Economics of happiness

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Happiness is a stste of being and economics of that explain the interrelation with wealth

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Economics of HappinessAn Introduction to the Paradox of Development : 

Economics of HappinessAn Introduction to the Paradox of Development

The beginning : 

17/07/2008 Economics of Happiness_ S Nandi 2 The beginning Brickman and Campbell wrote a paper “ Hedonic Relativism and Planning the Good Society” in which they wrote…. “ bettering the objective conditions of life bears no lasting effect on personal wellbeing”___ In M. H. Appley (Ed.), Adaptation level theory: A symposium (pp. 287-302). New York: Academic Press. This is psychology but the message was not taken up in economics … Later Easterlin ( 1974) and Scitovsky( Joyless Economy,1976) brought the issue from psychology to economics___ “ paradox of happiness” came into economics discussion Paul A. David and M.W. Reder (eds), Nations and Households in Economic Growth, N.Y. Academic Press, 1974.

Overview : 

17/07/2008 Economics of Happiness_ S Nandi 3 Overview Definition of Happiness Evidence from Neuro-science Measuring Happiness Trends in Happiness Happiness and Income Easterlin Paradox__ Explanation and policy

Slide 4: 

17/07/2008 Economics of Happiness_ S Nandi 4 What is happiness? Some opinion Happiness comes fleetingly now and then,To those who have learned to do without it and to them only. Don Marquis Happiness depends, as Nature shows,Less on exterior things than most suppose. William Cowper Happiness doesn't depend on any external conditions, it is governed by our mental attitude. Dale Carnegie Happiness is a mystery like religion, and it should never be rationalized. G. K. Chesterton

So what is happiness?... : 

17/07/2008 Economics of Happiness_ S Nandi 5 So what is happiness?... Happiness = feeling good, enjoying life, and feeling it wonderful!!! Unhappiness = feeling bad and wishing things were different… Subjective evaluation of life. Is it important? Can it be measured?

Measuring Happiness : 

17/07/2008 Economics of Happiness_ S Nandi 6 Measuring Happiness Can we really measure happiness, and how? Who would know better than psychologists and neurologists?

Evidence from Neuro-Science : 

17/07/2008 Economics of Happiness_ S Nandi 7 Evidence from Neuro-Science How we feel happy or otherwise? Physiological explanation…. Positive feelings correspond to brain activity in the left-side of the pre-frontal cortex, above and in front of the ear Negative feelings correspond to brain activity in the same place in the right side of the brain

Figure reproduced from: Layard, R (2005) Happiness: Lessons from a New Science. Penguin Press: New York. : 

17/07/2008 Economics of Happiness_ S Nandi 8 Figure reproduced from: Layard, R (2005) Happiness: Lessons from a New Science. Penguin Press: New York.

Cartoon reproduced from: Layard, R (2005) Happiness: Lessons from a New Science. Penguin Press: New York. : 

17/07/2008 Economics of Happiness_ S Nandi 9 Cartoon reproduced from: Layard, R (2005) Happiness: Lessons from a New Science. Penguin Press: New York.

Happiness Surveys : 

17/07/2008 Economics of Happiness_ S Nandi 10 Happiness Surveys So we can show that there are correlations between feelings and brain measurement How do psychologists measure happiness? How accurate are reported feelings? Next two slides are based on household surveys in the USA……

Who are happy ? : 

17/07/2008 Economics of Happiness_ S Nandi 11 Who are happy ? Happiness is high among: Women People with lots of friends The young and the old Married people The highly educated The healthy Those with high income The self-employed

Not Happy : 

17/07/2008 Economics of Happiness_ S Nandi 12 Not Happy Happiness is low among: Men The unemployed Divorced and separated people Adults in their mid to late 40s Minorities and immigrants Those in poor health Commuters

Literature- Economics of Happiness : 

17/07/2008 Economics of Happiness_ S Nandi 13 Literature- Economics of Happiness New method combining tools and methods of economists with those typically used by psychologists Method captures broader elements of welfare than do income data alone Method is uniquely well suited for analyzing questions where revealed preferences do not provide answers, for example the welfare effects of institutional arrangements individuals are powerless to change (like inequality or macroeconomic volatility) and/or behaviors that are driven by norms or by addiction and self control problems (alcohol and drug abuse, smoking, obesity) continued next……

Continued…… : 

17/07/2008 Economics of Happiness_ S Nandi 14 Continued…… While economists traditionally have shied away from reliance on surveys (e.g. what people say rather than what they do), there is increasing usage of data on reported well being (happiness): a) consistent patterns in the determinants of well being across large N samples across countries and across time b): econometric innovations help account for error and bias in survey data (AND with the error that exists in all kinds of data!!)

Literature : 

17/07/2008 Economics of Happiness_ S Nandi 15 Literature Biases in the way people answer surveys (question ordering/random events) Adaptation – at individual and country levels a) individual level: some psychologists believe that people ALWAYS adapt to their set point, even after extreme events like divorce or spinal cord injuries; THUS if a poor peasant, who has adapted to his/her condition reports he/she is happy, what can development economists do with this information? b) country level: Easterlin paradox - average happiness levels have not increased as rich countries get richer and make improvements in other areas such as health, education; BUT………………

Literature : 

17/07/2008 Economics of Happiness_ S Nandi 16 Literature how long does it take individuals to adapt to these extreme changes? Equilibrium could be a LONG time away…..Do we not care about several years of very low well being levels caused by certain phenomena? most relevant information is about individual well being; country level averages do not tell us much and it is difficult to control for error/cultural traits, etc. Do we really care if Nigerians are happier than Ghanaians just because they have a tendency to respond in a more cheerful manner? WITHIN countries, wealthier, healthier, and more educated people are happier than poorer, less healthy, and less educated ones and have more time to enjoy those lives

Econometric study : 

17/07/2008 Economics of Happiness_ S Nandi 17 Econometric study Based on a model that happiness depends on certain biological, economic and social parameters the study with a large sample reports the effects of individual parameters on the level of happiness as follows:  

Happiness in Latin America_ Study : 

17/07/2008 Economics of Happiness_ S Nandi 18 Happiness in Latin America_ Study Dependent Variable: Happiness __________________________________________________________ Independent variables   coefficients t - value       Age   -0.025 -4.21 Age squared   0.000 4.72 Male   -0.002 -0.07 Married   0.056 1.63 Log wealth index   0.395 10.56 Years of education   -0.003 -0.64 Minority   -0.083 -2.49 Student   0.066 1.01 Retired   -0.005 -0.06 Homemaker   -0.053 -1.04 Unemployed   -0.485 -7.54 Self employed   -0.098 -2.33 Health (self-reported)   0.468 24.58 Adjusred R2   0.42 Number of obs.   15209 * Ordered logit estimation; country dummies included but not shown. Source: Latinobarometro, 2001.

Inequality and Happiness : 

17/07/2008 Economics of Happiness_ S Nandi 19 Inequality and Happiness The effect of inequality on individual welfare remains a debated question in economics. A common explanation for these mixed findings is that in Europe and the U.S., inequality can be a signal of income mobility and opportunity as much as it is a signal of injustice. In Latin America, a region where the gaps between the poor and the wealthy are larger and more persistent, inequality seems to be a signal of persistent advantage for the very wealthy and persistent disadvantage for the poor. Paper explores the effects of relative income differences, as well as of inequality more broadly defined, on well being in Latin America, the region with the highest inequality in the world. Also analyzed trends in respondents’ perceptions of inequality, rank, and opportunity as a means to gauge the effects of broader, non-income definitions of inequality on well being.

Inequality and happiness : 

17/07/2008 Economics of Happiness_ S Nandi 20 Inequality and happiness Large and consistent effects of relative income differences on well being; Average country and city-size wealth, holding individual incomes constant, had no significant effects on well being, with the exception of in the smaller, poorer cities; Suggests that inequality or relative position matters more in Latin America than it does in other places, such as Europe and the United States. Back of the envelope calculation suggests that inequality in the region makes those in the highest quintiles 5% happier than the average and those in the poorest quintile 3% less happy, regardless of differences in average or individual wealth levels within and across these groups. .

Easterlin Paradox : 

17/07/2008 Economics of Happiness_ S Nandi 21 Easterlin Paradox Easterlin ( 1974) made systematic study on the relation between economic prosperity and level of happiness across nations. He finds that after a certain level the relation between economic prosperity and happiness is weak____ Implication is that high economic wellbeing need not bring more happiness____ this is known as Easterlin Paradox. Literature has tried to explain this paradox.

Japan – Life satisfaction remains static : 

17/07/2008 Economics of Happiness_ S Nandi 22 Japan – Life satisfaction remains static

USA : 

17/07/2008 Economics of Happiness_ S Nandi 23 USA

Slide 24: 

17/07/2008 Economics of Happiness_ S Nandi 24 What are the determinants of happiness, when averaged over a long period of time?

Typical Happiness Questions : 

17/07/2008 Economics of Happiness_ S Nandi 25 Typical Happiness Questions World Values Survey “Taken all together, how happy would you say you are: very happy, quite happy, not very happy, not at all happy?” British Household Panel Survey “How satisfied or dissatisfied with your life overall? 1.very dissatisfied, …, 7.very satisfied.”

Satisfaction with Life Scale : 

17/07/2008 Economics of Happiness_ S Nandi 26 Satisfaction with Life Scale Self experiment about how happy you are? Below are five statements that you may agree or disagree with. Using the 1-7 Scale below, indicate your agreement with each item: 7 = Strongly agree 6 = Agree 5 = Slightly agree 4 = Neither agree nor disagree 3 = Slightly disagree 2 = Disagree 1 = Strongly disagree

Satisfaction with Life Scale : 

17/07/2008 Economics of Happiness_ S Nandi 27 Satisfaction with Life Scale In most ways, my life is close to ideal The conditions of my life are excellent I am completely satisfied with my life So far, I have gotten the important things I want in life If I could live my life over, I would change nothing Total = x1+x2+x3+x4+x5 = ?

Satisfaction with Life Scale : 

17/07/2008 Economics of Happiness_ S Nandi 28 Satisfaction with Life Scale 30-35 Extremely satisfied, much above average 25-29 Very satisfied, above average 20-24 Somewhat satisfied, average for Americans 15-19 Slightly dissatisfied, a bit below average 10-14 Dissatisfied, clearly below average 5-9 Very dissatisfied, much below average Benchmark: Men score 28 on average and women 26. Average student score 23 and 25; Eastern Europe and Chinese score between 16 and 19. Male prison score 12 on average, as do hospital patients. Source: M.E.P. Seligman, Authentic Happiness, NY. Free Press, 2002

Reported Happiness alsocorrelates with… : 

17/07/2008 Economics of Happiness_ S Nandi 29 Reported Happiness alsocorrelates with… Person’s assessment of happiness by friends and family Person’s assessment of happiness by spouse Person’s recall of good and bad events Heart rate and blood pressure measures response to stress The risk of getting coronary heart disease

Standard Economic Model : 

17/07/2008 Economics of Happiness_ S Nandi 30 Standard Economic Model Private actions and exchanges leads to Pareto Optimum where no one could be happier without someone else being less happy But, broadly speaking, economic model predicts that an increase in wealth for all should lead to an increase in happiness for all

Slide 31: 

17/07/2008 Economics of Happiness_ S Nandi 31 That seems to be true at the cross-section, e.g. comparing self-rated happiness between rich and poor nations

Levels, relative to the US, in leisure-adjusted GDP per capita, 2001 [smaller gaps relative to the US after valuing leisure-time in some Continental European countries] : 

17/07/2008 Economics of Happiness_ S Nandi 32 Levels, relative to the US, in leisure-adjusted GDP per capita, 2001 [smaller gaps relative to the US after valuing leisure-time in some Continental European countries]

Subjective measures of life-satisfaction: 90% of respondents satisfied with their life in ⅔ of countries : 

17/07/2008 Economics of Happiness_ S Nandi 33 Subjective measures of life-satisfaction: 90% of respondents satisfied with their life in ⅔ of countries

Slide 34: 

17/07/2008 Economics of Happiness_ S Nandi 34 Similar results within a nation Take America in 2002 for example

Economic Growth and Happiness : 

17/07/2008 Economics of Happiness_ S Nandi 35 Economic Growth and Happiness However, the growth in income doesn’t seem to be significantly correlated with a growth in the happiness for all The so-called “Easterlin” paradox again

Mean Happiness and Real GDP per Capita from 1975-97 for repeated cross-sections of (different) Americans. Easterlin paradox : 

17/07/2008 Economics of Happiness_ S Nandi 36 Mean Happiness and Real GDP per Capita from 1975-97 for repeated cross-sections of (different) Americans. Easterlin paradox

Mean Happiness & Real Annual Income per Capita between 1985 and 2000 for the same group of 8,649 individuals (21-65 years old)in West Germany. : 

17/07/2008 Economics of Happiness_ S Nandi 37 Mean Happiness & Real Annual Income per Capita between 1985 and 2000 for the same group of 8,649 individuals (21-65 years old)in West Germany. Real Income Happiness Source: German Socio-Economic Panel

This is also reflected in the cross-section of countries : 

17/07/2008 Economics of Happiness_ S Nandi 38 This is also reflected in the cross-section of countries

Let us go back to our income-happiness slide : 

17/07/2008 Economics of Happiness_ S Nandi 39 Let us go back to our income-happiness slide The positive relationship between income and happiness disappears after $15,000 per head

Question::So why is there no relationship between income growth and increase in happiness, at least for the Western society? : 

Question::So why is there no relationship between income growth and increase in happiness, at least for the Western society?

Some clues of unhappiness… : 

17/07/2008 Economics of Happiness_ S Nandi 41 Some clues of unhappiness… Social comparison (i.e. the richer you get, the more likely that you will compare yourself with others) Habituation (i.e. people get used to money very quickly) Unobserved choice that is positively correlated with income, but is associated negatively with happiness (e.g. working hours, etc.) Change in consumption pattern __ more comfort goods and less creativity goods Comfort goods_ durable consumer goods, gadgets, design clothes _ that has strong diminishing returns and be boring Creativity goods _ reading books, a walk in woods, classical music  

Clues : 

17/07/2008 Economics of Happiness_ S Nandi 42 Clues With technological advance prices of comfort goods are cheaper and as such relative prices of creativity goods dearer…… We also consume less and less relational goods [ typical creativity goods]__ use of computer for purchase, home delivery, use of ATM…. All for saving time, but in process social interaction goes….. Time spent on TV increases after long work hours__ alienation in personal level….. Depression….

Clues : 

17/07/2008 Economics of Happiness_ S Nandi 43 Clues But now, let us look at the 3rd reason… The unobserved correlation between income and happiness

Slide 44: 

17/07/2008 Economics of Happiness_ S Nandi 44 People work longer hours now than ever!!

Slide 45: 

17/07/2008 Economics of Happiness_ S Nandi 45 Long Working Hours in the EU Graph 1: % of employees working over 45 hours per week Source: European Working Conditions Survey, 2000

Work-Life Balance : 

17/07/2008 Economics of Happiness_ S Nandi 46 Work-Life Balance Income is strongly associated with working hours Working hours, on the other hand, is associated with more commute time, and less time spent with family and friends The question is… What is more important between money and social relationships?

Some clues fromEconomic of Happiness : 

17/07/2008 Economics of Happiness_ S Nandi 47 Some clues fromEconomic of Happiness Using happiness regression equations, economists have been able to work out the shadow prices of social relationships In other words, we have been able to put a financial value on friendships

Slide 48: 

17/07/2008 Economics of Happiness_ S Nandi 48 Source: Powdthavee (2006). How much do social relationships worth in terms of happiness?

Slide 49: 

17/07/2008 Economics of Happiness_ S Nandi 49 Other theories also possible, e.g. rising crime rate, etc. So how do Asian countries fare with this income-happiness relationship?

Slide 50: 

17/07/2008 Economics of Happiness_ S Nandi 50

So income doesn’t automatically translate to happinessAnd we must be doing something right…at least : 

So income doesn’t automatically translate to happinessAnd we must be doing something right…at least

War & capitalism : 

17/07/2008 Economics of Happiness_ S Nandi 52 War & capitalism Pursuit of wealth is reason for most wars Requires heavily armed, belligerent forces So-called leaders of freedom and democracy are complete opposite!

Slide 53: 

17/07/2008 Economics of Happiness_ S Nandi 53 Quality of Life?

A life of abundance : 

17/07/2008 Economics of Happiness_ S Nandi 54 A life of abundance Average real incomes tripled since WWII Beyond the dreams of even kings! Sophisticated dwellings, communication, transport, health, education…

Studies into sources of happiness : 

17/07/2008 Economics of Happiness_ S Nandi 55 Studies into sources of happiness Ie in general, social relationships, religious belief, job satisfaction, ‘serious or committed leisure’ are most important Clive Hamilton (2003) Growth Fetish

Progress? : 

17/07/2008 Economics of Happiness_ S Nandi 56 Progress? Material Wealth Natural Resources Happiness Population Time Science & Technology Social cohesion

References : 

17/07/2008 Economics of Happiness_ S Nandi 57 References Brickman, P., & Campbell, D. T. (1971). Hedonic relativism and planning the good society. In M. H. Appley (Ed.), Adaptation level theory: A symposium (pp. 287-302). New York: Academic Press. Frey, Bruno and A. Stutzer, Happiness and Economics, Princeton University Press, Princeton, 2002. Scitovsky, T., The Joyless Economy: an Enquiry into human satisfaction and consumer dissatisfaction, Oxford, OUP, 1976. Layard, Richard, Happiness: Lessons from a New Science, Penguin, New York, 2005. Powdthavee, N., Putting a price tag on friends, Relatives and Neighbours: Using surveys of life satisfaction to value social relationship, WP, Univ of London [ Institute of Education], 2006.

References : 

17/07/2008 Economics of Happiness_ S Nandi 58 References Carol Graham et al., “Does Happiness Pay? Some Initial Evidence from Panel Data for Russia”, Journal of Economic Behavior and Organization, Vol. 55, 2004. Easterlin, Richard A., Does Economic Growth improve the human lot? Some Empirical Evidence., in Paul A. David and M.W. Reder (eds), Nations and Households in Economic Growth, N.Y. Academic Press, 1974. _____________, Expalining happiness, Proceedings of the National Academy of Sciences, 19, September, 2003. Hamilton, Clive, Growth Fetish, Allen and Unwin, London, 2003. Van Praag, Bernard and A. Ferrer-i-Carbomell, Happiness Quantified: A Satisfaction Calculas Approach, Oxford, OUP, 2004.