Watching the X Factor last night, the question occurred to me: does this help explain the Easterlin paradox?
Compare the pop music of your youth - the Stones, Bowie, the Smiths, Nirvana, whatever - to the X Factor “product”. One is life-changing music you’d listen to endlessly. The other is something thrown into a Tesco trolley to be heard once or twice before the listener tires of it.
This highlights a conflict between consumer surplus and GDP. Form the point of view of consumer surplus, it might well be better for one CD to be bought and heard ecstatically 100 times. But from the point of view of GDP, it’s better for 10 CDs to be bought and heard tolerably a couple of times.
In this sense, Simon Cowell is good for GDP - he’s getting CDs sold in Tescos which never happened in “our day” - but he’s bad for life satisfaction. Pop music is no longer the source of well-being it once was; the marketing effort is diverted towards the next Joe McElderberry and away from genuinely exciting acts.
What’s going on here is a process of monetizing consumer surplus. When this happens, GDP increases, but satisfaction falls. This is because consumer surplus doesn’t feature in GDP, but profits and units sold do.
Here are some other examples of the process:
- Supermarkets want customers to use self-checkouts. Consumer surplus falls, but profits rise.
- Football clubs charge much more for tickets, thus transferring consumer surplus to revenue.
- Computer games no longer come with a printed manual, but rather with a pdf document we have to print ourselves.
- Banks want us to deal with call centres rather than face-to-face humans.
- Low-cost airlines increase their profits by making the travelling experience as unpleasant as possible.
- Cheap clothing sells well, but partly because it falls apart so quickly and so needs replacing, whereas well-made clothing doesn’t: I have suits which are older than the Saturdays - and I can get into them, which is more than I can say for the Saturdays.
Through mechanisms such as these, GDP grows because consumer surplus falls. The Easterlin paradox is, then, no paradox at all. Economic growth happens precisely by reducing satisfaction. A successful business is not one in which a customer pays £10 and goes away ecstatic, but one in which he pays £20 and goes away just content enough to want to come back. A lot of corporate strategy consists in converting the former business into the latter.
There are, of course, offsetting mechanisms here. Technical progress increases consumer surplus: compare Sky+ to VCRs, or just think how much you get off the internet without paying. And, of course, the threat of competition sets a limit to how far consumer surplus can be monetized; the X Factor did not prevent the emergence of Lady Gaga. And in some cases, what’s going on is not so much a rise in GDP as an increase in profits at the expense of wages, a by-product of which is falling consumer surplus.
The thing is, I’m not sure that these factors entirely offset the process I’ve described. Insofar as they don’t, growth occurs at the expense of happiness.
* The paradox might not actually exist (pdf). But this doesn’t affect my argument, which is merely that there are some aspects of economic growth that inherently reduce well-being.