From Constance Lever-Tracy
You featured two interesting opinion pieces side by side: Ha-Joon Chang’s discussion of inequality (25 April, p 28) and Richard Layard’s call for a measure of general well-being (GWB) to supplement that of gross domestic product, or GDP.
Economic theory may seem to make the GWB redundant, since GDP is composed of market prices, and these are taken to be a good proxy for the subjective utility (or happiness) expressed in the willingness to pay them.
But inequality fundamentally undermines the validity of this proxy. The law of diminishing marginal utility means that additional money provides less happiness than the initial sum. Less subjective utility is needed to motivate the spending of the rich than that of the poor. Rising GDP is a misleading proxy for well-being if inequality is ignored.
Eden Hills, South Australia
