Money doesn't make the world go round

By rights we should all be rejoicing. The years of gloomy recession are over and growth is back - perhaps with a vengeance. It is led this time by investment and exports rather than consumption and should be more sustainable than in the past. Even more cheering for the optimists, there is tentative evidence that we may be on the verge of a long-run growth surge of the kind that happens only once every 50 or so years, when new technologies such as the car or electricity, and now information technology, sweep decisively through the economy and society. No wonder, perhaps, that last October John Major promised the Tory party conference that standards of living would double over the next 25 years.

But what was most surprising about Major's promise was not that he made it, but rather that it had so little impact. Part of the problem was the public's unwillingness to believe that the recession is really over. But the hollow reception may also have far deeper implications, signalling that a whole cluster of assumptions about growth and its contribution to human happiness and welfare - assumptions that have underpinned British politics since 1945 - may now be breaking down.

Precisely 40 years before, Rab Butler had drawn on the first published national income statistics to make the same promise: that 3 per cent growth would double people's standard of living by 1980 (in fact it took until 1988). Then there was universal support for growth as the best guarantee of other desirable things such as generous welfare, health services or cleaner cities. Today there is much more ambivalence. It is not just that a large minority of anti-roads campaigners and environmentalists sees growth as the problem rather than the solution. It is also that for the majority of middle Britain, the balance between the costs and benefits of growth has sharply changed.

Many of the signs became apparent during the recession and its aftermath. Secure middle-class prosperity has been replaced by anxiety. Even after two years of recovery, a fifth of middle-class employees, according to Mori, now fear losing their jobs over the next year. Millions are stuck with negative equity or demoralised by a housing market that resolutely refuses to turn around. Overall, Britain is now spending more than £16bn a year on purely defensive expenditure, such as insurance and burglar alarms, not to mention the costs of buying bottled water or commuting from the countryside to avoid bad water and polluted air.

In the past it was legitimate to see growth as the answer to these problems. In the 1980s, growth dispelled much of the depression that gripped the country at the beginning of the decade. Earlier, too, it was growth, not the lack of it, that made it possible to eliminate smog and clean up rivers. But today there is an accumulation of evidence that growth may be causing as many problems as it solves. This evidence falls into two categories. The first set is subjective: how good or bad people feel.

In most developing countries there are reasonably clear correlations between growth and people's sense of happiness. More money quickly translates into longer lives, better amenities and the pleasures of television, cars and washing machines. The same appears to have been true in most of the West, at least until the 1970s. Although at times the costs of growth were immense, by the 1950s and 1960s people really had never had it so good.

Since then, however, the link between growth and happiness has been broken. In the UK and the United States, while GDP has doubled over the past 30 years, people's reported happiness levels have remained roughly constant. In some European countries they have fallen, sharply in the cases of Belgium and Ireland.

This is in part a consequence of the fact that people's expectations have risen in tandem with growth. We are now dissatisfied if we do not have a foreign holiday or a large car.But the suggestion that there may be a permanent gap between aspiration and achievement is an insufficient explanation of why growth may have lost its lustre.

For whether or not one accepts the subjective data on happiness, it is hard not to be struck by the fact that it is almost precisely mirrored by more objective indicators. Since the 1960s, economists have been trying to devise better measures of human welfare than the standard figures for GNP. The pioneers were James Tobin (who later won a Nobel Prize) and William Nordhaus, who developed a measure of welfare which adjusted the standard US GNP figures to take account of other objective factors that might affect people's sense of well-being: free time, time taken travelling to work, and the quality of the environment. They also subtracted defensive expenditures on things like insurance and policing, or the use of non- renewable natural resources.

The story told by their work - and subsequently extended by the World Bank's Herman Daly - is striking. Between 1929 and 1947, their measure of welfare correlated almost perfectly with economic output. Then, between 1947 and 1967, every six-point rise in output delivered only a one-point rise in "real" welfare. Since then the correlation has gone into reverse: in other words, since the early 1970s growth has coincided with falling welfare, not only in the US but also in several other Western countries that have been studied by organisations such as the Stockholm Environment Institute and the New Economics Foundation.

Economists counter this sort of evidence by arguing that the goal of policy is not increased welfare, but rather to expand choice. Sir Arthur Lewis put the point succinctly in his classic book Theory of Economic Growth: ``the advantage of economic growth is not that wealth increases happiness but that it increases the range of human choice ... What distinguishes men from pigs is that men have greater control over their environment ... not that they are more happy."

This view may or may not be good philosophy, but it takes policy makers a long way from how the public sees things (not least because many people are increasingly baffled by the explosion of choice), and further away from what we know of human nature. For decades of research have confirmed that such things as good health, stable social networks and relationships -which are also important in keeping people healthy - are far more important to happiness than income or consumer choice. Psychologists would also point to other factors that have gone off the agenda in recent years; for example, a degree of equality tends to promote happiness and good health, because of the importance of relative status to self-esteem.

But recent psychological research also has another explanation as to why the fruits of growth and expanding choice have been disappointing. According to the psychologist Mihaly Csikszentmihalyi, people find most fulfilment in what he calls "flow": absorption in challenges that stretch our capacities without being so difficult that we cannot cope. Flow can be found in all sorts of activities: in many jobs, in craftwork, art, sports, voluntary work, even in looking after a child. But many institutions block flow: routine jobs that do little to expand people's potential, bureaucratic red tape, and forms of leisure that leave people inert and passive.

For societies facing the prospect of far more free time, these are not marginal issues. They suggest that if we are serious about cultivating a happier society, we might encourage schools to produce school-leavers not only with high earnings potential, but also with the capacity to enjoy challenges, and cultivate a greater sense of purpose than they can get from saving for a new car or a more exotic holiday. In the same way we might encourage more meaningful challenges for those without work and those with too much time on their hands.

So far orthodox politics has shown little sign of knowing how to respond to stagnant well-being. Lip-service is paid to the environment, and many politicians are struggling to understand the new insecurities, particularly of the middle classes. But when the chips are down, both main parties still compete to be better deliverers of growth, better guarantors that the perpetual motion machine of the modern economy will keep on moving.

Their justification is that even if the costs of growth have risen, lack of growth might be even worse. As the Tories discovered in the early 1990s, no growth generally means no room for policy innovation and bitter conflict over resources, whereas an expanding economy makes it far easier to satisfy conflicting demands. Moreover, most of the public have not turned against growth. No one is marching down Whitehall demanding less disposable income. Few are migrating from the rich countries to the poor.

This standard response to scepticism about growth does not really get to the heart of the matter, however. Instead it confirms that much of government and politics is still bound up with fighting the last war, marshalling great energies to little avail, while all around society is moving on in search of a different kind of growth.

It is not hard to imagine what this might mean. People tend to stop growing physically in their teens; but they do not stop growing in other senses. Rather, physical growth is succeeded by qualitative growth. Thirty years ago Abraham Maslow showed how the same might apply to societies as they rise up what he called a "hierarchy of needs". Having met basic needs for food, shelter and security, he forecast that societies would turn their attention to the quality of relationships, to culture, enthusiasms, and spirituality.

This is what has happened, with the rise of everything from green politics to counselling, and rock climbing to martial arts. But politics remains stuck in a previous era: far more at ease talking about income and housing, crime and jobs, than about these softer, more qualitative issues.

Just as the development of national income statistics in the 1940s brought economics into line with a mass market, mass production economy, so we now need sets of indicators and new criteria of success to fit a far more developed society - criteria with which to appraise more rigorously which government policies contribute to fulfilled lives and a balanced ecology.

It is not hard to guess what this might mean in policy terms. If a happy electorate is a legitimate goal, relatively small efforts to create jobs, to reduce inequality, to cut bureaucracy or to promote demanding forms of leisure will achieve far more than another percentage point on growth. Halving travel-to-work time might achieve more than doubling the number of cars. Improving air quality to cut asthma might do more than a quarter point cut in interest rates.

In previous centuries nations measured their success by military power. For most of this century they measured it by their economic power and their ranking in GDP tables. By 2020 my guess is that we will have moved on again. Our obsession with growth and GDP will seem as odd as the 19th century fetishisation of armies does to us now. Increasingly, societies will be judged by very different criteria: by quality not quantity, well- being not income, balance not growth.

When that happens we will see earlier dissenters, like Wordsworth and Ruskin, Carlisle and Gandhi, in a new light. But don't hold your breath; the new politics of quality and ecology, of ethics and meaning, will undoubtedly prevail in time. It won't happen for a while, not until a generation or two of civil servants and politicians have retired and taken their assumptions with them.

Geoff Mulgan is the director of Demos, the independent think-tank. His Analysis programme `The Pursuit of Happiness' will be broadcast on Radio 4 on Thursday at 8pm.