Policymakers and companies want to explore what really makes us tick. As a result, understanding happiness will be at the heart of economics in the future
This article was first published in the November/December 2016 international edition of Accounting and Business magazine.
It is getting harder to accuse economics of being ‘the dismal science’. With every passing year, the discipline is taking an increasing interest in hedonics – the study of what makes us cheerful and fulfilled. The rising status of hedonics was underlined when Angus Deaton, an economist and leading happiness researcher, became the most recent recipient of the Nobel Memorial Prize for Economic Sciences.
Governments are also throwing their weight behind the trend. France and the UK have both started collecting data on wellbeing, while earlier this year the United Arab Emirates appointed a minister for happiness.
So why is this discipline growing so fast? What has it taught us so far? And what does the future hold for practitioners of this ever more ‘sentimental’ science?
Although economists are exploring a range of factors that affect our mood, the most basic debate has been over whether money makes us happy – and if so, when, how and why?
The issue was identified in passing by the field’s founding father Adam Smith, who believed that the notion that wealth created happiness was an illusion, albeit a helpful one. Writing in 1759 he argued that: ‘The pleasures of wealth and greatness strike the imagination as something grand and beautiful and noble, of which the attainment is well worth all the toil and anxiety which we are so apt to bestow upon it. It is this deception which rouses and keeps in continual motion the industry of mankind.’
The question was only picked up again in earnest in the 1970s by Richard Easterlin, professor of economics at the University of Southern California. He concluded that at a national level happiness does not increase with wealth once basic needs are fulfilled, a phenomenon that has come to be known as the Easterlin paradox.
More recently, economists have been breaking down this question into its various sub-components. ‘The issue itself has sometimes been hard to pin down,’ says Paul Zak, professor of neuroeconomics at Claremont Graduate University in Southern California. ‘For a start, we can try to measure different dimensions of happiness – day-to-day sentiment, an overall sense of life satisfaction, or a sense of purpose, what the Greeks called “eudaimonia”.’ In addition, it is possible to link either of these dimensions of wellbeing to money in a host of ways. Does income matter in absolute terms, with diminishing returns below a certain point? Is it the change in income that is important, with stagnation or decline making people unhappy at even high levels of earnings? Or is it relative income, with the material progress of your neighbours or the rest of society being the crucial determinant? Finally, is it net wealth, rather than income per se, that is key?
As yet, there is no full consensus on these questions. But there are issues on which many economists now agree. The research of Deaton and psychologist Daniel Kahneman suggests money stops producing additional gains in day-to-day happiness after about US$75,000 a year in the US – roughly sufficient for a secure life. Still, there are also indications that people continue to rate their overall life satisfaction higher as their income continues to climb.
There is also strong evidence that relative wealth is important. A recent study allocated an average of US$357 each to around 500 lucky ‘lottery’ winners in rural Kenya, enough to almost double the wealth of the average villager. By using a range of clinical tests, the study showed lower levels of stress and depression among the winners. Sadly, this only lasted about six months and was matched with a corresponding rise in cortisol, a stress hormone, among non-winners, presumably envious at their neighbours’ windfall.
Other research suggests that more extreme levels of inequality can also reduce happiness. A rise in incomes of the top 1% of earners can depress life satisfaction in the rest of society, even when household incomes and GDP remain constant, says Jan-Emmanuel De Neve, an Oxford University academic and co-author of this study: ‘We knew that human wellbeing is sensitive to relative standing or rank but we have underestimated the importance of the range of the income distribution which is getting extended as the top tier races ahead.’
Moving from individuals to countries, the controversy is even greater. University of Pennsylvania economists Betsey Stevenson and Justin Wolfers have disputed the Easterlin paradox, using survey data to show a reliable increase in life satisfaction as nations grow richer, with no limit in sight so far.
An additional wrinkle in the debate is that it appears to matter not just how much money you have, but how you use it. ‘We found that spending on other people and experiences, over possessions, tended to make people happier,’ says Michael Norton, a professor at Harvard Business School and co-author of Happy Money: The New Science of Happier Spending. ‘Your decisions are crucial in determining how much satisfaction you get from your cash.’
All the rage
So why has this study become all the rage among economists? Richard Layard, a professor at the London School of Economics and one of the creators of the World Happiness Report, believes that policymakers have increasingly seen the appeal of this approach. ‘In the end what really matters is the quality of life as people experience it,’ he says. ‘We believe this should become the acid test for public policy. But wellbeing also matters because it affects productivity – the best places to work also experience the biggest rises in share price. So it’s a win-win approach.’
Ecologically minded policymakers have been especially keen on hedonics. An economic model based on the assumption that ‘more is better’ may ultimately place unsustainable demands on the world’s natural resources. Finally, the discipline may be getting a push from recent lower levels of growth around the world.
‘The financial crisis got some countries to measure things other than GDP,’ says Dan Ariely, professor of behavioural economics at Duke University and author of The Honest Truth about Dishonesty. ‘If GDP growth is weak, why not measure something that makes us look a little better, like happiness.’
The techniques of economists are also becoming more futuristic. For much of the history of economics, academics simply assumed they knew why people made decisions. From the 1990s, behavioural economists have proved through experiments that human decision making was less rational than previously thought – with predictable irrationality, as Ariely has put it.
Increasingly, economists are moving beyond self-reported surveys to biological data, as in the Kenyan study. Claremont’s Zak has even set up a monitoring company, ZESTxLabs, which allows companies to measure the minute-by-minute response of potential customers to their products by collecting gigabytes of data from sensors on the head, torso and fingers.
‘As the cost of such technology falls, it is likely to be used more and more by policymakers and companies who want to understand what really makes us tick,’ Zak says. ‘This will be at the heart of economics in future.’
Christopher Fitzgerald and Fernando Florez, journalists
"We found that spending money on other people and experiences, over possessions, tended to make people happier"