Draft letter not sent

Subj:    RE: Fundamental problems in welfare economics

Date:   06/06/03 06:58:01 GMT Daylight Time

From:  mattberkley@dsl.pipex.com

To:      mattberkley@aol.com

Sent from the Internet (Details)

Dear Professor Arrow

Thank you very much for replying.     I understand what you say about the

polemical and arrogant tone.     My message read as if I were saying that

such things as the inflation rate for the poor and adult equivalence scales

were left out of the theory of welfare economics, which is not what I meant

to convey.     I say more about this below.

Perhaps I, like many people, am prone to blame my own weaknesses and

frustrations on others.      In my own case, I have failed to bring

attention to a serious flaw in development economics, while at the same time

cursing other people for similar failings.   It is quite hard to be a lone

voice in a crowd, knowing something and being unable to communicate it.

What I realised two years ago was that when studying hungry people,

economists never took account of the possibility that their results might be

influenced by changes in longevity.

A year before that, in 2000, I was a trustee of a family fund, hoping to

further justice, partly economic justice.       I thought that the debate on

globalisation could do with better statistics on poverty trends, and I

thought that somehow the fund could help with this if the money were very

well targeted.     It was around this time that I read "Growth is Good for

the Poor".      First I read the article in the Economist, to which I

subscribed for many years, describing the conclusion of the research.      I

was ready to accept the conclusion, and approached the article itself in

what I would describe as a naive way.      When I saw the document I was

astounded.    There seemed to be gross distortions of the truth.     I could

hardly believe that such a piece of writing could be broadcast to the world.

I was shocked by several aspects.  One of the thoughts I had was "but they

haven't followed real people  -  they've just looked at the averages, which

don't show us how well or badly people did;    maybe the figures come out

that way because poor people died earlier in some places".     I remember

thinking to myself that I hadn't realised that was the way economists got

their conclusions.     These were longitudinal conclusions, but the data

were cross-sectional.

I thought to myself

"they've confused

[the rise in the average for the poorest fifth]

with

[the average income rise for people in the poorest fifth]".

They measured the first one, but said they had found out the second one.

At the same time, there seemed to be many questionable things about this

document.     I have a list of fourteen flaws, several of them pointing to

factors in the analysis which are completely unknown.     The factors were

part of the analysis, but not the logic of the document:   the authors

simply left out discussion of awkward questions about the flaws.    The fact

that there appeared to be so many things wrong confused me.     I suppose I

like to see the whole of a problem, insofar as that is possible.     I could

not understand this problem, because there were so many facets to it.

Part of what I could not understand was how these things could go

uncorrected, both in the sense of tradition forbidding such poor work, and

in the sense of not being immediately corrected by prominent economists in

the next edition of the newspaper.

To cut a long story short, I knew I was right  -  this was not the way to

measure the progress of poor people.     Nor was reducing the proportion of

poor people, which I found offensive as a concept.      I told a senior

economist in the UK Department for International Development at a meeting of

NGO people and experts with DFID staff, and was laughed at.    I contacted

several economists who seemed to have done relevant work.     I could not

bring myself to question the World Bank staff themselves, because I regarded

them as liars.      No-one could be stupid enough to have made the arguments

they had made.

I could not find anyone with whom I could discuss the life-length issue

sensibly.     A head of department for development studies at a very

well-known university said to me that the problem was data availability.

I knew it wasn't.     The problem was that people were not thinking about

the problem.      This was a theoretical matter, not an empirical one.

I spoke to various experts about the flaw, but they did not shed any more

light on it than I could shed myself.     The experts included Professor

Kanbur.      When I learned from him that no-one had thought about it, I

worked furiously for several days to try to understand it.     I realised

that since poor people kept dropping off the bottom of the income

distribution, the figure for average income was kept artificially high.

I expect that it was then that I realised most people would make average

income rise by dying.

A good way to measure economic welfare in a country might be to multiply the

median income by mean life expectancy   -  provided income were adjusted by

a) age structure, b) the inflation rate for the person on median income, and

c) extra necessary items of expenditure, and some account were taken of d)

significant changes in assets.

Such a way would, however, value richer people's lives as more valuable than

poor people's lives.     That would be so even if some extra monetary value

were assigned to a year of life.     That kind of problem arises with any

measure which combines life length and a static measure of welfare.

Bentham said that the felicific calculus should include the duration of

pleasures.    But what weight do we assign to an extra year of life?

When we are 1 year old?    When we are 5?  10?  15?   35?   55?   95?

That is not a scientific question.     It is a moral question.

Social science is the science of human societies.      Moral philosophy is

something else entirely.

Professor Kanbur's paper on differential mortality and poverty measurement

confuses the two.     I realise that there is a demand on economists to

produce answers as to whether things are getting better or worse.     But

the only valid scientific statements from a social scientist are those based

on data, theory and assumptions whose appropriateness for the purpose has

been thought out.

Any system of welfare economics which did take into account life length

would be highly subjective.     It would have to place a monetary value on

each human life.   But there is no such value.     We would have to invent

it.    I would not dare to put such a value on life.     I would not dare to

place a higher value on a rich person's life than a poor person's life.

I suggest that the lives of people with little are more valuable, to them

and to us, than we think.     Necessity is the mother of invention.

People who have little make do with little.     My own preference is to

spend time with people of many backgrounds, because you get different angles

on life.     Poor and apparently ignorant people have much to teach me.

They deal with real life, if anyone does.    A hungry person has a healthy

set of priorities.     They may well be more sane than many of us who have a

surplus of food, money, options, moral stances, thoughts, fears.

I suppose I have had a surplus of fears about what I was looking at.    To

be saying something so obvious, and yet apparently at a high level of theory

in a respected academic subject, seemed ludicrous.    My image of the world

changed.      I had had a faith that people who were in charge of such

things as economics understood them.     It was as if the world had gone

mad.    Of course you can't use the Sen index or the FGT index or the

average income for the poorest fifth as an indicator of economic gains to

hungry people.     It still baffles me:   why would anyone think that you

could?       The omission of information on differential mortality seemed to

me to be the devious workings of the selfish gene:   a drive towards natural

selection, through false logic in the brains of people whose genes were

threatened.

Above, I said that my message read as if I were saying that such things as

the inflation rate for the poor and adult equivalence scales were left out

of the theory of welfare economics.    That is of course not true.     They

are, however, not required as a theoretical basis for conclusions from

academic economists on aggregate economic gains or losses for poor people.

In that respect, the theory underpinning practical work within welfare

economics certainly is defective.

It is quite a big assumption to make that in both China and Brazil the

inflation rate for basic food was the same as that for the whole economy,

for all periods studied.     It is also quite a big assumption to make that

there are no systematic effects, for example, between disproportionate rises

or falls in the price of basic food compared to the overall inflation rate,

correlated with the variable whose effect the social scientist is trying to

measure  -  such as rises in income per capita, or trade volumes.

It is also quite a big assumption to make that average food requirements did

not increase due to changes in the age structure.     This flaw appears in

the World Bank's Millennium Goal indicator for the proportion of poor people

(and another indicator, the share of income in the poorest 20%).      It is

certainly a flaw, because there are now fewer children per adult in many

countries in Asia and Latin America, and we do not know that the change has

not affected poor people.     The effect of a fall in the birth rate is to

make total consumption requirements fall and average consumption

requirements rise.     The dollar line is inappropriate for a world where

the proportion of adults is increasing.

What would I use to calculate welfare?      I would not be so arrogant as to

try.     If I were measuring economic power, then I would take into account

inflation at different income and asset levels, income, assets,

environmental assets (both natural and made by humans), freebies, subsidies,

debts and maybe more.     I would not judge economic inequality by income

inequality.    If I look around me, at my life and those of others, I see

people with low income and high assets.     Are they rich or poor?    I see

people with high income and high expenses.     They could move to a cheaper

area or a cheaper country, but then they would not have the job they want

with the social life that they want.    They might not get a job which pays

so much.      If they have children in a local school, then they do not want

to move them.     Housing costs where I live are high.    Housing costs, and

other costs, in other parts of my country are lower.     What is economic

inequality between my town and those?      Suppose wages and assets are half

what they are in my town.     Are the people half as well off economically?

That has two answers.      One depends on prices and necessary expenditure.

The other doesn't.      In terms of absolute economic welfare, the answer

may be no.     In terms of relative economic power, the answer may be yes.

If prices and wages for poor people rise in tandem, then in one sense they

have done no better.    But in another sense they have:   the goods of the

non-poor are now more affordable (in terms of percentage increases in income

needed to buy them) than before, for those who manage to scrape together a

surplus.     Have poor people done better?     Well, no and yes.    You

would need both statistics, to answer two separate questions.      Life is

complex.

Matt Berkley