Prelude to Happiness Economics

Happiness Economics is a field of econometric (using statistical methods for economic issues) literature and study that attempts to determine what influences individual happiness. Most notably, and under much contention, is whether or not increases in income actually make individuals happier. There’s a multitude of evidence from both camps—those who agree a higher paycheck makes you smile, while others dispute that ‘happiness’ as being only a temporary sense of satisfaction that quickly subsides.

It all started with a seminal paper by Richard Easterlin in 1974 that presented econometric evidence that rising incomes did not result in higher levels of happiness. Easterlin found that within a country, people with relatively higher incomes were more likely to report being happy. When you step outside that country, however, and start to compare internationally, the average reported level of happiness does not vary much, at least for countries who surpass a certain “satiation point,” or income level that meets their basic needs (at that time around $15,000). This meant that even though countries like the United States and Japan had rising levels of national income (GDP), the average level of happiness of those countries did not seem to be rising accordingly. Sometimes, average reported happiness even declined when income was still rising. This apparent difference when comparing happiness between countries versus within one country spurred a surge of research to try and understand this “Easterlin Paradox.”

“So you think that money is the root of all evil. Have you ever asked what is the root of all money?”
-Ayn Rand

On the one hand, there emerged a bulk of literature that countered Easterlin, announcing that in many cases income was very related to a nation’s happiness. But just as Easterlin’s argument seemed to suffer too much evidence against it, a surge of research would push back showing that increasing cash flow didn’t necessarily ensure increased happiness.

Stepping back, this sounds obvious. How many times have we heard, money can’t buy you happiness, or some similar intoned quip? Once basic needs are met, like food, shelter and security, increased income simply can’t substitute for other basic human needs like social interaction, community, leisure time and companionship.

Fortunately, there’s literature out there that strongly backs this up. Take a 2010 study by DeLeire and Kalil who found that the happiness a person gains by being married is equal to a $20,000 increase in income each year. Companionship pays! They also found the only positive correlation between wealth and happiness was consumption of leisure goods, which generally are spent in social settings–showing the importance of social interaction and friendship. Another explanation is that spending on leisure goods may be an antidote to loneliness that makes one “feel like one of the Jones’s” even if one isn’t. In my mind, the current obsession with celebrity culture and extravagant lifestyles could support this observation.

More and more literature and studies are coming out that offer evidence proving that social bonds, community involvement, freedom of choice and wealth of natural capital are essential to increasing happiness, especially in developed nations where we seemingly “have it all” but aren’t getting any happier.

But if valuing other things than money is so important, how do we do that? It’s difficult, but there have been inroads. For example, the Genuine Progress Indicator (GPI) was created as a substitute to GDP that could better reflect the health of a nation’s economy by including environmental and social factors. While GDP doesn’t necessarily reflect when poverty rates increase, when work is done in the household, or when wetlands, forests and farms are depleted, the GPI tries to. Key word, however, is “try.” There’s a lot of troubleshooting and analysis yet to be done before a valid substitute could take the place of traditional Gross National Product.

GDP still stands as a decent representation of how well a country’s economy is performing, although it clearly leaves out significant elements—like inequality, externalization of environmental destruction, cultural and artistic activities, and (my favorite) leisure time with friends. All of which are, arguably, essential to our happiness. Hopefully my thesis work will help shed some light on how to improve our current international value system into something more holistic, applicable, and reflective of how much things are truly worth.