The economics of happiness: a progress report

Little by little, psychology's insights into happiness and well-being are being integrated into economic theory and debate. Happiness has become one of the hot topics in economics over the last decade, with both the size and depth of the literature increasing at a rapid rate.

Though US-based psychologists Daniel Kahneman and Ed Diener and economists Richard Easterlin and Alan Krueger can take much credit, so too can the British 'brat pack' consisting of Warwick's Andrew Oswald, Paris-based Andrew Clark, Dartmouth's Danny Blanchflower and (as an honourary elder statesman), the LSE's Richard Layard. The two Andrews were writing about this stuff years ago, when 'respectable' academic economists thought the topic barking.

What is particularly encouraging is that economists are starting seriously to tackle the major empirical and the theoretical challenges that this literature has uncovered. A new paper by Andrew Clark, Paul Fritjers and Michael A Shields, prepared for the Journal of Economic Literature, ups the ante. Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles (PDF) takes as its starting point Easterlin's seminal 1974 paper which posed a paradox - that happiness does not appear to increase with income, once basic needs are fulfilled. The paper covers a lot of ground, including adaptation, social comparisons, relative income, utility and much more besides. There is a short but insightful description of the key challenges for empirical work. And to wrap it up, the authors explore some implications for economic theory and policy design. As a sampler, here are the authors concluding remarks:

The interaction between economic theory and happiness is therefore the next milestone for the developing economics of happiness literature. However, it is clear that the empirical literature on happiness still faces several challenges, many of which are shared with other empirical literatures. Two of the key challenges are to deal with a general inability of survey data to precisely time changes in income with changes in happiness over long time periods, and the difficulty in mapping incomes into current and expected consumption. It is also the case that most datasets do not contain reliable (if any) ex ante information regarding the group (the reference point) to which individuals compare themselves. Similarly, no dataset can contain all the variables of importance, so that researchers will continue to face the issue of endogeneity with respect to income and other variables such as marriage, education, and the reference group. Finally, natural experiments producing exogenous variation in income are only rarely observed, making the issue of establishing the causal effect of income on happiness a major challenge.

Our final conclusion is that taking relative income seriously is an important step towards greater behavioural realism in Economics, such that our models and empirical analysis move closer to how real people feel and behave. Some may not like the insertion of additional arguments into individual utility, and remark that any behaviour can be rationalised by an appropriate manipulation of the utility function. While this is formally true, it does not apply wholesale to the issue of relative income. As we have tried to demonstrate, utility functions including relative income terms produce a wide variety of testable predictions regarding both well-being (measured by survey or neurologically) and observable behaviours: it is not true that “anything goes”. To our mind, this is precisely why we need to appeal to both direct measures of utility and observed behaviour in order to obtain a better idea of what the utility function looks like, and make policy recommendations in the best interest of society. Testing these predictions not only allies theory and empirical analysis in economics, it also spills across many disciplines in the social and natural sciences; it is arguably the most important and the most promising of the research avenues open to this thriving literature.

This is no light summer reading, but for those seeking to advance the debate, it's a big step forward.

Comments

[GVV]

Happiness research is the latest fancy of rich country economists.Absolutely no relevance in UDCs.

[Peter]

GVV - are you kidding? A method by which social welfare can be increased without extra resources isn't relevant in UDCs?

[Lafayette]

NE: "Little by little, psychology's insights into happiness and well-being are being integrated into economic theory and debate. Happiness has become one of the hot topics in economics over the last decade, with both the size and depth of the literature increasing at a rapid rate."

Kudos for all the luminary psychologists involved in bringing their "art" (because it is surely not a science) to economics (which is a "science" and surely not an art).

But, I suggest, nonetheless, that they are getting off on the wrong foot. First of all, economics does not and cannot deal with "happiness". Well-being, yes, but happiness ... that's a no-no.

Happiness is an ephemeral emotion, a mood. I can be happy today and not tomorrow and it has nothing to do with my economic situation. A cross neighbor spitting invective at me can change my mood in a nanosecond. The state of my mind is in the domain of psychology.

Well-being is the domain of economics because we can define it in ways economics could handle the notion. Many attempts have been made at accumulating a set of metrics that supposedly measure "well-being". I remember that the Economist used to dabble in it. The problem is, however, in the definition of that set.

Meaning this: What defines economic well-being for me, may not define it for you. So, let's get on with that arduous task before letting the leash on those who will be hell-bent on generating the statistical base.

Defining "economic well-being" is first a matter of understanding the notion of well-being. Only by understanding the notion of well-being will we be able to measure it. Here's one shot at it:
* Success (outward display of achievement): employment, average net salary, cost of either professional training or a university-level education, rate of divorce and rate of separation from spouse, number of single-head households.
* Net worth (outward display of riches): individual assets minus debt
* Comfort (visible standard of living): rent vs. purchase, individual average worth of house, average value of car, expenditure on entertainment
* Freedom of choice : diversity of consumer choice, propensity to take foreign vacation, ability to start own business and obtain risk capital,

More importantly, however, the above classes must be weighted for each population, meaning that each “class” must be investigated in a given population to ascertain its preponderance in the notion of “well-being”. This results in a weighting factor which is applied to the actual metrics of the attributes listed.

Of course, one may find the above list either wrong or incomplete. Which is why I posted it ...

[Mapuii]

Economics of happiness - a real eye opener!

Well! Its true that happiness is a state of the mind and it differs from individual to individual.But this is where the concept of uniqueness of each one of us comes into existence.

What most of us doesnot understand is that when economists talks of "Happiness" it means an overall evaluation of life as-a-whole not just emotions or mental state.

Happiness Economics - an interesting subject not just from an academic point of view but for common man's existence as well.

Cheers to all to believe in both quality and quantity living

[Gross National Happiness (GNH)]

International Institute of Management published a policy white paper titled “The American Pursuit of Unhappiness: Gross National Happiness (GNH)”. Med Yones, president of the institute, provides an answer to the question "Why choose happiness as a subject for economic research?", according to him, "The answer is simple: mental and emotional well-being of citizens improves their performance and broadens the intellectual, physical and social resources of a nation. Research has found that happy people have better health habits, lower blood pressure, stronger immune systems and higher endurance levels. They cause less stress on the national healthcare system. Citizens with better emotional and mental health are easier to relate to and work with, tend to be better decision makers, are more creative, and outperform peers in problem-solving, innovation, persistence and productivity."

According to the American Journal of Psychiatry the rates of depression across almost all demographic groups have risen in the United States over the past 10 years, with major depression rising from 3.33 percent of U.S. adults in 1991-1992 to 7.06 percent in 2001-2002: In other words, it has more than doubled. How much productivity is lost due to illness?

The institute suggests a solution built on the concept proposed in 1972 by Bhutan's King Jigme Wangchuck, who coined the term Gross National Happiness (GNH), to emphasize the holistic values of economic development policies.

To improve Gross National Happiness, the institute makes several recommendations addressing 6 main public policy areas: Government, Economics, Work, Media, Education and Environment. The full text of study can be found at:
http://www.iim-edu.org/grossnationalhappiness/

[Arthur Eckart]

"Citizens with better emotional and mental health are easier to relate to and work with, tend to be better decision makers, are more creative, and outperform peers in problem-solving, innovation, persistence and productivity."

Sounds like the U.S. economy. However, people tend to be most unhappy at mid-life and happiest early and late in life (because they realize, at mid-life, all their dreams won't be fulfilled).

Anyway, who needs the stress to start, manage, and expand a business when you can collect welfare for doing nothing?