Happiness Economics

What is Happiness Economics?

Happiness economics refers to the systematic study of the connection between personal satisfaction and economic factors such as wealth and employment. It closely relates economics to social sciences like psychology, physical health, etc., by accounting for subjective happiness-related measures.

In other words, it is the link between individual pleasure and economic difficulties primarily through econometric analysis. This econometric analysis uses mathematical, statistical, and economic data to conclude economic relationships. 

Economic security, employment quality, consumption quality, leisure time, relationships, the environment, freedom, and control are all assessed.

The field gained momentum in the late 20th century and has grown substantially since then, challenging neo-classical measures of economic well-being like GDP, employment, etc.

Although measuring happiness and quality of life can be challenging due to the subjective nature of these factors, many proponents of the emerging field argue that it allows economics to reflect real life better.

This contrasts with neoclassical economic theories, which are notorious for their unrealistic assumptions about consumer behavior.

In order to measure the above-mentioned subjective factors, economists rely on surveys that require individuals to rank their happiness upon consumption of a particular commodity/service. 

Another means of observing a person's happiness is by tracking their quality of life through indices focusing on life expectancy, access to healthcare, literacy rate, etc.

At first glance, there are some flaws in acquiring data through these methods. However, it is important to note that gathering data on happiness is crucial to aid authorities in implementing policies that are better suited to the needs of their people.

How is Happiness Economics Measured?

In happiness economics, econometric analysis determines the elements that raise or reduce an individual's quality of life and well-being. However, determining an individual's well-being is difficult since joy is subjectively measured.

As mentioned previously, it is a relatively recent field of study. However, mainstream economics has long depended on the idea of utility, or the pleasure that individuals derive from satisfying their goals and requirements. 

However, because an external observer cannot directly witness or assess the subjective, internal sense of happiness, joy, or disquiet, economists rely on monitoring people's activities to indicate what provides utility.

To measure this utility, economists use various observable proxies, mostly market prices in terms of money, to indicate how much utility people experience from various economic goods or activities. 

The basic idea is that measuring the amount of money people are willing to pay or accept for various goods and services in a market demonstrates the amount of utility they expect to receive from those things. 

This also means that economists often use indicators like a person's income or total consumption to indicate their total utility.

Happiness Economics And classical utility theory

Happiness economics seeks to address some of the flaws of the classic method by attempting to measure utility, or happiness, more directly. 

Traditional utility theory has a crucial flaw. It cannot account for the satisfaction individuals get from commodities, services, activities, or amenities that occur outside of markets since it is based on observed market pricing, quantities, and incomes.

This means that the influence on the human pleasure of anything that is not or cannot be exchanged on the market will be difficult, if not impossible, to quantify.

It also presumes that observable market prices and quantities represent the entire value of products and services sold on the market, which is not always the case. 

Those who research happiness economics think it is critical to investigate elements impacting the quality of life and traditional economic studies, such as income and wealth.

It aims to address these issues mostly by asking individuals to complete surveys in which they rate or score the satisfaction they get and indicate how much they are willing to pay or accept for goods that do not have direct market pricing. 

They also look at indexes that measure the quality of life in various nations, concentrating on access to health care, life expectancy, literacy levels, political freedom, GDP per capita, cost of living, social assistance, and pollution levels.

Factors Affecting Gross National Happiness

Contentment is difficult to quantify since it is a subjective concept. Measuring joy typically entails:

• Surveys in which respondents are asked to rate their levels of happiness.
• Satisfaction indices like GDH often synthesize personal surveys and established metrics.

For example, The poll asks participants to rate their degree of pleasure (on a scale of 1–10) based on criteria such as political freedom, health care, and education in their respective nations. 

After the replies are gathered, they are inspected and processed, yielding a score representing a certain population's overall joy.

Following are five key factors that economists look into when studying what influences an individual's happiness:

• Quality of Work: This relates to an individual's satisfaction upon working. Monotonous jobs requiring less creativity can bore the worker, creating a sense of repetition. 
• However, jobs that demand out-of-the-box thinking and innovation may create a sense of self-worth and contentment.
• Psychological Well-being - Undoubtedly, an individual with good mental health will be happier and, consequently, more productive. This increased productivity again creates satisfaction and generates further happiness.
• Family Welfare - Normally, parents derive happiness from seeing their children succeed. Successful children, in turn, can better support their parents when the latter retired. In this way, individuals don't seek to maximize their welfare but also that of their family members.
• Environment - Studies have shown that environmental factors such as low pollution, clean air, greenery, etc., positively impact an individual's happiness level.
• Other Non-Economic Factors - Social interactions, religious beliefs, spirituality, etc., all influence satisfaction and happiness.

Other Indices of Happiness Economics

In addition to GNH, several other happiness economics metrics have emerged over the past 30 years or so. 

Each country has its level of happiness. It is assessed through self-reports. However, it is important to remember that it is a subjective state. Therefore, it is crucial to assess it individually based on a large sample.

As per the 2021 World Happiness Report, the happiest nations across the globe are:

1. Finland
2. Iceland
3. Denmark
4. Switzerland
5. Netherlands
6. Sweden
7. Germany
8. Norway
9. New Zealand
10. Austria

Europe, where most of the top-ranking nations are located, is specially engaged in this field. 

The region ranks its 35 members according to aspects like housing, income, employment, education, the environment, civic involvement, and health. This encourages countries to work towards improving the well-being of their citizens.

On the other hand, some of the least happy countries in the world include:

1. Afghanistan
2. Zimbabwe
3. Rwanda
4. Botswana
5. Lesotho
6. Haiti
7. Tanzania
8. Yemen
9. Burundi

Relationship between income and happiness

According to neoclassical economic theory, increasing income is associated with higher levels of utility and economic well-being.

Rising income is often seen at low-income levels as a means to promote happiness. This is because increasing income allows a person to purchase products and services considered vital to life's necessities, such as food, shelter, health care, and education. 

As a result, classic economic ideas concerning the relationship between income and utility are rather robust at low-income levels.

However, at a particular income level, the marginal utility of wealth and income can rapidly drop, with more money doing nothing to boost total utility and happiness.

It is subject to diminishing returns where the satisfaction increases up to a certain amount and then drops.

According to research conducted by renowned psychologist and economist Daniel Kahneman and Angus Deaton, emotional well-being increased with wages only up to a $75,000 yearly salary barrier.

The Easterlin Paradox

In 1974, economist and professor at the University of Pennsylvania Richard Easterlin observed a pattern in the relationship between income and happiness among several developed nations. 

He noted that after a certain threshold, levels of happiness do not increase with an increase in income. This strange but groundbreaking discovery was termed 'The Easterlin Paradox.'

This is why it may not be true that rich countries are always happier than poor ones. Higher levels of a country's GDP per capita did not correlate with higher levels of enjoyment expressed by residents in industrialized countries.

He observed that increased GDP per capita in the United States was not associated with an increase in pleasure levels.

Easterlin's observation has been challenged by other researchers who argue that there is a strong link between happiness levels and real GDP. 

According to economists Betsey Stevenson and Justin Wolfers (2008), the Easterlin Paradox is rooted in Easterlin's failure to identify statistically significant correlations between long-term economic growth and average levels of happiness.

One issue is that wealthy nations have greater levels of social cohesiveness, social trust, and a stable political system, which may lead to contentment rather than GDP.

It might be difficult to determine if happiness is caused by high GDP or by other characteristics of high-income countries.

Regardless of whether or not the paradox holds, it is worth mentioning when discussing happiness economics as it allows us to grasp better the potential challenges of this new and upcoming branch of social science.

Importance of Happiness

Concerns over the limitations of GDP as a measure of socioeconomic performance drew attention to this field.

There has been growing interest in determining a society's overall well-being through both objective (wealth) and subjective (happiness) measures.

Indeed, some governments have also recognized that happiness amongst their population can contribute to economic growth.

One example is the Kingdom of Bhutan, where happiness is included in the nation's constitution. The country uses the Gross National Happiness (GNH) index to determine its success in achieving economic development.

The four pillars of GNH have frequently been used to explain the concept:

• Good Governance
• Sustainable socio-economic development
• Cultural Preservation
• Environmental Conservation

These four pillars can be further divided into nine domains that better reflect the values of the GNH index:

• Psychological Well-being
• Health
• Education
• Time Use
• Cultural Diversity and Resilience
• Good Governance
• Community Vitality
• Ecological Diversity and Resilience
• Living Standards

However, such indices imply that ensuring people's happiness is a direct responsibility of the government. Since each individual has a different definition of what it means to be happy, guaranteeing this may be beyond the government's power.

An alternative to mainstream happiness economics is determining the economic consequences of happiness. For example, happiness increases labor market productivity. In fact, a number of studies attest to the idea that a happy worker is a productive worker.

Policies for Happiness

The limited relationship between income and happiness highlights the importance of accounting for non-monetary factors when devising policies.

Economic development can still be good, for example, by reducing unemployment and creating possibilities, but it should not be society's main goal.

Governments should steer consumers away from demerit goods like alcohol and drugs toward merit goods like training and cultural appreciation. These improve self-worth, creating a sense of satisfaction and improving happiness.

Dissatisfaction can be caused by inequity and a perception of unfairness. A more fair society has the potential to increase happiness.

An equitable society leaves its members more content than one where the gap between the rich and poor is wide. Hence, redistributing resources from wealthier areas to poorer ones can allow a country to improve happiness. 

Families with low incomes could experience a significant improvement in their level of satisfaction as their income rises. But, on the contrary, taking away from high-income families does not detract from their overall level of happiness.

Finally, in the work environment, companies may need to concentrate more attention on workplace aspects that boost employment value instead of more basic performance-related payments and cash bonuses.

Government and Happiness Economics

A government is the system or collection of individuals in charge of an organized society, most commonly a state.

In the broadest sense, the government is made up of the legislative, the executive, and the judiciary. A government is both a tool for enforcing organizational policies and a system for defining policy.

Many governments have a form of constitution, a declaration of their governing ideas and ideology. 

It has many roles and responsibilities in regulating the country. As a result, we will debate whether it includes the responsibility of ensuring the happiness of its people.

Arguably, a country's government must promote its population's enjoyment. Therefore, the government has a critical role in improving people's mental and economic well-being by enacting effective policies and fostering a liberal political atmosphere. 

However, overall public pleasure has dropped substantially in nations where the government maintains a substantial degree of social intervention (through ideological, religious, or other methods).

When we look at the consequences, we see that long-term enjoyment leads to:

• Better health and longevity: People who are happy live longer and have better health.
• Outstanding job performance, particularly in organizational citizenship.
• More supportive social interactions, such as being less prone to divorce.
• Better citizenship and "prosocial" activities, such as being more inclined to assist others, volunteer, or contribute money to charity.
• Better mental health and resilience when presented with stressful circumstances, such as being less prone to suffer from mental health disorders like depression and more likely to bounce back if something awful happens.

Happiness Economics Drawbacks

There are several significant issues with happiness economics in terms of theory, methodology, and implementation:

1. For starters, survey-based research methods cannot be heavily relied upon as consumers' answers are subject to biases. Further, there is no consequence for the responder if they deliver false information, bringing into question the credibility of this approach.

2. Another major drawback is that the results generated by observing subjective measures often mirror those obtained from more objective measures like GDP. Wealthier countries generally have higher happiness levels than poorer countries that lack good quality institutions.

3. A new challenge would arise if governments could define and determine happiness. For example, should they focus on maximizing happiness or equalizing it among citizens? 

A suboptimal decision could lead to undesirable outcomes such as merely improving a facade of happiness instead of enhancing the quality of life.

The issues mentioned above are only a few of many that riddle this branch of economics. Hence, policymakers must proceed with caution when deliberating on this topic.

Conclusion

Growth is necessary but not sufficient for a country's economic development. Therefore, factors such as mental and physical health, environment, education, etc., all of which contribute to happiness, are vital for sustaining growth.

As stated in a research paper by Carol Graham, the study of happiness economics also reveals various open-ended questions. These include the consequences of happiness on national metrics and economic growth trends, as well as labor effort, consumption, and investment.

In order to answer these questions, countries must gather more high-quality data on the well-being of their citizens. Such data should allow researchers to gather information about an individual's intangible personality traits and observe the direction of causality.

Undoubtedly these are challenging issues to tackle. However, once overcome, economists can better answer these questions and maybe even raise the standard of global socio-economic welfare in the future.

Researched and authored by Jessica Yarak 

Researched and authored by Rhea Bhatnagar | LinkedIn

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