The Global Moment

The Economics of Happiness

A growing number of economists are bravely asking: What factors make people happy?
Design by Beau House

In the last few years, a growing number of economists have been discovering happiness. It's not that they are spending more time admiring flowers, helping old folks cross the road, dancing on the street or baking pies for neighbors. In fact, these happiness economists are working long hours in soul-numbing ways, torturing data with their latest econometric techniques to force deeply buried facts to the surface.

What is different is that these economists are revisiting old assumptions and asking new questions. They're not taking the neoclassical model of rational economic man for truth. They have been willing to learn from their colleagues in psychology. They have given up on the old assumption that the more you consume, the better off you are; instead, they are actually looking at the question empirically. Most importantly, they are bravely asking, "What factors make people happy?" It's another sign of the coming revolution in economics.

Not everyone is welcoming this new research program. The results are terrifying Milton Friedman's disciples. Consider this: once people have an annual income of about $10,000 per capita, further income does little to promote happiness. Worse yet, economic growth in most industrial nations, which has tripled or quadrupled our wealth since 1970, hasn't made us noticeably happier. In some countries, despite all this vast increase in wealth and consumption, folks are less happy than they were a generation ago.

I talked to Rafael Di Tella, an Argentinean economist at the Harvard Business School who is deeply involved in happiness research. Speaking from Buenos Aires, he explained, "Some of the very basic things we assumed in economics are not consistent with the evidence. This idea that income is so important to happiness is not correct. All the evidence seems to be pointing in the direction that we are working too much. In fact, we're happy if we work less. We are spending too much time on work and too little time with friends and family. So there's a mistake in the economic models that suggest happiness will come from more income."

How worried are those who believe society is but the sum of all the (selfish) individuals (with insatiable appetites) who square off in the market against powerful corporations freed of government control? Very worried. The Cato institute, a think tank based in Washington, DC, issued a 41-page brief attacking happiness research and its potential to undermine the "libertarian ideals" embodied in the US socioeconomic system. It countered with a creative interpretation of the data: "The happiness-based evidence points unambiguously to the conclusion that those of us lucky enough to live in the United States in 2007 are succeeding fairly well in the pursuit of happiness." Perhaps Cato also interprets the stats showing the millions of Americans on anti-depressants, the number of kids who show up at school without having had a decent breakfast, or the proportion of African-American men spending their days in prison as other signs their ideals are succeeding. Unfortunately for advocates of laissez-faire, the happiness evidence keeps knocking over more and more of the most cherished economic beliefs.

Lord Richard Layard is a distinguished British economist, Member of the House of Lords and a committed advocate for reorienting public policy towards the promotion of happiness. After reading his recent book on the economics of happiness, I could not resist calling him up to learn first hand what his research would imply for Chicago-school economics.

"Economists often fail to think of the social externalities of the policies they promote," he noted, "Many economists suggest workers should be ready to move to where the high paying work is, since this would increase income. Workers who move a lot would destabilize the community and family life. This would tend to decrease trust and increase mental illness.

"Another example is when one person works harder to improve their income, and feels extra well-being from greater consumption. At the same time, they make their neighbors feel worse off, because the neighbors' relative income has worsened. Not only that, but the pollution caused by the extra consumption enabled by higher income also decreases happiness for the rest of society. So most economists worry about how taxes discourage people from working, but in fact, taxes can be encouraging people to have a less feverish pace of life and to focus more on time with friends and family rather than consumption."

It seems almost unimaginable that economists would be now thinking of ways to design the tax system so that we work less, consume less and value each other and the planet more. But Layard would not stop there. (Advertising executives be forewarned.)

"One of the keys to achieving happiness is to live appreciating what one has, rather than wanting more. It is important that we not be totally focused on wanting something that we don't have – that makes for unhappy people. So it's not at all healthy for children to be bombarded with stories on the box that make them feel that they have to have this particular brand of clothing or this particular toy or train or whatever it is, as if they can't be a decent human being without it." Layard even pointed to the value of Sweden's law prohibiting advertising to children.

The folks at Cato and their brethren at the Vancouver-based Fraser Institute are most alarmed by how economists are now training the happiness lens to examine the gap between rich and poor. As Layard explained, "It's a very simple fact that an extra dollar is worth more in terms of happiness to a poor person than to a rich person. We now have evidence that shows the extent of the difference, which is roughly that a dollar is worth 10 times more to a poor person than to a rich person whose income is 10 times higher. The value of an extra dollar to somebody is roughly inversely proportional to their income, such that a little more or a little less money makes so much more difference in happiness to a poor person than it does to a rich person."

For a 21st-century economist, what an outlandish idea! By spreading the wealth around a little more equitably, society's total happiness can go up. After all, a CEO who takes home $50 million a year could have 90 percent of it taxed away without their total number of smiles dropping by more than a couple dozen, while that same money would be enough to improve the lives of the entire population of a small city in Africa.

No wonder the folks at Cato and other neocon "think" tanks are fearful. Might we actually deal with the legions of homeless in rich countries more generously then dropping the odd coin in the soiled paper cups they hold up to us? Might we find a way to transfer some of the wealth that has flowed for so many decades from South to North in the opposite direction? Imagine a world where everyone lived on at least $4 a day, while a few people lived slightly less extravagantly. Might we increase the total happiness on this planet?

46 comments on the article “The Economics of Happiness”

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CargoCult

The deeper underlying problem is that all of modern economic theory is deeply flawed - their econometric models are based on false assumptions and fail to include basic physical facts, such as the conservation of energy, thermodynamics, and the like.

What is needed is a new ecology-based theory of economics. After all, every year the grass grows - but it also stops growing every year, and some individuals pass away, and some come into being. A forest can be growing continually, but stay the same size - because new trees grow as old trees fall down. This is the definition of healthy growth in ecological terms.

Ecology also shows why growth rates matter. A redwood tree grows steadily but slowly and lives a thousand years, while a corn plant springs up, reproduces and dies in a single year. Businesses and corporations should also have such natural life cycles - immortal corporations are not a good idea.

Unlike economists, ecologists are trained in the basic physical sciences and therefore understand the limits of ecological productivity. Economists, on the other hand, largely live in a make-believe land of infinite resources and robotic wealth-seeking humans. Those are the basic assumptions of "econometric models" which are used to produce things like electricity demand forecasts for World Bank/IMF loan programs. They were also used to "prove" that NAFTA would benefit U.S. and Mexican labor back in the 1990s - nothing but fluff.

We also need to remember the physical aspects. The past 100 years has been a time of resource abundance - a 100-year flood of cheap oil that fueled the most rapid industrial development in human history. At the same time, medical advances defeated age-old diseases and led to longer lifespans and a rapidly growing global population that used even more natural resources and land.

All modern economic theories are based on this era of abundant cheap oil and limitless agricultural production - they never considered the opposite situation. They cheered "consumer confidence" because it meant that more of the oil was being bought, more money was circulating, more agricultural land was active, and more wealth was accumulating. This mentality has brought us to the edge of disaster for human civilization.

The physical world cannot sustain modern consumer culture for much longer - we are entering a new era of scarcity, as opposed to the past 100 years of surplus. This is going to turn global economics upside down, along with the impact of the steadily warming climate.

Consumer culture isn't very good for social or mental well-being either. An economic system based on ever-increasing consumption is a dead end, no matter which way you look at it - and ditching the traditional economic indicators (GDP, Dow, etc.) as indicators of progress is a necessary first step in reforming it.

CargoCult

The deeper underlying problem is that all of modern economic theory is deeply flawed - their econometric models are based on false assumptions and fail to include basic physical facts, such as the conservation of energy, thermodynamics, and the like.

What is needed is a new ecology-based theory of economics. After all, every year the grass grows - but it also stops growing every year, and some individuals pass away, and some come into being. A forest can be growing continually, but stay the same size - because new trees grow as old trees fall down. This is the definition of healthy growth in ecological terms.

Ecology also shows why growth rates matter. A redwood tree grows steadily but slowly and lives a thousand years, while a corn plant springs up, reproduces and dies in a single year. Businesses and corporations should also have such natural life cycles - immortal corporations are not a good idea.

Unlike economists, ecologists are trained in the basic physical sciences and therefore understand the limits of ecological productivity. Economists, on the other hand, largely live in a make-believe land of infinite resources and robotic wealth-seeking humans. Those are the basic assumptions of "econometric models" which are used to produce things like electricity demand forecasts for World Bank/IMF loan programs. They were also used to "prove" that NAFTA would benefit U.S. and Mexican labor back in the 1990s - nothing but fluff.

We also need to remember the physical aspects. The past 100 years has been a time of resource abundance - a 100-year flood of cheap oil that fueled the most rapid industrial development in human history. At the same time, medical advances defeated age-old diseases and led to longer lifespans and a rapidly growing global population that used even more natural resources and land.

All modern economic theories are based on this era of abundant cheap oil and limitless agricultural production - they never considered the opposite situation. They cheered "consumer confidence" because it meant that more of the oil was being bought, more money was circulating, more agricultural land was active, and more wealth was accumulating. This mentality has brought us to the edge of disaster for human civilization.

The physical world cannot sustain modern consumer culture for much longer - we are entering a new era of scarcity, as opposed to the past 100 years of surplus. This is going to turn global economics upside down, along with the impact of the steadily warming climate.

Consumer culture isn't very good for social or mental well-being either. An economic system based on ever-increasing consumption is a dead end, no matter which way you look at it - and ditching the traditional economic indicators (GDP, Dow, etc.) as indicators of progress is a necessary first step in reforming it.

Anonymous

The flawed assumption isn't that the reason people are put on earth is to be happy, which is a not even a question by a metaphysical hyperbole. Neither is the flaw of economics that it does not account for finite reasources as the scarcity of reasources is one of the many things that stimulate economic growth and higher efficiency standards. If the world ran out of fossil fuels on tuesday, by wednesday there would be a whole new fuel for the earths population to propel themselves about with -- and retain a similar paradigm for day to day life as they formerly had. That isn't because humanity is inevitable but because that is how we make sense of reality as sentient beasts.

The presumption in these criticisms is that the world is hurling towards disaster, which is quite simply hyperbole.

That being said -- the flawed assumption of this article is that "happiness" can be a policy direction. That's just asinine. Is there only one happiness? Whose happiness should it be? Mine? What if my happiness is at the expense of another persons happiness? It's just a philosophical nightmare and a logistical non-entity. Moreover positing the idea as though it's grounded on some kind of consumption paradigm is equally silly. If consumption does not make people happy -- then why the concern for the impovershed? If it is to be treated within limitations, who get's to decide on those limits? Such questions would require the government to establish an "ideal rate of consmption", which would invariably reflect the values of the individuals within the government measuring these rates of happiness. Does that sound socially just?

Ultimately I can really think of only a few items on which happiness could be (near) universally accepted and they are far too vague to represent viable policy options. "Fun is good" and "people like food". The degrees to which these items apply and methods through which these ideals can be obtained...far less coherent, uniform or plausible to administrate.

Anonymous

The flawed assumption isn't that the reason people are put on earth is to be happy, which is a not even a question by a metaphysical hyperbole. Neither is the flaw of economics that it does not account for finite reasources as the scarcity of reasources is one of the many things that stimulate economic growth and higher efficiency standards. If the world ran out of fossil fuels on tuesday, by wednesday there would be a whole new fuel for the earths population to propel themselves about with -- and retain a similar paradigm for day to day life as they formerly had. That isn't because humanity is inevitable but because that is how we make sense of reality as sentient beasts.

The presumption in these criticisms is that the world is hurling towards disaster, which is quite simply hyperbole.

That being said -- the flawed assumption of this article is that "happiness" can be a policy direction. That's just asinine. Is there only one happiness? Whose happiness should it be? Mine? What if my happiness is at the expense of another persons happiness? It's just a philosophical nightmare and a logistical non-entity. Moreover positing the idea as though it's grounded on some kind of consumption paradigm is equally silly. If consumption does not make people happy -- then why the concern for the impovershed? If it is to be treated within limitations, who get's to decide on those limits? Such questions would require the government to establish an "ideal rate of consmption", which would invariably reflect the values of the individuals within the government measuring these rates of happiness. Does that sound socially just?

Ultimately I can really think of only a few items on which happiness could be (near) universally accepted and they are far too vague to represent viable policy options. "Fun is good" and "people like food". The degrees to which these items apply and methods through which these ideals can be obtained...far less coherent, uniform or plausible to administrate.

Bill Farren

Very well said--one of the best comments I've read on any blog in a very long time.
Current day economics is so flawed. Those making most of the political and economic decisions today have no understanding these concepts.

Bill Farren

Very well said--one of the best comments I've read on any blog in a very long time.
Current day economics is so flawed. Those making most of the political and economic decisions today have no understanding these concepts.

Gustavo

Why don't you guys come out here and publish the most poor countries all over the world have low economic freedom and refused free-market policies in their recent pasts, bringing forth poverty?

Gustavo

Why don't you guys come out here and publish the most poor countries all over the world have low economic freedom and refused free-market policies in their recent pasts, bringing forth poverty?

rising tide

I'm sorry, but this article and the research described therein is all based on the assumption that the purpose we're here on earth is to be happy.

What if one disagrees with that premise?

A lot of the greatest successes in the world and the hugest leaps in human ability and technology were borne from unhappiness. The more content we are, the less we accomplish.

Regardless, this is just another poorly veiled attack piece aimed at discrediting those who are financially successful and those who choose to work hard - as if that is the morally wrong thing to do. The bias is evident, and no attempt to balance out viewpoints is made. In essence, this is a propaganda piece - similar to (as an above poster mentioned) communism in its ethos. Nice. Another version of self-gladhanding and mind control. But because it's from the other side, the left, I guess that makes everything OK.

I'm sorry to say, but manipulation and control are the same regardless of what one's viewpoint is.

Regarding the communism-loving poster above: it's evident that those who embrace communim as a "good thing" have never in thier lives lived in a communist society: as I do.

Cheers to a closed open mind.

rising tide

I'm sorry, but this article and the research described therein is all based on the assumption that the purpose we're here on earth is to be happy.

What if one disagrees with that premise?

A lot of the greatest successes in the world and the hugest leaps in human ability and technology were borne from unhappiness. The more content we are, the less we accomplish.

Regardless, this is just another poorly veiled attack piece aimed at discrediting those who are financially successful and those who choose to work hard - as if that is the morally wrong thing to do. The bias is evident, and no attempt to balance out viewpoints is made. In essence, this is a propaganda piece - similar to (as an above poster mentioned) communism in its ethos. Nice. Another version of self-gladhanding and mind control. But because it's from the other side, the left, I guess that makes everything OK.

I'm sorry to say, but manipulation and control are the same regardless of what one's viewpoint is.

Regarding the communism-loving poster above: it's evident that those who embrace communim as a "good thing" have never in thier lives lived in a communist society: as I do.

Cheers to a closed open mind.

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