Identity Between materail performance and material welfare
Income and Product Aggregates and Social Welfare
The material performance and the welfare of a community are not always identical. If, in a country, the production of a large number of consumable products is on the increase, it does imply that the economy has registered an advance in material production. But it is possible that there might have been at the same time a serious erosion of the consumption standards due to some other factors. The community, on the whole, may be materially more prosperous but it may be at the expense of the happiness or contentment of the people. The divergence between material performance and the level of welfare cannot be properly accounted for by the mere income and product aggregates. The following considerations in this connection, must be given due weightage:
(1) Conflict between economic and social values: The figures of national income and product do not measure the social but rather the economic value of current productive activity of a community. The total output of goods and services, in a specified year, is evaluated in terms of their market prices. Any increase in this economic aggregate does not necessarily mean a corresponding increase in its value from a sociological viewpoint. A community may spend identical amounts on intoxicants and social security. In strictly economic or material sense, the contribution of the two to national income may be the same, yet the expenditure on social security will contribute more towards increasing the welfare of the community. This type of reasoning leads us to the sphere of normative value judgments as to what is and what is not in the interests of the welfare of the community. But the aggregates of national income and product fail to ascertain the level of welfare since the community may never attach social value of a particular commodity or service equivalent to its monetary value. Thus the income and product aggregates cannot claim to represent the true welfare of the people.
(ii) Divergence between economic and social costs: National income and product are simply related to the economic cost of producing goods and services. It includes elements like labour charges, value of raw materials and other factor inputs, allowances for capital consumption, indirect taxes and other levies. Such costs can be objectively and readily measured. But these alone are not the costs which a society has to incur during the process of production. The current productive activity imposes certain social costs which are subjective and intangible in nature but have a direct bearing upon the welfare of the community. The people in a country will not be prosperous and happy just because more production is being generated.
The impact of productive activity upon the general deterioration of physical and social environments must also be considered. With greater mechanisation and industrialization, the fall-out of industrial effluents contaminates the surroundings. The industrial expansion erodes agricultural fields, parks, playgrounds etc. The industrial growth and urbanisation create problems like the industrial slums, diseases and crimes. The damage to physical and social environments, consequent upon the current level of productive activity, clearly has an adverse effect upon the health and welfare of the community. Thus, spite an rovement in the material performance of the economy reflected by income and product aggregates, no accurate conclusion can be given about the level of welfare.
(iii) Qualitative changes: The qualitative improvement of products ensures a higher level of welfare. If the people in a country consume superior and nutritive foods, finer clothes, elegant dwellings and have access to other comforts and luxuries of life, the community enjoys clearly. a superior and better standard of living. The national income and product aggregates, when employed for inter- temporal comparisons of the standard of living of a community, can take into account or be adjusted for the distortions caused by the fluctuations in the market prices. But the distortions caused by the qualitative changes in output over time are repletely overlooked by the income and product aggregates. If a community spends the same amount on automobiles today as ten years back, in quantitative terms no material difference exists. But today’s motor car may be far superior to the motor car produced ten years back and therefore the consumption of motor car today contributes more to the welfare of the people than in some previous time. Thus qualitative changes in output have great impact upon welfare, yet they remain unaccounted in income and product aggregates.
(e) Composition of production: It will not be, proper to make any hasty generalisation about the welfare of a society simply because the aggregate income or output has increased. Given an unchanged level of aggregate output, if the internal structure of gross product undergoes changes it will have varying effects upon the well-being of the people. The welfare implication of an increase in national output cannot be assessed without some knowledge of the composition of output. If the increase in national product is due mainly to an increased production of war equipments and ammunition, such an increase in material performance will not be associated with any improvement in the consumption standards of the people. If the increase in national product is due to an increased production of machinery and capital equipments, such a change in the composition of output in the short period may be at the cost of reducing output of consumable goods. In this situation, although aggregate output has increased, yet the shortages and inflationary pressures experienced presently will considerably depress the standard of living of the people. Such a change in the pattern of production is, however, likely to have favourable effects upon the standard of living in the long run, since the increased production of capital goods will permanently increase the productive capacity of the economy. If the increase in gross national product is due to an increased production of consumer goods, such a pattern of production leads obviously to an expansion in the range of products available for consumption. Thus for a full understanding of the welfare implications of national product, it is necessary to take into account the changes in the composition of output over time. The problem with quantitative income and product aggregates, however, is that they fail to take into account these dynamic changes in the internal structure of product aggregate.
(vi) Changes in the distribution of income and product : No doubt, national income and product aggregates are very useful measures of the over-all productive activity in a country, yet no welfare implication, on their basis, can be derived, unless the distribution of income among the various section of the community is given due consideration. What type of income distribution will be more conductive for economic expansion and welfare, is a question on which divergent opinions exist. But it may be conceded that a more equitable distribution of income definitely makes a direct contribution to the welfare of the people. The income and product aggregates in general tend to overlook the changes in income distribution in an economy.
