This is part two of a three-part series. In part one of this series, I discussed different types of inequality and which ones we should be concerned about. You can find part one on Understanding Inequality here and part three on Declining Inequality here.
Part 2: Measuring inequality
Adam Smith was well aware that money is not the sum of well-being; he once opined that ‘the greatest part of human happiness comes from the consciousness of being loved’. Smith would easily understand why someone would choose greater flexibility over higher pay to spend more time with loved ones, and he would understand that such a choice does not make anyone worse off, but is merely an example of someone acting on personal preferences. The greater an individual’s freedom to make choices to act on his preferences, the better off he is. “Every man is rich or poor, according to the extent to which he can afford to enjoy the necessities, comforts, and amusements of human life,” as Smith noted. Income is only one (admittedly important) measure of well-being, precisely because higher income often offers individuals more options.
Well-being has many facets. Efforts to measure this should include income, but should also recognize the complexity of the topic and avoid a myopic focus on income.
Economist Vincent Geloso of George Mason University and I tried to do just that by creating a new measure of inequality, the Inequality of the Human Progress Index (IHPI). The IHPI assesses well-being holistically by attempting to encompass a fuller range of choices available to individuals than can be inferred from income alone. By examining inequality in a multidimensional way, the IHPI takes inequality more seriously than measures that focus solely on income inequality. In fact, we examined international inequality across a greater number of dimensions than any previous index.
We first created a Human Progress Index that includes income and other measures, each addressing a different component of progress that matters in terms of human well-being: longevity, childhood survival, nutrition, environmental security, access to opportunity , access to information, material well-being and political freedom.
We chose these variables to capture the multifaceted nature of well-being with the best available data. Smith may be right when he says that ‘awareness of being loved’ is a key component of well-being, but it is quite difficult to find a good measure of this; we limited ourselves to easily quantifiable statistics where the extensiveness of the annual range of each dataset and the coverage of different countries allowed for meaningful analysis. By including so many variables, we had to limit ourselves to measuring changes in global inequality since 1990, because data before that date was often unavailable or limited. The index confirmed that impressive gains have been made since then, with most people around the world better off in absolute terms.
More importantly, were these gains shared, or did some countries see the most benefits while others lagged behind? To find out, we looked at how inequality between countries has changed over time along the dimensions that I will discuss in part three of this series.
Read more?
John VC Nye on living standards and modern economic growth in the United States Concise encyclopedia of economics.
Jeremy Horpedahl, Americans Still Thrive at Econlib.
James R. Otteson’s short biography of Adam Smith at AdamSmithWorks
Chelsea Follett is the editor-in-chief of Human Progress.org, a project of the Cato Institute that aims to educate the public about global improvements in well-being by providing free empirical data on long-term trends.