HAPPINESS ECONOMICS

Camille Palumbo

« Happiness Economics ». These two words put together sound somewhat strange. Happiness has to do with warmth, joy, love and self-fulfillment, while economics speaks with cold figures about money, productivity and benefits.

The truth is that the fathers of Economics, remarkable philosophers such as Adam Smith, John Stuart Mill and Jeremy Bentham, were considering happiness as fundamental for their field, and moral and humanistic considerations were brought into the analysis.

Then something bizarre happened. Economics decided to become a hard science, as credible as mathematics, and with rules allowing us to predict the future. Mathematical formalisation became the rule and subjective considerations left the stage.

Today, the environmental boundaries and human consequences of our economic model focused on growth reveal its limits and the need for a new paradigm is becoming obvious.

That is where happiness makes its comeback. Serious economists such as Sir Richard Layard, Tony Blair’s economic counsellor, head of the LSE’s Center for Economic Performance and collaborator with the OECD, has written a volume of literature on happiness[1], and it is a blossoming field of research. 

We will try to shed some light on what this is all about and what we can get out of it. We will first review the methods of happiness economics in order to give an overview of its results, and then draw some conclusions regarding our way of life.

1-    The method

The economics of happiness relies on expressed preferences whereas economics only takes into account revealed choices . This means people are asked what they want rather than judged on what they do. This is important because the discrepancy between expressed and revealed preferences can be quite large, depending on how much influence people have on their environment. Revealed choices are actually limited by what people are powerless to change.

Concretely this means that happiness economics is based on large-scale surveys made across countries and across time. A typical survey begins by a question like “How happy are you with your life?” In order to avoid bias that question could be induced by a context of questions which aim at exploring the different parameters influencing happiness.

It also means that the economics of happiness uses psychology, which might seem heretical to some economists, but is in fact very logical when exploring such a complex subject as happiness. Actually psychology and neuroscience are helping to bring the economics of happiness closer to hard science. Indeed it allows researchers to measure quantitatively and objectively, through brain activity measurements, how people’s feelings correspond to reality. It also helps to avoid biases such as mood fluctuations.

In the empirical approach of the method it is very important to avoid romanticism, i.e.: basing the analysis on an idealised but non-existent human nature; a

paternalism that would expect the experts to know, better than the individual himself, what makes people happy. You could need to avoid, for example, an ethnocentrism that would consider the researcher’s point of view on happiness as universal.

1-    Overview of the results

The main finding is that there is no direct correlation between wealth and happiness.

More precisely, the “Easterlin paradox”, named after Stanford economist Richard Easterlin who formalised it, states that within one country wealthier people declare themselves happier than poorer ones, but there is no significant difference in happiness levels between rich and poor countries. In the same way, at the aggregate level, there does not seem to be a correlation between the increased wealth of some western countries and the level of happiness of its people. 

This is illustrated by the two graphs below[1]:

From both graphs we can deduce that once that the primary needs have been met, happiness and wealth are not correlated in an absolute, but in a relative way. Indeed, expectations are not constant, they change according the income, so the richer one becomes, the more demanding one becomes.

Thus it is also obvious that many other elements are influencing people’s happiness. It is highlighted that security (feeling safe in a country but also security in the family and job security) is very important. For example, people who have climbed up the social ladder and changed social classes are less happy on average than people in the social class they are coming from. This is because they feel insecure about falling back to their original social class.  This could also explain why richer people are happier. In a society where money helps to get out of difficulties, richer people feel more secure because they know that if anything happens to them, they can get out of trouble.   

Another interesting finding is that non pecuniary-problems are more difficult to overcome than  pecuniary problems.

Finally these findings are nothing astonishing; they remain in old sayings such as “L’argent ne fait pas le bonheur (mais y contribue)” et “Plaie d’argent n’est pas mortelle”. These findings however  seem to have been forgotten in our growth-centered economic model. 

1-    What conclusions can we draw for our growth-centered model?

So what conclusion should we draw about the happiness of our society? Richard Layard suggests something very interesting: “more taxes to be happier”.  The reasoning is simple: in our competitive and productive society, people are caught in a rat race where they work more to earn more and this ends up making them less happy than if they worked less and had more time for family life. So taxes should be set to modify preferences between work and leisure. Indeed the marginal benefit of one hour of work will be reduced by the tax, increasing the attractiveness of leisure.

In my opinion, this amounts to a roundabout way of saying that once we have reached a level of wealth that allows all of us to live decently, we should let people concentrate on what makes them happy and rather than asking people to solely focus on contributing to economic growth. However, it is also possible that work can make people happy. But as other factors can make people happy as well, there is no reason for work to be overvalued.

I think that the suggestion made by Sir Layard is a good one, because it allows people to strike the right balance between work and leisure, without forcing them into anything, like imposing work time reduction would do.

But for it to have a real impact, I think that we need a conceptual revolution. Indeed, when a society is leading us to believe that we need a SUV, a swimming pool and an espresso machine, we all want to work more to earn more. If our work is taxed we will only rant because we will have to work even more to earn “enough”, while we will actually never feel that we have enough.

If we were not bombarded by advertisements all the time and convinced by our governments that things will get better if the GDP is growing, I am sure that even without extra taxes people would work less. But perhaps I am mistaken. 

Sources: 

• Carol Graham, “The Economics of Happiness”, The New Palgrave Dictionary of Economics (forthcoming)
• Luci Davoine, “L’économie du bonheur peut elle renouveler l’économie du bien être ? », CNRS, 2007
• Richard Layard, “ Happiness: Has Social Science a clue?”,  Lionel Robbins Memorial Lactures, February 2003.
• Richard Layard, “Income and Happiness: Rethinking Economic Policy”,  Lionel Robbins Memorial Lactures, February 2003.
• Richard Layard, “ What Would Make a Happier Society”,  Lionel Robbins Memorial Lactures, March 2003.

POSTSCRIPTS:

THE HAPPY PLANET INDEX

In 2006, the New Economics Foundation, in England, launched a Happy Planet Index, in order to measure the environmental efficiency with which countries provide long and happy lives.

Using the happiness research described in Camille Palumbo’s essay, they added two indicators: life expectancy and the ecological footprint,a measure of the impact of our consuming habits on the environment.

As an example, in their rankings, the United States and Germany had a nearly identical level of life satisfaction and life expectancy. Yet the average German’s consuming habits, including use of energy, is only about half that of the United States resident. Yet, Germany’s ecological footprint is only half that of the USA. This  means that Germany is around twice as efficient as the USA in generating happiness. This and other statistical match-ups on the Happy Planet Index  demonstrate that happiness doesn’t have to cost the earth. The current “crude focus” on GDP is outdated, destructive, and doesn’t deliver a better quality of life. Growth as we know it is not answer and alternatives such as “smart growth” need to be explored seriously, and even sustainable forms of degrowth may end up as a viable model.

ECOLOGICAL FOOTPRINT

Notes from Lutz Weischer

What is the ecological footprint?

The earth has about 11 billion hectares (ha) in productive surface. Each human being would rightfully be entitled to 1.8 global hectares.

(I ha = 10,000 sq meters = 2.47 acres = 107,639 square feet)

Calculations for individuals by nation

The average American uses 9.6 ha (more than 5 earths if everyone in the world consumed the same)

Average Frenchman: 5.6 ha (more than three earths)

Average Chinese: 1.6 ha (a bit less than one earth, though this figure is changing upward)

Average Bangladeshi: 0.5 ha (less than 1/3 of an earth)

Product calculations: an example

If you live in Berlin and drink 0.2 liter of milk per day and the milk comes from:

Brandenburg (66 km away): you’d use 2.2 sq meters per year

Bavaria (660 km away: you’d use 21.8 sq meters per year

[For this reason, one of the goals of smart growth is to re-localize the economy so as to spend less in fuel for transport of goods]

What does calculating the Ecological Footprint teach us?

We need to act urgently

There is such a thing as ecological justice. And we are the problem. Not the Bangladeshis and not the Chinese.

PART FIVE

IS VOLUNTARY SIMPLICITY ENOUGH TO REVERSE THE GLOBAL WARMING TREND OR DOES SMART GROWTH HAVE TO BECOME POLITICAL?

Throughout the world, people with a noble mission carefully recycle, use public transportation or bicycles, live in eco-friendly structures, and consume less in order to enjoy life more. Is this enough to recreate a more humane and durable quality of life for everyone? Or, should we learn from Henry David Thoreau and Martin Luther King and become actively engaged in a more political way?