The Case for Happiness-Based Economics

We're familiar with the American trinity of life, liberty and the pursuit of happiness. Washington typically passes laws to protect the first two. Should we start paying more attention to the third?

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When typical measurements make your economy look like a failure, politicians tend to look for alternate report cards.

Last year, British Prime Minister David Cameron called for his government to start measuring psychological and environment well-being.* Two years ago, French President Nicholas Sarkozy commissioned prominent economists to come up with alternatives to GDP that better mirrored national well-being. A young king of Bhutan started it all in 1972, when he proposed that his country seek Gross National Happiness rather than Gross National Product.

The Money ReportMoney doesn't buy happiness -- beyond a point. Economist Richard Easterlin reached that well-known conclusion as early as 1971. He found that among rich countries, people living in countries with the highest per-capita GDPs didn't report greater happiness. He also didn't find evidence that GDP growth among rich countries made people happier. Above some level of income required to meet basic needs, the absolute level of wealth didn't seem to matter. Easterlin did find on the other hand, that within a single country, richer people were happier than poorer people. The apparent contradiction came to be known as the Easterlin Paradox.

For a while, the evidence supported it. Europe, the United States, and Japan all appeared to flatline in happiness even as their economies grew. Some poorer countries seemed just as happy as richer ones. The only disagreement seemed to be the critical threshold. Estimates ranged as low as $10,000 per year, and last September, economist Angus Deaton and psychologist Daniel Kahneman found $75,000 annual income as the point beyond which more money failed to "buy" more happiness. Whatever the case, it seemed that above a threshold, happiness stopped growing with increasing income.

The paradox was resolved through evidence from psychology, which found that, like so many things, happiness was all relative. Happiness relative not only to the wealth of our neighbors, but also to the level of our aspirations. And both tend to increase as we get richer. As a result, we end up on a "hedonic treadmill," where more income is continually required to stay at the same level of happiness.

Then, in 2008, economists Betsey Stevenson and Justin Wolfers upended that view just as it was becoming accepted. They painstakingly converted incomes to purchase price parity, normalized different scales for happiness, and even re-interpreted survey questions in other languages. They then reexamined Easterlin's claims and found that they didn't hold up. Their conclusion: Absolute income matters. Life satisfaction continues to increase with greater income, after all.

Neoliberal economists cheered. Angus Deaton said wryly, "As an economist I tend to think money is good for you, and am pleased to find some evidence for that." Stevenson and Wolfers wrote triumphantly that their findings "put to rest the earlier claim that economic development does not raise subjective well-being," and all but broke out the green pom-poms to cheer for GDP.

Their research, however, also emphasizes something that most economists are less eager to discuss. Central to Stevenson and Wolfers's analysis is the use of a logarithmic scale to relate happiness to income. What correlates with a fixed increment of happiness is not a dollar increase in absolute income (e.g., an additional $1000), but a percentage increment (e.g., an additional 100%). So, going from a $5000 annual income to $50,000 links with as much additional happiness as going from $50K to $500K, or from $500K to $5 million, or even from $5 million to $50 million.

Presented by

Kentaro Toyama is a visiting scholar at the School of Information, University of California, Berkeley. He is working on a book tentatively titled Wisdom in Global Development: A Different Kind of Growth. For more information, see KentaroToyama.org. More

Kentaro Toyama is a visiting scholar at the School of Information, University of California, Berkeley. He is a leading researcher on international development, who focuses on the potential and the limits of information technology to address the challenges of global poverty (about which he writes a blog here). Toyama graduated from Yale University with a Ph.D. in computer science and Harvard University with a bachelor's degree in physics. He is working on a book tentatively titled Wisdom in Global Development: A Different Kind of Growth. For more information, see KentaroToyama.org, and follow him on Twitter: @kentarotoyama.

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