The New Economics of Happiness

New studies -- including a report on the happiest countries on the planet -- suggest that building a theory of "happynomics" is harder than you'd think

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Economists can measure unemployment, GDP growth, and housing prices. But do they know how to measure happiness? If they did, what would we even do with the results?

Each year, the OECD produces the Better Life Index, a comprehensive report on the well-being of advanced countries based on a long list of factors, including income, housing, and life satisfaction. In the 2012 survey released this week, Australia took the top spot. The U.S. finished third.

Does that mean Australia is objectively the best place to live in the world? Absolutely not. Even the architects of the index would tell you that the "good life" is utterly subjective, and different people have different values. If you equally measure income and work-life balance (two real metrics in the OECD study), you assume that everybody in the world values money and down-time the same. In the real world, some people like smaller houses, some prefer long vacations, and some choose to work in banking because they like having money and don't care for down-time.

The nice thing about the Better Life Index is that it lets users weight the 11 metrics to emphasize the values that matter most to you. When I emphasized income, housing (e.g.: rooms/person and dwelling size), and jobs (e.g.: employment, long-term unemployment), the United States came out way ahead. From these metrics alone, we really might be number one.
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But when I lowered those metrics and instead emphasized community (via surveys on quality of support network), life satisfaction (via surveys) and work-life balance (e.g.: time devoted to leisure), Denmark moved from number 15 in the world to the runaway winner. The United States fell from number one to number 18. Only Switzerland and the Netherlands hung around in the top five. Australia, the overall winner, didn't even appear in the top seven in either list.
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The OECD's metrics are not inscribed by the Almighty on stone tablets. They're just educated guesses about what makes for strong communities a decent environment and so on. But they help to tell an important story: If you want to measure what makes people satisfied, you have to understand what they value. And that is really, really hard work.


The most commonly cited statistic in happiness economics is the rule that somewhere between $40,000 and $110,000, a higher salary doesn't buy much more joy or satisfaction. Many people draw the bright white line at $70,000. This provides a strong utilitarian impulse to raise taxes on the rich, who apparently can't buy much happiness with their extra millions, and to funnel the money to the poor to bring them closer to $70,000.

But that's an awfully blunt instrument for maximizing happiness. But one reason why incomes differ is that some people care more about making money than others.

Take, for example, two equally capable students graduating from the University of Michigan. Student A goes into Acting, because he likes the stage and doesn't mind being poor. Student B goes into Banking, because he likes money and he doesn't mind working 100 hours a week. The federal income tax code will implicitly punish Student B's decision with higher rates and reward Student A with maybe even a net tax credit, even though Student A didn't care about money in the first place. If you nationalize this lesson, it suggests that, in our imprecise efforts to funnel money from the top to the middle, we wind up taking money from people who care overwhelmingly about having a high income and distribute it among people who don't.

"Differences in preferences, not merely ability, play a role in driving the variation in income across individuals," Benjamin Lockwood Matthew Weinzierl write in a fascinating 2012 paper. Some people are rich because they really want to be.

The psychological research backs up the economic wonkery. Here's the great Daniel Kahneman on how kids who want to be rich are more likely to be rich and more likely to be happy about being rich:

[In] a large-scale study of the impact of higher education... young people filled out a questionnaire in which they rated the goal of "being very well-off financially" on a 4-point scale ranging from "not important" to "essential."...

Goals make a large difference. Nineteen years after they stated their financial aspirations, many of the people who wanted a high income had achieved it. Among the 597 physicians and other medical professionals in the sample, for example, each additional point on the money-importance scale was associated with an increment of over $14,000 of job income in 1995 dollars!

The importance that people attached to income at age 18 also anticipated their satisfaction with their income as adults ... The people who wanted money and got it were significantly more satisfied than average; those who wanted money and didn't get it were significantly more dissatisfied.
This might put an arrow in the quiver of those who don't find income inequality much of a tragedy. To a large extent, lower-income people might just be "racing for other finish lines," Bryan Caplan concludes. Maybe Caplan's right, and maybe he's wrong. I doubt either of us knows enough about the preferences of low-income Americans (or any-income Americans) to say for sure what finish lines they're racing for.

The safe conclusion to draw is that good arguments on behalf of income redistribution are complicated by the fact that not all people value income the same way -- just like not all people value community, the environment, and housing size the same way. Happiness is a cake with a million recipes. The same factors that make it so hard for the OECD Better Life Index to compare the "good life" country-by-country make it hard to devise any sort of happiness-centric public policy.

After thought: Happiness and income might have a controversial relationship. But plenty of evidence suggests that unemployment makes you miserable, no matter where you live. Here's Professor David Fryer, Chartered Psychologist and Fellow of the British Psychological Society: "International cross sectional research has convincingly demonstrated that not only are unemployed people more likely to be depressed than otherwise similar employed people but longitudinal research has also persuaded most researchers in the field that unemployment causes depression and other negative psychological consequences." It's conceivable that employment-maximizing policies might be more important, from a happynomics standpoint, than income-egalitarian policies.