August 1, 2005

What’s New for the Fall?  Recently I was talking with an alumna of the McCombs MBA program.  She asked me, “I know you change your MBA Macroecon course every year.  So what are you doing new this year?”  The answer to that question is given below:

1)  Questioning GDP.  We all agree that Real Gross Domestic Product in per capita terms is a lousy measurement for the “well-being” of society.  I usually mention this in passing each fall and then plow on as treating GDP as a perfect substitute for well-being.

Recently Lord Richard Layard, a very well respected economists at the London School of Economics, has published a book entitled “Happiness:  Lessons from a New Science” based on his 2003 Robbins Lectures.  Layard’s basic contention is that GDP completely failed to measure well-being over the past 50 years in the OECD countries.  As proof he turns to psychology and sociology as well as economic data for support.  He makes a strong argument that once income reaches about $15,000 a year increases in income really don’t correspond to increases in happiness.

In doing so Layard calls into question some underlying assumptions of both micro and macroeconomics.  He argues that as income increases, economic households get involved in a “rat race” of one-upsmanship.  Thus, as incomes increase we have more objects but because others in our ‘circle’ may have even more objects than we do, we feel relatively worse off.  Thus, as incomes increase and we are “richer” we can often feel less happy.

Layard then goes onto offer some potential solutions to this endless circle.  Some of his solutions are sound:  placing more value on personal and family relationships, teaching values to children, and placing an extremely high value on selflessly serving others.  While others of Layard suggestions will raise eyebrows:  ban advertising aimed at children (as they do already in Sweden), and drastically increase government spending on mental health services.  Still other of his other suggestions are down right dangerous including significantly increase income taxes and government mandated redistribution of wealth.  Layard’s main suggestion, for macroeconomists, is his call for a better measurement of “happiness.”  This seems reasonable and very defendable.

I’m not sure how economists and policymakers will respond to Layard’s call.  I think he is right in many ways and dead wrong in others (See my blog for more details).  But, I do think there will be more work put into creating a better macro measurement of “well-being” of a society.  This would dramatically shake up financial markets as well the entire field of marketing.  It will be interesting.

2)  More discussion of Globalization.   Steve Magee and I are kicking around some ideas of how to address the “globalization question” in a more structured way.  Up to this point the globalization debate has been framed by political pundits making gross generalizations, or by the long winded ramblings of economists who readers often ignore.  We want to discuss why it is trade barriers really exist (Steve’s work on Blackhole tariffs) and why these trade barriers have been around for so long (evolutionary economics).  We also want to look at economic growth and business cycles fluctuations in a globalization context.  It turns out to be a lot more difficult than it sounds!

For example, it is difficult to discuss global financial crises without getting into exchange rate regimes and the failure of Bretton Woods.  So the issue is where to start?  The pundits have it so much easier:  they can just say simplistic things like “outsourcing steals jobs away from Americans” or “market outcomes are always efficient.”  Both are overly simplistic and wrong.  But how to convince students/readers of this without boring them to death is challenge we still haven’t completely figured out.  So we are going to use our MBA students as guinea pigs for some of what we have produced thus far.

We will see how the new batch of MBAs responds to the changes.

All the best,