Friday, August 15, 2008

Happiness Is In The Eye Of The Beholder

There has been a lot of debate about the economics of happiness. In other words, how much is income related to a person's happiness. A seminal study done by Richard Easterlin in the mid- 1970s revealed (correctly in my mind) that income is a poor indicator of someone's happiness. This became known as the Easterlin Paradox. That is, more income does not necessarily generate more happiness. This meant that achieving a high GDP growth, long view by politicians and economists as the appropriate gauge for welfare, will not guarantee satisfaction in a nation's citizens--which can only mean that there are other non-monetary factors at play. Most economists agree (me included) that income growth causes well-being to increase, but up to a certain imputed point. That is, the utility of money exhibits the form, in mathematical parlance, of a concave function.

However, earlier this year another study by Betsey Stevenson and Justin Wolfers professed the opposite conclusion: more income equals to more happiness. The authors claim that better information gathering sources and enhanced econometric techniques available today in comparison to Easterlin's time heightens the credibility of their results. Yet, a closer inspection of their study reveals that their findings are not what they're cracked up to be. First, the method of data gatherings is primarily surveys (so was Mr. Easterlin's study), which always run the risk of people not being completely honest. Second, unless the same people that Mr. Easterlin's study targeted were interviewed for the recent study--which they were not--the results will be suspect. I'm not saying they are wrong; i'm merely saying there is a doubt about their validity or better they should be taken with a grain of salt.

Third and most importantly, there is evidence that contradicts the authors' results. They mention that Japan's experience "does not undermine the claim that there is a clear link between economic growth and happiness." This conclusion was in contrast to what Easterlin had found in the same country. The authors, however, never mentioned that Japan has the highest suicide rate among developed nations. Furthermore, in Britain, which in particular the authors do not consider, there are nearly as many people who are medically unable to work because of depression or stress than people unemployed. In my view, these evidences severely dent the authors' entire claim.

That said, this debate has deeper roots. It is the idea that through econometrics one can fully assess those aspects of humanity that are impossible to quantify. The current study of finance and economics rests on the idea of positivism, that is "the purpose of science is to stick to what we can observe and measure." If happiness exists, then it must be quantified; if it cannot, then its existence is dubious. This is why it is taught in Econ 101 that we study "positive" economics , that is how things are; in contrast to "normative" economics, which emphasizes the way things ought to be. This means that any ideas about morality are taken out the analysis. It is interesting to note that Adam Smith, before writing The Wealth of Nations, laid out his morality foundation in his less-known work, The Theory of Moral Sentiments. This last work has fallen in the memory hole of modern economists. Happiness exits and money is not the way to measure it. I doubt there will ever be a good proxy to gauge it.

No comments: