Economics of Happiness

Carol Graham of Brookings works on economics of happiness. I was reading her very interesting article on the same topic.

Last year was not a happy one. Economic crisis. Job losses. Wars. Yet, while we can quantify things such as gross domestic product or home foreclosures, it’s harder to measure their impact on our collective happiness.

One way to gauge that effect is through what has become known as the economics of happiness — a set of new techniques and data to measure well-being and contentment. Hundreds of thousands of people are surveyed and asked how happy or satisfied they are with their lives, with possible answers on a scale between very unhappy and very happy.

How much happiness does money really buy? How do you weigh the relative loss in happiness resulting from a pink slip, a divorce or a diagnosis of illness? Such questions have gone from the fringes to the center of the dismal science, with economics journals now boasting thousands of articles from “Does Happiness Pay?” to “Do Cigarette Taxes Make Smokers Happier?”

And the ideas are filtering through to politicians and the public. Most recently, the Sarkozy Commission — led by Nobel Prize-winning economists and sponsored by the president of France — issued a worldwide call for the development of broader measures of national well-being. The idea is to develop metrics that can be compared across countries and over time, like GDP, but that emphasize more than income.

It seems laudable to want people to be happier — in America, we’re all about the pursuit of happiness — but should happiness supplant economic growth as an objective of government policy? The kingdom of Bhutan already uses “gross national happiness” as its preferred measure of progress. The British government has an office in Whitehall studying how to track well-being, using happiness as a base. And in the United States, the Centers for Disease Control and Prevention is incorporating novel measures of well-being into national health statistics.

So what makes people happy?

For the past 10 years, I have been studying happiness around the world, in countries as different as Afghanistan, Chile and the United States. It has been an amazing foray into the complexity of the human psyche and the simplicity of what makes us happy. What is most remarkable is how similar the forces driving happiness are in various countries, regardless of a nation’s level of development.

Wherever I look, some simple patterns hold: A stable marriage, good health and enough (but not too much) income are good for happiness. Unemployment, divorce and economic instability are terrible for it. On average, happier people are also healthier, with the causal arrows probably pointing in both directions. Finally, age and happiness have a consistent U-shaped relationship, with the turning point in the mid- to late-40s, when happiness begins to increase, as long as health and domestic partnerships stay sound.

Though this recession has thrown many alphabet soups (U, V, W, anchor shaped, question mark, tick mark etc) over possible recovery, U shape is most commonly seen in economic trends. All three forms of globalization – trade, Finance and labor show U-shaped curves over the century. Same is the case with Kuznets Curve and now environment Kuznets curve as well.

Policy options

All of this seems rather logical, suggesting that if a government wants to get into the business of promoting happiness, it can pursue some straightforward policy goals, such as emphasizing health, jobs and economic stability as much as economic growth.

But here’s the complicated part. While there are stable patterns in what leads to happiness, there is also a remarkable human capacity to adapt to both prosperity and adversity. Thus people in Afghanistan — a war-stricken country with poverty like that of sub-Saharan Africa — are as happy as people in Latin America, where typical social and economic indicators are a good deal stronger. Kenyans, meanwhile, are as satisfied with their health care as Americans are with theirs. Being a victim of crime makes people unhappy, but the impact is smaller if crime is a common occurrence in their society; the same goes for corruption and obesity. Freedom and democracy make people happy, but the effect is greater when they’re used to such liberties than when they’re not.

The bottom line is that people can adapt to tremendous adversity and retain their cheerfulness, while they can also have virtually everything — including good health — and be miserable.

I think about this when I reflect on my own experience. I grew up in Lima, Peru, but work in Washington. When the tires were stolen off my car in Northwest D.C., I was absolutely flummoxed, as were the police — who were there within an hour. Had it happened in Lima, I would have blamed myself for leaving the car out on the street overnight and surely would not have bothered calling the police, as they probably would not have come.

Interesting. All this is so true. While living in metropolitan cities you fret over delay in trains, power cuts etc but as you move to other towns, this becomes a way of life and you start adapting.

What people don’t like is uncertainty.

One thing that people have a hard time adapting to, however, is uncertainty. People seem to be much better at dealing with unpleasant certainty than with the uncertainty of how bad a particular health condition or economic downturn will get. My most recent survey research — with colleagues Soumya Chattopadhyay and Mario Picon — shows, for example, that average happiness in the United States declined significantly as the Dow dropped with the onset of the financial crisis in 2008. According to our calculations, happiness fell 11 percent compared with its pre-crisis levels, reaching its lowest point in mid-November 2008.

But when the market stopped falling and some stability was restored in March, average happiness recovered much faster than the Dow; by June, it exceeded its pre-crisis level — even though living standards and reported satisfaction with those standards remained markedly lower than they were before the crisis. Once the uncertainty ended, people seemed to be able to return to previous happiness levels, while making do with less income or wealth. 

Read the whole thing. Different and insightful.

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2 Responses to “Economics of Happiness”

  1. Economics of Happiness « Mostly Economics | Drakz News Station Says:

    […] more here: Economics of Happiness « Mostly Economics Share and […]

  2. ferzam Says:

    perhaps this one area that the government or policy makers should seriously look into but not as the be-all or end-all…

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