The Economics of Happiness

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness

The American Declaration of Independence

As a Brit, I have always been envious that the US, at its birth, spelt out in no uncertain terms its commitment to “the pursuit of Happiness”. The UK is without such a clear statement of intent unless you count our national anthem or other similarly martial numbers such as Rule Britannia.

However, in the centuries since the first flowering of US democracy, and particularly since second world war, good old-fashioned happiness has seemingly been supplanted both in the US and here across the pond by the much more baffling pursuit of GDP.

Gross Domestic Product is, in effect, a measure of the value of all goods and services produced in an economy in a specific time frame, normally a year (although GDP figures are released on a quarterly basis). GDP and its sister statistic GNP (Gross National Product) are both measures of national income and rises and falls in these metrics are commonly used to answer the deceptively simple question of “how well are we doing as an economy?”

Why GDP?

The economist Simon Kuznets was tasked in the 1930s by the newly born National Bureau of Economic Research (NBER) with the job of providing reliable data on the size of national income. His techniques for national income accounting helped to standardise the data used by the US Department of Commerce for measuring economic growth.

Right from the outset, Kuznets had misgivings about how his brainchild might be used, cautioning that “the welfare of a nation can scarcely be inferred from a measure of national income”, a warning that has been consistently ignored ever since.

GDP measures everything except that which is worthwhile.

Bobby Kennedy

There has been the odd lone voice railing against this single-minded stalking of GDP. A speech by presidential candidate Bobby Kennedy provided a strong critique of its crude use as a policy objective. In the decades following his tragic assassination GDP growth has become even more firmly entrenched as the main policy objective of the government.

Gross National Happiness is more important than Gross Domestic Product.

Jigme Singye Wangchuk, 4th King of Bhutan
King Jigme Khesar Namgyel Wangchuck

In 1972, the King of Bhutan made the still novel decision to make “gross national happiness” rather than GDP the main objective of the country’s development. More recently the UK Prime Minister tasked the UK’s Office for National Statistics with the job of regularly publishing data on levels of self-reported happiness amongst UK citizens. Despite this, it remains the fact in the UK as elsewhere rises and falls in the GDP statistic can seemingly make or break governments.

The Easterlin Paradox

The link between greater levels of economic activity may seem obvious but this has been called into question by some economists, notably Richard Easterlin. In a 1974 paper entitled “Does Economic Growth Improve the Human Lot? Some Empirical Evidence”, Easterlin provides evidence that seems to demonstrate that, beyond a certain level of GDP per capita, further economic growth fails to add to people’s self-reported levels of happiness.

The evidence is more nuanced than this initial observation; people’s subjective happiness does appear to be correlated with their “position” in society, relative to others. So, in other words, dependent on which society you live in, relatively “rich” or relatively “poor”, your happiness will be affected by where you sit in the pecking order. It seems part of the reason for this paradoxical outcome is what is referred to as “hedonic adaptation” – very simply we get used to increases in income and greater levels of access to material goods. Arguably the upshot of all of this is that if we seek to generate greater levels of happiness then a greater degree of redistribution of national income might be at least as effective as an increase in national income itself.

Easterlin’s ideas and empirical evidence have been challenged in an ongoing lively debate with other economists but if nothing else should allow for a little mental space to begin to challenge the at what at times can seem mindless striving after higher and higher growth rates given that we cannot be completely sure this is making us any happier.

So what does make us happy? How can we measure happiness? And what policies or initiatives can be utilised to bring about greater levels of societal happiness?

These concerns are of growing interest for economists, notably the UK-based economist Professor Richard Layard. Layard echoes Easterlin to point out that happiness is often linked to social comparisons i.e. if all incomes rise but some rise at a faster rate than others then this could have a net negative impact on happiness. He also talks about the effect of adaptation, the implication of which is that people might “get used” to higher incomes and therefore work longer hours than is good for their happiness levels. Another key challenge to conventional economics he makes is to the idea that an individual’s preference might not be constant – this means that as fashions change accumulated possessions might be reduced in value in terms of how much they contribute to happiness.

Layard is of the view that taxation has a number of positive functions including redistributing income and paying for public services but also a less obvious impact on changing people’s view of work; higher levels of taxation could encourage a more positive work-life balance.

More practically he has been at the forefront of trying to improve access to mental health care seeing poor mental health as being the foremost cause of unhappiness.

Richard Layard

In 2010 Layard launched the Action for Happiness movement aimed at sharing practical ways of engendering greater happiness in our lives.

Layard has also contributed to the World Happiness Report, a UN-sponsored publication which attempts to rank countries according to levels of self-reported happiness. Its methodology makes use of a Cantrill ladder – respondents are asked to think of the worst possible life situation (0) vs the best possible life situation (10) and then rank their current life situation on their own “ladder”. The Report then looks at these ratings and compares them with other aspects of people’s lives to paint a picture of happiness deriving from a number of key aspects in people’s lives. These include mental health, as outlined earlier, but also job security, family relationships, religion, etc. with up to 14 aspects considered in survey data.

Interestingly the countries that top the rankings tend to be relatively wealthy countries with more progressive taxation systems e.g. Iceland, Denmark etc. Unsurprisingly countries that are poor and have suffered recent conflict and/or high levels of corruption sit towards the bottom e.g. Syria, South Sudan etc.

Constructing Happiness

More recently, some economists, such as Professor Paul Dolan, have looked at the question of happiness from a more microeconomic perspective; what can we as individual economic agents do to maximise our happiness? What decisions can we make day to day that will “improve our lot”?

His work has not been without controversy. For example, he recently declared that evidence suggests that women tend to be happier without children and a spouse. His books such as Happiness by Design and Happy Ever After incorporate some of the insights of behavioural economics to look at how we can ensure greater levels of happiness by allocating our attention more efficiently. This idea of “choice architecture”, creating structures in our lives to make it easier to fall into happiness-inducing behaviours is also touched upon by economists Thaler and Sunstein in their best-selling book Nudge.

Final Thoughts

As economists we tend to shy away from “that which cannot be measured” but what if those factors are exactly what would improve our “lot”? And what would an economy look like that pursued these factors and took an agnostic position on GDP growth?

This is a guest post written by Pete and Gav, who are the hosts of the Economics In Ten Podcast.

If you are interested in finding out more about the Economics of Happiness then you might enjoy listening to the special episode on their podcast which can be found at all good providers. As well as themed specials such as Happiness Economics special they take a light-hearted look at the lives and times of great economists (series 1 includes Smith, Keynes, Hayek, Ricardo, and Marx). Here are the links to the Apple and Spotify platforms for the Happiness Economics Special.

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