriction enables better use of available information (Adjusted R squared = 0.81 versus 0.51). The estimated coefficients were as follows (followed by standard errors in brackets):

Standard of Living: 0.309 (0.020)
Health: 0.055 (0.016)
Achieving: 0.272 (0.018)
Relationships: 0.160 (0.014)
Safety: -0.006 (0.018)
Community links: 0.076 (0.016)
Future security: 0.047 (0.018)
Intercept: 10 – 10*(.309+.055+.272+.160-.006+.076+.047) = 0.876 .

Now, we know that a linear production function is inconsistent with the law of diminishing returns. The model predicts, for example, that an increase in achieving rating from 7 to 8, will result in the same increase in life satisfaction rating (+0.272) as for an increase from 8 to 9. But this doesn’t necessarily mean that the estimated model fits the data well over the full range of variation in achieving ratings. One way to test this is to use the estimated coefficients to hold other factors are constant at their average values and to examine how remaining variation in life satisfaction is related to achieving ratings. The results are shown in the chart below.

It is evident from the chart that the linear model prediction of how life satisfaction varies with achieving tracks fairly closely the estimate of life satisfaction with variables other than achieving held constant. In other words we can be fairly confident that diminishing returns does not apply to achieving.

The chart also shows large gaps between the estimates of life satisfaction with variables other than achieving held constant and average life satisfaction levels. This reflects correlation between ratings on achieving and ratings on other variables. This could be because of causal relationships between various domains or because ratings on different domains are influenced by common factors such as personal disposition or temperament.

I’m reluctant to post the results of this little piece of research because I can’t claim any expertise in this area (and my ignorance might be fairly obvious to people who do have such expertise). But the results of this exercise seem to me to have some implications for the question that I raised in my last post about the appropriate balance between different domains such as achieving and relationships. The absence of diminishing returns to achieving does not mean that high achieving by itself is likely to give many people very high life satisfaction. That usually requires high ratings on relationships and on the other domains as well. But we shouldn’t assume that achieving and relationships are completely independent. There is higher positive correlation between relationship ratings and achieving ratings (0.4) than between relationship ratings and the ratings for any of the other domains.
Does this mean that high achievers find it easier to maintain good relationships with others? Or, does it mean that people tend to view maintaining good relations with others as an achievement?

Does meaningful work contribute to life satisfaction?

In my last post I expressed disappointment that the authors of an article about material prosperity and life satisfaction did not acknowledge the sense of achievement that many people obtain from their work.

How do I know that meaningful work contributes to life satisfaction? It would be easy enough to make a fairly long list of people I know who probably get a great deal of satisfaction from their work. I expect many readers could make similar lists. There is also some research evidence on this question.

It is well known that unemployed people tend to have much lower levels of life satisfaction than people in other workforce categories (including those who have retired). The Australian Unity Wellbeing Index indicates, however, that unemployed people also tend to have much lower levels of satisfaction with what they are achieving in life. There is also a marked difference in satisfaction with ‘achieving in life’ between employed people who are looking for alternative work and those not looking for work. Robert Cummins et al, authors of the report, suggest that low satisfaction with what they are achieving in life may be one of the main reasons why people seek to change their employment. The authors add: ‘Many employed people gain a great sense of ‘purpose in life’ from their employment, and having a sense of purpose is central to wellbeing’ (See: Report 17, April 2007, p. 164-5 and Figures 8.9 and 8.18).

Research on the relative contributions to life satisfaction of orientations to pleasure, engagement (the psychological state that accompanies highly engaging activities) and meaning (pursuit of a meaningful life) is also relevant. Christopher Peterson, Nansook Park and Martin Seligman have found (using data from an internet survey) that orientations to engagement and meaning have a greater impact on life satisfaction than does pleasure. The authors also found somewhat higher life satisfaction scores for respondents simultaneously near the top of all three orientations and notably lower scores for respondents simultaneously near the bottom of all three orientations (‘Orientations to happiness and life satisfaction: The full life versus the empty life’, Journal of Happiness Studies, 2005).

A short article by Amanda Horne on the ‘Positive Psychology News Daily’ site refers to research by Michael Steger and Bryan Dik which suggests that meaningful work is associated with people developing a sense of identity which comes from knowing ‘who they are, how their world works and how they fit in with and related to the life around them’ and ‘people’s identification of, and intention to pursue, particularly highly valued, over-arching life goals’ (Chapter on finding meaning at work in Oxford Handbook of Positive Psychology and Work).

One of the points emphasised by Peter Warr, the author of extensive research on happiness in the workplace, is whether individuals want to be in the role they have been assigned, the value to them of different role characteristics and the attractiveness of core tasks. He suggests that such matters can have major implications for individual happiness. Warr also notes:

‘Some happiness is not actually accompanied by feelings of pleasure, or satisfaction of desires. This second form of happiness invokes reference standards of some kind, perhaps some realization of personal potential’ (‘Searching for happiness at work’, The Psychologist, Dec. 2007).

Some people might wonder why people who claim to get a great sense of achievement from their work often require high levels of remuneration for their services. I think this might have a lot to do with rationing of their time. Successful actors, sporting professionals, business leaders, artists etc. can be fairly sure that by requiring high levels of remuneration their services will be purchased by people who will appreciate them. They also know that can always give their wealth away if they feel embarrassed by the amount they are accumulating for doing things they might be happy doing for nothing.

Consideration of the way high-achievers allocate their time raises some obvious questions about the importance to life satisfaction of an appropriate balance between work and home life and between different domains such as ‘achieving in life’ and ‘personal relationships’. That might be a good subject for a later post.