How to measure well-being? OECD’s Better Life Index

In recent years increasing concerns emerged regarding the issue of how to measure people’s well-being and, ultimately, how satisfied people are with their life in general. The traditional economic approach to get to grips with this issue is to use statistics related to a country’s Gross Domestic Product (GDP). In this regard, GDP per capita is a widely used indicator to measure people’s actual economic well-being and its change over time. I would like to highlight just two out of many shortcomings regarding this approach of measuring people’s well-being. First, GDP per capita is calculated as a proxy for the average economic well-being of people living in a specific country. This is problematic, because if inequality in a country increases enough relative to GDP per capita, it is possible that most people can be worse off, although the average income is increasing. Second, statistics related to a country’s GDP are a very distal indicator for people’s well-being, as GDP mainly measures market production in monetary units. This is problematic, because on the one hand, many services relevant for people’s well-being do not have a market price, and on the other hand, individuals assess the different aspects of their well-being by drawing on their subjective values and norms.

During the last years, a lot of work has been conducted to face the challenges of measuring people’s well-being. One out of many promising approaches are the recommendations made by the Commission on the Measurement of Economic Performance and Social Progress (CMEPSP) set up by Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi. These recommendations include, among others, two important basic principles. First, indices should focus on the well-being of people in each country, rather than on the macro-economic conditions of economies. Second, both objective and subjective aspects of living conditions and their appreciation by individuals should be integrated to understand people’s well-being.

By drawing upon those recommendations of the CMEPSP, the OECD has identified 11 dimensions as being essential to people’s well-being and included them in a first attempt to provide a comparable and comprehensive set of indicators at an international level. These indicators include both the people’s material living conditions but also their quality of life. The OECD Better Life Index is available online (www.oecdbetterlifeindex.org) in a sophisticated and fancy tool to compare the different dimensions across countries but also to create one’s own Better Life Index. Give it a try!

Despite my enthusiasm to complement the GDP-based indices for economic wealth by drawing on objective and subjective indices of well-being, the latter are in an early stage of development. They still need to prove that they are a reliable, but also valid measure for people’s quality of life and, finally, could provide policymakers with the information they need to make improved decisions for people’s well-being.

Tom Schneider

The Limits of Regulation - A Claim for Good Management

A new study from Syracuse University recently revealed the shrinking numbers of fraud prosecutions since the financial crisis in 2008 (http://articles.businessinsider.com/2011-11-16/wall_street/30404680_1_prosecutions-transactional-records-access-clearinghouse-financial-crisis#ixzz1ehpr2kd9, see also  http://tagesanzeiger.ch/wirtschaft/geld/Finanzbetrueger-haben-Justiz-im-Griff/story/28152529).  And the New York Times already in the spring of this year raised the question: “Why, in the aftermath of a financial mess that generated hundreds of billions in losses, have no high-profile participants in the disaster been prosecuted?” (http://www.nytimes.com/2011/04/14/business/14prosecute.html?pagewanted=all). It seems that a serious regulation failure exists based on wrong assumptions of what should guide the actors’ behavior.

In our book we argue that today the underlying basic assumption of the dominant business model, which promotes self-interest as rational behavior, is at risk of having to be revised (see chapter 5). And we mention that already the Nobel Prize Winner Amaryta Sen reflected on the basic assumption of the self-interest of actors in his book "On Ethics and Economics” in 1987. He concludes that the idea that only self-interested values are rational is even harder to defend.

If all human beings are modeled as self-interested actors, and efficient market functioning fails to occur, additional control mechanisms of firms and their actors must exist. These are normally in the form of state laws and regulations, or in some cases voluntary self-regulation (e.g. Global Compact). A continuous need for control is all the more important as some of the actors are not interested in efficient market functioning. And it is the same actors that are also trying to annul all kind of regulations. In as much as state sovereignty is by definition limited to geographical borders, this leaves serious gaps in governmental control of this self-interest. But even a mixture of compulsory and voluntary adherence to regulation will always lag behind a constantly and swiftly changing environment.  It is consequently often up to the discretion of the diverse actors of firms whether or not they exploit such regulatory gaps. Meanwhile, regulators and prosecutors are frequently not able to fulfill their functions in an adequate way, resulting in the lack of prosecutions mentioned above.

To overcome this unsatisfactory situation, new mindsets are necessary: After the first waves of corporate scandals, Ghoshal claimed in his seminal paper that we have to change the basic assumption of strategic management, and that amoral business with its negative impact should not serve as a role model (Ghoshal, S. (2005). Bad Management Theories Are Destroying Good Management Practices. Academy of Management Learning & Education, 4(1), 75-91). In this context, we ask why it is necessary for firms to commit themselves to the worst forms of self-interest and to fight against an endless series of constraints, when they can focus and draw upon the stimulating cooperation of a broad cast of stakeholders for value creation? We propose as a positive approach that the potential of value creation will be unleashed through creating a sense of mutuality in networks of stakeholders, rather than through the self-interest of single parties sometimes violating regulations. Therefore new narratives about leadership are required for good management (http://www.fh-hwz.ch/g3.cfm/s_page/63500/s_name/leadershipprojekt11).

Sybille Sachs