The Economics of Happiness
The Economics of Happiness
By Tom Green /

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 bookon 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?


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The Economics of Happiness