JAYVEE

Are you happy? Contented? Satisfied?

Do you feel well with your status in life right now?

These are some of the basic questions of people to assess whether they or the other people around their surroundings are contented and satisfied in the current status of their life. It is undeniable that happiness is one of the ultimate goals in life. Thinking straightforward, you don’t do things that will not make you happy. You don’t go to a school which you strongly feel that you will not be contented with. You don’t stop eating until such point where you think that it is already enough. There are lot of ways to make people happy, but in the end, what really matters is how happy have they been in totality with regards to their exogenous environment and exogenous factors - neighbors, colleagues, their security, and also the economic performance of the country and the political stability/government situation affect the happiness level of one person.

Happiness also is an indicator of well-being. Of course it’s even hard to imagine a person to be of well-being when he is not even happy with the current status of his life. Although happiness is a relative and case-to-case between people, we can establish the fact that once they reach the point where they are happy with their situation, then they have achieved some well-being, if not all.

So now here comes a new field of study in economics: a field that studies the happiness of people through economic indicators, political indicators and also social indicators.

But why study happiness in economics?

It’s because the ultimate goal of economics is happiness. Only within the past century has economics become the dismal science – only after abandoning the “pursuit of happiness” for the “pursuit of wealth.” Early nineteenth century economists, including notables such as Britain’s Adam Smith and Thomas Malthus, considered happiness to be the ultimate goal of all economic activity. Smith wrote of the

“wealth of nations” but his writings reflect a clear understanding that one’s pursuit of wealth should not take precedent over one’s social responsibilities. Malthus, who suggested population ultimately would outstrip our ability to produce food, also suggested that Smith assumed too strong a connection between increases in wealth and increases in happiness. Neither assumed that greater wealth was synonymous with greater happiness. In the later half of the century, the focus of economics shifted toward satisfying individual human “wants,” as well as needs, – with a clear understanding that human “wants” were affected by human relationships.

However, at the turn of the twentieth century, Vilfredo Pareto, an Italian, set about to free economics from the subjectivity of sociology and psychology, by focusing on the “revealed preferences” rather than “happiness.” To Pareto, all that mattered was whether a person consistently chose one thing over another. Obviously, rational persons would make choices consistent with their wants and needs. Economists should focus on consumer preferences and choices, he suggested, and let the sociologists and psychologists worry about whether such choices actually make people happier. Pareto’s theories eventually were adopted by other economists, primarily because it allowed economics to focus on observable and measurable human behavior, rather than some intangible concept of human happiness.

Happiness always has been a matter of discussion and debate among the world’s greatest philosophers. It was accepted as the motive of all purposeful human activity. The “hedonists” philosophers equated happiness to sensual pleasures – to individual, personal experiences. Another group of philosophers, including Aristotle, used the term eudaimonia for happiness. Eudaimonia is inherently social in nature – it is realized by the individual, but only within the context of family, friendships, community, and society. Aristotle’s happiness, social happiness, is a natural consequence of positive personal relationships. This “social happiness” was considered to be a “by-product” of actions taken for their own sake – not to achieve some sensory satisfaction, but because they are “intrinsically good.” In essence, Aristotle and his followers believed that happiness was not something to be pursued, but instead, was a natural consequence of “righteous living.”

To the extent that contemporary economics includes any remaining element of happiness, it most clearly is “hedonistic” in nature rather than eudaimonic. Eudaimonia depends on “personal relationships,” not on some “impersonal altruism.” Thus, the current pursuit of economic wealth is a pursuit of individual, hedonistic or selfish sensory pleasure. And, pursuit of individual wealth, within this context, inevitably leads to the exploitation of other people and the degradation of human relationships. Thus, the pursuit of “individual wealth” quite logically has diminished our “social happiness.”

What is the economics of happiness and how do we make the proper approaches to it?

The economics of happiness is an approach to assessing welfare which combines the techniques typically used by economists with those more commonly used by psychologists. While psychologists have long used surveys of reported well-being to study happiness, economists only recently ventured into this arena. Early economists and philosophers, ranging from Aristotle to Bentham, Mill, and Smith, incorporated the pursuit of happiness in their work. Yet, as economics grew more rigorous and quantitative, more parsimonious definitions of welfare took hold. Utility was taken to depend only on income as mediated by individual choices or preferences within a rational individual’s monetary budget constraint.

The economics of happiness does not purport to replace income-based measures of welfare but instead to complement them with broader measures of well-being. These measures are based on the results of large-scale surveys, across countries and over time, of hundreds of thousands of individuals who are asked to assess their own welfare. The surveys provide information about the importance of a range of factors which affect well-being, including income but also others such as health, marital and employment status, and civic trust. The approach, which relies on expressed preferences rather than on revealed choices, is particularly well suited to answering questions in areas where a revealed preferences approach provides limited information. Indeed, it often uncovers discrepancies between expressed and revealed preferences. Revealed preferences cannot fully gauge the welfare effects of particular policies or institutional arrangements which individuals are powerless to change. Examples of these include the welfare effects of inequality, environmental degradation, and macroeconomic policies such as inflation and unemployment.

Related applications of the economics of happiness

Happiness research has been applied to a range of issues. Since a comprehensive review cannot be undertaken here, a selection of some of the issues the surveys can inform is provided. These include the relationship between income and happiness, inequality and poverty, the effects of macro-policies on individual welfare, and the effects of public policies aimed at controlling addictive substances. Some studies have attempted to separate the effects of income from those of other endogenous factors, such as satisfaction in the workplace.

Studies of unexpected lottery gains find that these isolated gains have positive effects on happiness, although it is not clear that they are of a lasting nature (Gardner and Oswald, 2001). Other studies have explored the reverse direction of causality, and find that people with higher happiness levels tend to perform better in the labour market and to earn more income in the future (Diener et al., 2003; Graham, Eggers and Sukhtankar, 2004). A related question, and one which is still debated in economics, is how income inequality affects individual welfare. Interestingly, the results differ between developed and developing economies.

Most studies of the United States and Europe find that inequality has modest or insignificant effects on happiness. The mixed results may reflect the fact that inequality can be a signal of future opportunity and mobility as much as it can be a sign of injustice (Alesina, Di Tella and MacCulloch, 2004). In contrast, recent research on Latin America finds that inequality is negative for the well-being of the poor and positive for the rich. In a region where inequality is much higher and where public institutions and labour markets are notoriously inefficient, inequality signals persistent disadvantage or advantage rather than opportunity and mobility (Graham and Felton, 2005).

Happiness surveys also facilitate the measurement of the effects of broader, non-income components of inequality, such as race, gender, and status, all of which seem to be highly significant (Graham and Felton, 2005). These results find support in work in the health arena, which finds that relative social standing has significant effects on health outcomes (Marmot, 2004). Happiness research can deepen our understanding of poverty. The set point theory suggests that a destitute peasant can be very happy. While this contradicts a standard finding in the literature – namely, that poor people are less happy than wealthier people within countries – it is suggestive of the role that low expectations play in explaining persistent poverty in some cases. The procedural utilities and capabilities approaches, meanwhile, emphasize the constraints on the choices of the poor.

What is perceived to be poverty in one context may not be in another. People who are high up the income ladder can identify themselves as poor, while many of those who are below the objective poverty line do not, because of different expectations (Rojas, 2004). In addition, the well-being of those who have escaped poverty is often undermined by insecurity and the risk of falling back into poverty. Income data does not reveal the vulnerability of these individuals, yet happiness data shows that it has strong negative effects on their welfare. Indeed, their reported well-being is often lower than that of the poor (Graham and Pettinato, 2002). Happiness surveys can be used to examine the effects of different macro-policy arrangements on well-being.

Most studies find that inflation and unemployment have negative effects on happiness. The effects of unemployment are stronger than those of inflation, and hold above and beyond those of forgone income (Di Tella, MacCulloch and Oswald, 2001). The standard ‘misery index’, which assigns equal weight to inflation and unemployment, may be underestimating the effects of the latter on well-being (Frey and Stutzer, 2002b). Political arrangements also matter. Much of the literature finds that both trust and freedom have positive effects on happiness (Helliwell, 2003; Layard, 2005). Research based on variance in voting rights across cantons in Switzerland finds that there are positive effects from participating in direct democracy (Frey and Stutzer, 2002b).

Research in Latin America finds a strong positive correlation between happiness and preference for democracy (Graham and Sukhtankar, 2004). Happiness surveys can also be utilized to gauge the welfare effects of various public policies. How does a tax on addictive substances, such as tobacco and alcohol, for example, affect well-being? A recent study on cigarette taxes suggests that the negative financial effects may be outweighed by positive self-control effects (Gruber and Mullainathan, 2002).

What can the economics of happiness do to our policy implications and to better them?

Richard Layard (2005) makes a bold statement about the potential of happiness research to improve people’s lives directly via changes in public policy. He highlights the extent to which people’s happiness is affected by status – resulting in a rat race approach to work and to income gains, which in the end reduces well-being. He also notes the strong positive role of security in the workplace and in the home, and of the quality of social relationships and trust. He identifies direct implications for fiscal and labour market policy – in the form of taxation on excessive income gains and via re-evaluating the merits of performance-based pay.

While many economists would not agree with Layard’s specific recommendations, there is nascent consensus that happiness surveys can serve as an important complementary tool for public policy. Scholars such as Diener and Seligman (2004) and Kahneman et al. (2004) advocate the creation of national well-being accounts to complement national income accounts. The nation of Bhutan, meanwhile, has introduced the concept of ‘gross national happiness’ to replace gross national product as a measure of national progress.

Despite the potential contributions that happiness research can make to policy, a sound note of caution is necessary in directly applying the findings, both because of the potential biases in survey data and because of the difficulties associated with analysing this kind of data in the absence of controls for unobservable personality traits. In addition, happiness surveys at times yield anomalous results which provide novel insights into human psychology – such as adaptation and coping during economic crises – but do not translate into viable policy recommendations.

One example is the finding that unemployed respondents are happier (or less unhappy) in contexts with higher unemployment rates. The positive effect that reduced stigma has on the well-being of the unemployed seems to outweigh the negative effects of a lower probability of future employment (Clark and Oswald, 1994; Stutzer and Lalive, 2004; and Eggers, Gaddy and Graham, 2005). (Indeed, in Russia even employedrespondents prefer higher regional unemployment rates. Given the dramatic nature of the late 1990s crisis, respondents may adapt their expectations downwards and are less critical of their own situation when others around them are unemployed.) One interpretation of these results for policy – raising unemployment rates – would obviously be a mistake. At the same time, the research suggests a new focus on the effects of stigma on the welfare of the unemployed.

Happiness economics also opens a field of research questions which still need to be addressed. These include the implications of well-being findings for national indicators and economic growth patterns; the effects of happiness on behaviour such as work effort, consumption, and investment; and the effects on political behaviour. In the case of the latter, surveys of unhappiness or frustration may be useful for gauging the potential for social unrest in various contexts.

In order to answer many of these questions, researchers need more and better quality well-being data, particularly panel data, which allows for the correction of unobserved personality traits and correlated measurement errors, as well as for better determining the direction of causality (for example, from contextual variables like income or health to happiness versus the other way around). These are major challenges in most happiness studies. Hopefully, the combination of better data and increased sophistication in econometric techniques will allow economists to better address these questions in the future.