Why Economists Can’t Tell You Where to Live

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One of the most beautiful places I have seen in my entire life is Dali, an autonomous region in southwestern China. Dali is nestled in long valleys between tall snow-capped mountains. If you follow these mountains far enough, you will eventually reach the Kham region of Tibet and it’s mighty Himalayas.

I remember arriving at Dali station, getting off the train and feeling like I was in a totally different country to where I had begun my train trip. I had been living in Guangzhou – an economic powerhouse of China’s Pearl River Delta region. Home to 15 million people, Guangzhou’s GDP was greater than that of many countries. By contrast, Dali is relatively small in population and still very rural. In China, this naturally equates to being much poorer and many of my Chinese friends had described Yunnan province – the province in which Dali is situated – as being “backward” or “undeveloped”.  My Chinese friends were not wrong of course, in terms of just about every economic indicator, Dali was far behind Guangzhou – or any other tier 2 Chinese city for that matter. On paper, it was a bad place be, but in reality, it was one of the greatest places I had ever been.

How could these two facts co-exist? Do economists not use indicators like GDP to get a view of how developed a place is? Doesn’t economic development – the availability and affordability of products and services – cause greater standards of living? It is common to think as such, but the reality is not always like this.

The field of economics studies how an ever-growing population of humans satisfies their unlimited needs and wants with limited resources. Therein lies what Thomas Sowell called “The First Lesson of Economics”: Scarcity.

Everything is finite. As such, economists created a number of indicators with which they may measure the productions of the worlds economies. Demand curves, supply curves, measures of how big or small an economy is and the change thereof. All of this pointing toward a sacred goal of efficiency, production and growth.

This is – for poorer societies – highly important in the quest for better living conditions. The creation of new products and services for affordable prices has significantly improved the lives of billions of people throughout history. Internet access and cellphone ownership is now widespread even across poor sub-saharan African countries. This exchange of information has never been easier or faster. Anyone with internet access can find just about anything they could have desired on the internet with just the click of a button. Even the language barrier has partially been broken down by the use of machine translation.

But with this rapid and enormous growth has come a number of growing pains. Without a doubt the greatest example of this is in China where GDP growth rates were commonly around 10% per annum. Many Chinese cities today are densely populated resulting in skyrocketing property prices. The rapid growth of industry has also created air pollution making peoples’ places of residence engulfed in smog for many months of the year, not just in China but also other parts of East Asia. Environmental degradation has ensued as a natural consequence of this enormously rapid growth, something which the Chinese authorities have recently begun to address.

With this having been said, it is still clear that the lives of most Chinese people are vastly better than they were three decades ago. Economic development does indeed improve lives. The greatest example of this might be in a place like South Africa with rampantly high unemployment rates as well as having some of the world’s highest rates of violent crimes such as rape and murder. If South Africa could have the same economic growth rates that China has been having since the 1990s, there is no doubt that it would be a far wealthier and more successful nation. Far fewer people reliant on government grants, far more people would live in good housing. Economic growth would no doubt turn the “Standard of Living Curve” sharply upwards. With this in mind a good economist must also weary of the turning point on that “Standard of Living Curve”.

Perhaps a useful analogy for this would be that of a house. Owning a house is a great achievement in anyone’s life. You can renovate and curate your house to your liking, turning the house into a “home” so to speak. The utility of that house might become far greater than it’s price in rand or dollars. This utility is far great than that of own two houses which are badly built, small, ugly and depressing.

And yet, on paper, the man with one good house might not look as successful as the man with two houses. An economist could measure their property value and see how big each one is in square foot, but the economist can never measure the utility which the owners get out of their respective houses.

Such is the nature of utility: it is impossible to measure in a discreet data set, but it exists nonetheless and it is arguably much better for the individual than the things which economists normally measure, for example, money. No-one really “wants money”, rather people want the things which money can buy for them. The problem here is that there are many things which provide utility and also impossible to buy with money which leaves them left-out of the economic agenda. Consider things like time spent with one’s family, physical activity, clean air and water, high trust levels in society… the list goes on.

I am by no means advocating against economic growth or the continual development and improvement of goods and services. Instead, I think that it is prudent for a society to be aware of the fact that some things which are impossible to measure using economic calculations are those which are the most important. An economist can say that Dali’s economy is slower and less-developed than Guangzhou’s, but that economist can never really tell me the great satisfaction I create by gazing at the natural landscape of Yunnan rather than the light-filled urban jungle of Guangdong.

To conclude: the great French liberal theorist Frédéric Bastiat said that a bad economist accounts only for “what is seen” while a good one also accounts for “what is unseen.” The utility humans experience exists in an intangible reality which affects every person. It has nothing to do with the job of the economist, but a good economist should never forget utilities exist, lest they be destroyed in the blind rush for eternal growth and development.  The economists can never tell you why Dali is a better place to live than Guangzhou, but the individual can.

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