The Economics of Happiness

The Economics of Happiness

A growing number of economists are bravely asking: What factors make people happy?

By Tom Green / Source: Adbusters


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 socio-economic 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 neighbours' 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."



The Key to Happiness is Appreciation

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?



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