Happiness economics

The economics of happiness seeks to relate economic decisions to a wider measure of welfare than traditional measures of income and wealth.

Happiness economics attempts to evaluate a wider range of factors affecting well-being, quality of life and self-reported levels happiness. There are now several measures of happiness, such as Gross Domestic Happiness. (GDH) Countries such as Bhutan, France and UK have, to varying degrees, started using ‘happiness indexes’ in measuring economic performance.

Happiness economics challenges the assumption of neo-classical economics which traditionally stresses more conventional economic goals, such as economic growth, employment and income levels.

Measuring happiness and quality of life presents a challenge because of its normative subjective nature, but supporters argue that taking into account more in-depth factors affecting the quality of life helps to make economics more relevant to real life.

Measuring Happiness

To measure happiness is not straightforward because it is a subjective measurement. Measuring happiness usually involves:

  • Surveys asking people to report their own happiness levels.
  • Including measurable indices which affect broader welfare levels. For example, including levels of literacy, access to health care, political freedom, quantity of leisure, income levels and pollution levels.
  • Happiness indexes are usually a composite measure of both subjective surveys and traditional indexes.

Relationship between income and happiness

Neo-classical economic theory assumes that higher income correlates to higher levels of utility and economic welfare.

At low levels of income, increasing income is generally agreed to increase happiness. Rising income enables a person to buy goods and services considered essential to the basics of life – food, shelter, health care and education. Therefore, at low levels of income, traditional economic theories about the link between income and utility are relatively strong.

However, after certain income levels, there can be a rapid diminishing marginal utility of wealth and income –  with rising income doing little to increase overall utility/happiness.

One study by Daniel Kahneman and Angus Deaton found emotional well-being rose with earnings only up to a threshold of $75,000 annual salary.

Factors that affect happiness

  • Income – though with diminishing returns.
  • Quality of work – It is not so much the income level that is important, but the sense of satisfaction that is gained from work. Boring repetitive jobs may give little joy. Self-employment or work in creative skilled jobs, give an opportunity for higher self-respect and satisfaction from work.
  • Quality of consumption Tibor Scitovsky in “The Joyless Economy” (1976) argues it is a mistake to equate consumption with welfare. To Scitovsky it depends on the quality of consumption, e.g. buying fast food, watching tv, may give temporary pleasure, but lasting satisfaction is often missing. Scitovsky argues that skilled consumption, which involves potential risk can give greater joy and sense of accomplishment.
  • Leisure. If higher income is gained at the expense of leisure time, it may adversely affect happiness levels. Though Scitovsky also argues it is not just quantity of leisure but quality. For example, if you young people have too much free time, they may seek stimulus from drugs or gambling. It may depend on individual preferences – some people may enjoy work more than leisure time.
  • Welfare of family members. People don’t just maximise own welfare but that of children. Theodore Schultz visited a couple living on a farm – they appeared to be both poor and content. He asked them why. The couple replied; “they were not poor because they had used up their farm to send four children to college and that these children would be productive because of their education.” Here the parents get happiness from the opportunities of their children. Also, if their children get high paid jobs, they are in a better position to help their parents in retirement.
  • Environment. Good housing, low pollution levels and natural surroundings may influence people’s happiness more than income levels. Some studies have shown urban dwellers have lower happiness levels than rural dwellers. In some countries like China, economic growth has been at the cost of higher pollution levels.
  • Non-economic factors. Even accounting for a wider range of factors than usual, happiness will be affected by issues like social interactions, confidence, self-respect, religious beliefs e.t.c.

Easterlin Paradox

  • According to Richard Easterlin, once a developed country passes a threshold average income, more growth doesn’t increase average reported happiness. For developed countries, higher levels of a countries GDP per capita did not relate to a higher level of happiness reported by citizens.
  • He noted rising GDP per capita in the US did not related to any increase in happiness levels.
  • His theory has been challenged by Betsey Stevenson and Justin Wolfers (2008), who argue there is a connection between happiness and real GDP levels.
  • One difficulty is that richer countries also have higher levels of social cohesion, social trust, stable political system, this may lead to happiness rather than the GDP. It can become difficult to know whether happiness is due to high GDP or other features of high-income countries.

Why rising GDP may not increase happiness

  • Higher pollution from increased consumption. Environmental damage of higher growth
  • Higher levels of congestion and crowding due to more consumption and population growth.
  • Rising levels of inequality mean people don’t feel relatively better off.
  • Problem of affluence – Rise in obesity, stress of striving for higher paid work. Avnet Offer in – Challenge of Affluence: Self-Control and Well-being. argues higher growth gives more income, more choices, but also can make it harder to do the right thing. (e.g. growth in obesity because it’s hard to say no to cheap food.
  • See also: GDP and happiness.

Policy implications of Happiness economics

  • Link between income and happiness limited or even non-existent. Therefore, makes strong case for focusing more on non-monetary issues, such as quality of the environment, reducing working week and satisfaction from work.
  • Economic growth may still be beneficial, e.g. reduce unemployment, create opportunities, but it shouldn’t be the sole objective of society.
  • Governments may be able to nudge and influence consumer choice away from demerit goods (alcohol, drugs) towards merit goods, e.g. education, training, appreciation of culture.
  • Inequality and sense of unfairness can create dissatisfaction. More equitable society has potential to improve happiness levels.
  • Makes a strong case for redistribution between developed countries and developing countries. Low-income countries have the potential for significant increase in happiness from rising income. But, if developed countries give foreign aid, it won’t detract from overall happiness levels.
  • In work place environment, firms may need to emphasise factors which increase value of work, rather than cruder performance related pay and financial bonuses.

Paradox of hedonism

  • This states that pursuit of pleasure may fail to maximise happiness. This is because of irrational behaviour
  • Present-focus bias suggests humans may under-estimate the long-term costs of drugs, which give temporary ‘high.’ But afterwards, cause withdrawal symptoms and mental health issues.
  • Diminishing marginal utility of wealth – declining utility from higher income.

“Hedonic Treadmill”

“Hedonic Relativism and Planning the Good Society” (1971) Brickman and Campbell argue happiness tends to revert to long-term trend – despite temporary deviations from the norm.

A better-paid job may give momentary rise in happiness but after a few months the effect wears off.

Relativity of happiness

Prospect Theory states people measure utility from a relative standpoint. In other words, it is not so much absolute income levels, but relative income levels and relative social position. Thus even rising GDP per capita may not lead to increased satisfaction as people still feel relatively poor and unequal.

Other economists on happiness

Bruno S. Frey “Happiness – a Revolution in Economics”

Med Jones – developed a measure of Gross National Happiness Index (GNH Index) though first mentioned by Bhutan’s King Jigme Singye Wangchuck in 1972.

Richard Layard – Income and happiness – rethinking economic policy

United Nations World Happiness Report (2017 report)

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