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The Economics of Happiness
Transcript of The Economics of Happiness
James Ransome Defining Happiness Happiness can be broken down into 5 different types of life satisfaction, which unit measurements of happiness try to combine: 1) Preference satisfaction – utility theory, ignores subjective data
2) Objective lists or basic needs -fulfilment of a fixed set of material, psychological and social needs, Maslow’s hierachy
3) Flourishing (or eudaimonic) - does your life have meaning/purpose?
4) Hedonic (or affective)-how happy are you right now?
5) Evaluative (or cognitive) - how satisfied are you with life as a whole? Utility theory Utility is taken as a synonym for desire or want.
Desires cannot be measured directly, but only indirectly via willingness to pay.
Utility is an increasing function of income u = U(y)
Utility is an ordinal measure not a cardinal measure SWB This approach relies on using more subjective data such as surveys and evaluations of mood.
Merges the evaluative account of happiness with the hedonic account (posed by Dolan).
SWB data consists of the aggregated self-reports of individuals. Data sets that measure wellbeing include those from the: Main criticisms: 1. Subjective wellbeing is immeasurable and incomparable.
2. Even if it is possible to use SWB data, various measurement issues will bias the results.
3. Should it classify as economics? Empirical data to support the hypothesis:
Income is the primary determinant of happiness GDP per Capital and Well-being Contrasts Easterlin Paradox
Clear positive correlation between GDP per capita and life satisfaction (happiness measurements taken into account)
Life satisfaction is a component of measuring subjective well being
However, is happiness actually linked with economic growth?(See graph.1, slide 14) Relationship between well-being and income Logarithmic Scale
Clear positive correlation between annual household income and wellbeing
The Gallup World Poll measures subjective well-being with the question: “Please imagine a ladder with steps numbered from zero at the bottom to ten at the top. Suppose we say that the top of the ladder represents the best possible life for you, and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally feel you stand at this time?” Source: The National Bureau of Economic Research Life satisfaction and economic growth Throughout Europe, there is consistent positive correlation between changes in life satisfaction and an increase in a nations’s GDP per capita.
Belgium is the anomaly. Why? Happiness and the GB Economy Clear links between GDP per head (£) and life satisfaction
The recession in 2008 was the catalyst for sharp decrease in life satisfaction, 492000 UK company closures in 2009, 350000 in 2008 (Duedil) Money = Easterlin Paradox Easterlin Paradox Easterlin first published his “paradox” in 1974
Key concept: Strong correlation between the income within a country at a set time and well being. He also argued that the average level of happiness is steady, even when significant growth in income has been attained. Easterlin examined American citizens born in the 1940s.
1972-2000 – Average age increased from 26-54
The average income per person (adjusted for inflation, price changes) increased by 116%
Happiness in the year 2000 was at the same level as 1972. 2 Subgroups- College Educated- Some High School Educated
College Educated pupils on average happier
Over life course- income levels rise to a greater level for those with college education
Happiness does not move accordingly Orthodox, neo-classical economics relies on the preference satisfaction account of wellbeing. World Values Survey
European Social Survey,
German Socio-Economic Panel
British Household Panel Survey. Regression equation: SWB = α + β1.income +
β4∙education Measurements of Happiness Satisfaction with life index aims to show the average reported happiness in each nation (Gallup World Poll)
http://www.economist.com/blogs/dailychart/2010/11/daily_chart_1 (Wolfers, 2010) Source:(World Database of Happiness) (Layard, 2005) Easterlin’s Paradox Continued Easterlin’s Paradox Continued Social security
Freedom, the Control and Democracy Social Security Johan Norberg of CIS(The Centre for Independent Studies), a free enterprise economy think tank, presents a hypothesis that as people who think that they themselves control their lives are more happy, paternalist institutions may decrease happiness. Education One does not have to look far to find plenty of evidence of the influence of education on many important aspects of people’s lives.
There are some brief samples of impact statements drawn from Hayward, Pannozzo and Colman(2005) and other as indicated
“Education is the primary source of this human capital” (p.1, from Crocker, 2002).
“From a health determinant perspective, education is clearly a good investment that can reduce long-term health care costs” (pp.37-38). Freedom, Control and Democracy There is a significant correlation between feeling in control of one's own life and happiness levels.
The construct ‘locus of control’ was developed by Julian Rotter (Carrim et al., 2006). Source: Rotter, J. B. (1966) “The greatest happiness principle deserves a more prominent place in policy making”
— Veenhoven, 2004
Richard Layard advised that happiness should be monitored as closely as GDP.
If income is the main determinant of happiness what actions could the government take?
Could lower income tax
Performance related pay schemes
Increase welfare spending/ focus on the very poor where income has a disproportionate effect
If other factors are important?
Subsidise family friendly work policies
Increase spending on mental illness
“People grow accustomed to what they have—however much of it there is. Capitalism seems to turn luxuries into necessities.” – The Economist 2006 Reference Rotter, J. B. 1966. Generalized expectancies for internal versus external control of reinforcement. Psychological Monographs: General and Applied, 80(1), 1-28. http://dx.doi.org/10.1037/h0092976
Crocker, R.K.: 2002, Learning Outcomes: A Critical Review of the State of the Field in Canada, Canadian Education Statistics Council, Ottawa.
Coulombe, S., J.-F. Tremblay and S. Marchand: 2004, Literacy Scores, Human Capital and Growth across Fourteen OECD Countries, Statistics Canada, Ottawa, Catalogue number 89-552-MIE200411.
Frank, Robert H. 1985 Does money buy happiness? The science of well-being. (Oxford University
Hayward, K., L. Pannozzo and R. Colman: 2005, Draft: Developing Indicators for the Educated Populace Domain of the Canadian Index of Wellbeing, Interim Report, GPI Atlantic, Halifax.
Rotter, J. B. 1966. Generalized expectancies for internal versus external control of reinforcement. Psychological Monographs: General and Applied, 80(1), 1-28. http://dx.doi.org/10.1037/h0092976
Sacks, D., Stevenson, B., Wolfers, J., 2012 Income, Economic Development and Growth, Institute of Economic Affairs
Easterlin, R., 1974 The Economics of Happiness
Layard, R., 2005 Happiness: Lessons from a New Science, Penguin Press USA