Valuation and Evaluation: Measuring the Quality of Life and Evaluating Public Policy

This paper is about measuring social well-being and evaluating policy. Section 1 concerns the links between the two, while Sections 2 and 3, respectively, are devoted to the development of appropriate methods for measuring and evaluating. In Section 2 I identify a minimal set of indices for spanning a general conception of social well-being. The analysis is motivated by the frequent need to make welfare comparisons across time and communities. A distinction is drawn between current well-being and sustainable well-being. Measuring current well-being is the subject of discussion in Sections 2.2-2.3. It is argued that a set of five indices, consisting of private consumption per head, life expectancy at birth, literacy, and indices of civil and political liberties, taken together, are a reasonable approximation for the purpose at hand. Indices of the quality of life currently in use, such as the United Nations Development Programme’s (UNDP) Human Development Index, are cardinal measures. Since indices of civil and political liberties are only ordinal, aggregate measures of social well-being should be ordinal. In this connection, the Borda index suggests itself. In Section 2.3 the Borda index is used on data from 46 of the poorest countries in the early 1980s. Interestingly, of the component indices, the ranking of the sample countries in terms of life expectancy at birth is the most highly correlated with the countries' Borda ranking. Even more interestingly, the ranking of countries in terms of gross national product (GNP) per head is almost as highly correlated. There can be little doubt that this finding is an empirical happenstance. But it may not be an uncommon happenstance. If so, GNP per head could reasonably continue to be used as a summary measure of social well-being, even though it has no theoretical claims to be one. It is widely thought that net national product (NNP) per head measures the economic component of sustainable well-being. Section 2.4 and the Appendix show that this belief is false. NNP, suitably defined, can be used to evaluate economic policies, but it should not be used to make intertemporal and cross-country comparisons of the standard of living. In particular, comparisons of sustainable welfare should involve comparisons of wealth. For the purposes of comparing social well-being in an economy over time, often, one would analyze whether net investment is positive, negative, or nil. Writings on the welfare economics of NNP have mostly addressed economies pursuing optimal policies, and are thus of limited use. The analysis in Section 2.4 and the Appendix generalizes this substantially by studying environments where governments are capable of engaging only in policy reforms, in economies characterized by substantial non-convexities. The analysis pertinent for optimizing governments and convex economies are special limiting cases of the one reported here. In Sections 3.1-3.3 I explain that policy-evaluation techniques developed in the 1970s, while formally correct, neglected to consider (1) resource allocation in the wide variety of non-market institutions throughout the world, and (2) the role the environmental-resource base plays in society. It is argued that the evaluation of policy changes can be done effectively only if there is a fair understanding of the way socioeconomic and ecological systems would respond to the changes. The observation is no doubt banal, but all too often decisionmakers have neglected to model the combined socioeconomic and ecological system before embarking upon new policies or keeping faith in prevailing ones. Examples are provided to show that such neglect has probably meant even greater hardship for groups of people commonly regarded as particularly deserving of consideration. The examples are also designed to demonstrate how recent advances in the understanding of general resource allocation mechanisms and of environmental and resource economics can be incorporated in a systematic way into what are currently the best-practice policy evaluation techniques.