Happiness and Economics: How the Economy and Institutions Affect Human Well‐being

Citation

Clunies‐Ross, A. (2002), "Happiness and Economics: How the Economy and Institutions Affect Human Well‐being", Journal of Economic Studies, Vol. 29 No. 6, pp. 449-453. https://doi.org/10.1108/jes.2002.29.6.449.2

This important book is highly accessible. No one with a rudimentary sense of how social hypotheses can be tested empirically should find any difficulty with it. Even in the last chapter, where the authors write briefly about the general bearing of their findings on economic and social theory, a reader is unlikely to need technical knowledge in order to grasp the argument.

It is also brief and readable. Words are not wasted; evidence and interpretation are set down simply and directly. The simplicity may give at first an impression of naivety. But this is soon dispelled. The authors are fully aware of the hazards in survey‐based research. They take the necessary precautions and offer the necessary warnings. It is just that they tend to give the simple story or interpretation first, before noting the qualifications or mentioning what has been held constant.

They present and interpret a mass of studies that depend on asking people about their states of happiness or satisfaction. This reviewer found that a number of the findings fitted with what he knew or sensed or suspected, or at least ought to have known or sensed or suspected – and were none the less valuable for that. But then there were some that were surprising, or at least arresting. The most memorable of these, largely from the authors’ own work, are given in Chapters 8 and 9 and concern the bearing on happiness of political institutions.

They recognize, of course, that different people may not understand statements about levels of satisfaction in exactly the same way. Since those statements are about subjective feelings, it is hard to think of any way of testing directly whether they mean the same to two people or not. And the possibility of systematic differences of meaning across cultures throws doubt on, for example, cross‐country comparisons, as the authors acknowledge. Economists have tended to shift away from the early utilitarians’ talk of happiness as designating the fundamental policy objective – toward something more objective: choice, “revealed preference”. But, as Frey and Stutzer imply, happiness, or satisfaction, is a better designation than simply an extension of choice of what we desire for ourselves, and of what we desire for those to whom we wish well. It is indeed surely a legitimate and important question whether and in what circumstances an extension of choice is conductive to happiness. And it could surely be argued that, only insofar as extension of choice is conducive to happiness, is it a proper objective of a benevolent policy.

It seems reasonable to think that a group of respondents, sharing a language and culture with investigators, will on the whole mean something similar by happiness, and by various degrees of happiness, to what the investigators understand by the same expressions. Unless the respondents have some reason for systematic deceit, consistent differences in self‐ratings on happiness between subgroups of them will prima facie indicate something about corresponding differences in states of mind – and differences of the general character and direction that the investigators understand by differences in happiness. If an account of the factors bearing on what the parties understand by happiness is important – for policy purposes or simply for understanding – then there is potentially valuable information to be derived from careful studies of the kind reported in this book.

First, there are studies relating reported happiness to the “socio‐demographic” circumstances of individuals, such as age, sex, marital status, education, and health. Two fairly consistent findings are interesting because perhaps unexpected. Happiness does not fall consistently with increasing age from early adulthood; there tends to be something more like a U‐curve, with a nadir in early middle age. Then, though people who have disabilities do tend to be less happy than otherwise comparable people who do not, the differences are small and tend to diminish as those handicapped become accustomed to their disabilities. This latter finding – perhaps both – seem to say something about the capacity of people to adapt. It is often perhaps change for the worse, rather than an apparently worse state, that most markedly limits happiness.

Then happiness is related to various “socio‐economic” events and conditions, both individual and social. Cross‐sectionally across countries, happiness seems to increase with average income, but only very roughly and only up to an income of about $10,000 (mid‐1990s US dollars at US PPP), the level of South Korea or Greece. Lineally in rich countries there may be no detectable positive response at all of reported happiness to rising income: Japan after 1960 shows a flat happiness line; the USA after the mid‐1950s, even a slight fall. Cross‐sectionally in a particular country, however, richer people tend to be happier.

This apparent paradox the authors explain by the hypothesis that happiness depends on the matching of aspirations and reality, and that aspirations adapt with experience: one’s own and that of others. Individually, some of those who get richer may thereby become happier – until their aspirations catch up. Collectively we are on a treadmill. They relate this finding to the theory of Hirsch about “positional goods”: that, as we become richer, more and more of our utility depends on goods that are intrinsically fixed in supply, such as pre‐1900 houses, or hilltop views within commuting distance of a metropolis, so that, in spite of rising production, there is an increasing tendency for the gain of one to be at the expense of another. But, beyond that, once needs and desires for purchasable commodities are extensively met, extra income is perhaps valued largely as a prize in a race, and hence for its ordinal position in relation to other incomes. This might suggest that the scale of the incomes of, say, CEOs and those with whom they compare themselves could be considerably reduced in constant proportion without reducing their incentives to aim for and undertake top jobs. It would be comparable to reducing the scores in rugby for try, drop‐goal and the rest in constant proportion. As long as relativities remained the same, the absolute numbers would have no significance.

The (unsurprising) evidence about happiness, adaptation, and income enhances the case for equalizing redistribution and also tends to favour giving a large weight to income stabilization as against allocative efficiency.

Also interesting are the findings about the impacts on happiness of unemployment and inflation,. Unemployment, at least in industrial countries, has an ill‐effect on those who lose jobs over and above the effect of loss of income. Nut a rise in unemployment in a country also tends to reduce the happiness of those that do not lose jobs. The authors maintain that the finding about the unhappiness caused by loss of a job invalidates the view that all unemployment is voluntary. (Whether the finding is sufficient, or for that matter whether it is necessary, to invalidate that view is perhaps debatable.) They explore the reasons why, as the finding implies, people set a positive value on work independently of the remuneration. Whatever the reasons, the finding departs from the model that treats all paid services as entailing disutility for those who provide them. As to the observation that a rise in unemployment adversely affects the happiness even of those who keep their jobs, it suggests that people may be distressed by the misfortunes of their neighbours, a possibility that does not generally enter in to welfare‐economic assessment. This divergence in detail of the world from the models is in itself nothing striking, but the two findings raise the question whether economic‐policy discussion needs to be based explicitly on rather wider behavioural possibilities than standard models recognize. Insofar as people can come to derive positive utility from work and from the welfare of their fellow‐citizens, additional free lunches are possible.

On inflation, the interesting finding is that it is disliked, whether or not it is anticipated. But the conclusions of certain happiness studies about the comparative losses caused to well‐being by a per cent rise in the inflation rate and a per cent rise in unemployment imply that the use of a “misery index” that simply adds percentages of the two together exaggerates the relative importance of inflation.

The final section assembles evidence suggesting that, in Switzerland at least, the extent of direct democracy (initiative and referendum) and the extent of political devolution are positively associated with happiness. Moreover, in the case of direct democracy, it is mainly the existence of the rights, rather than the frequency of exercise of those rights, that is important; and value is derived from the “process” and not simply from the results. (It is not just that direct democracy achieves more of the policies that people want.)

Study of these questions is facilitated by the fact that the 26 Cantons of Switzerland have differing degrees of direct democracy and of devolution, each of which can be scaled. (Differing extents of exercise of direct democracy can also be measured.) These arrangements are related by the authors to the self‐ratings on happiness of a sample of Swiss people, other relevant variables being held constant.

To test further whether the value of direct democracy is derived from “process” and not just from results, Frey and Stutzer compare the happiness ratings of citizens and foreigners in each Canton. (Only citizens have the rights under direct democracy, but all alike, it is assumed, enjoy the fruits.) Everywhere, they find, foreigners are less happy than citizens, but the gap is significantly greater in those Cantons with more direct democratic rights. This suggests that the “process” itself is important. People like having the rights independently of the results of exercising them.

Using the citizen‐foreigner split in this way to test this further question is ingenious, but one may question the implied assumption that all benefit alike from the fruits of direct democracy. Is it not just possible that, where popular feeling among citizens holds greater sway, foreigners suffer more?

Frey and Stutzer use this evidence of the happiness impact of direct democracy and devolution as ammunition in support of a broader theory of the bearing of constitutions on welfare. Even if the difficulty of finding a consistent and operational social‐welfare function based on revealed preferences could be overcome, they regard it as ineffective that economists should instruct governments to maximize a welfare function. For one thing, governments are not thereby given any incentive to do so. A more promising approach, they say, is to find constitutional rules that will lead governments to act in accord with general welfare, and by implication with popular wishes. Direct democracy, they imply, and a high degree of democratic devolution, help to satisfy this requirement.

The present reviewer found himself persuaded of the value of a high degree of devolution as a means of relating decisions over public goods to the appropriate scale of community; and also of the process‐value of both extreme devolution and direct democracy. What he doubts is that, in general, direct democracy leads to better decisions. Frey and Stutzer imply that important Swiss national decisions by referendum, such as rejection of EEA membership in 1992 and of UN membership in 1986, typically represent defeats of self‐interested proposals made by what they call the “classe politique”. Some of the examples are convincing, but is easy to think of others – and among the most important decisions that a state has to make – on which the “classe politique” and the popular vote are likely to differ, not for any self‐interested reasons on the part of the politicians but arguably because they are on average better informed; have had more exposure to long‐term and world‐wide considerations, to the compromises that policy has to make, and to the arithmetic of taxing and spending; and are somewhat better at evaluating arguments. It seems quite likely that a right of popular initiative and referendum in Britain would lead to the restoration of capital punishment, and in the USA to withdrawal from the United Nations. Attractive as the authors’ arguments are, probabilities of this sort would have to be faced if we were to follow them all the way.

However, the value of the book goes far beyond its contribution on this interesting but contentious issue. The ammunition given, first, to the case against treating revealed preference as the sole criterion of welfare; second to the case for enhancing the weight given in policy to stability as against allocative efficiency as usually interpreted; and third, to the case for using a more realistic psychology – one that takes account, for example, of the fact that work is often valued for its own sake and that altruism is not entirely foreign to the human species – in the framework for discussing economic policy: all this serves to push the subject in the right direction. In particular, fuller recognition of the possibilities in human behaviour may show ways in which the trade‐offs between rival goods can be notably improved.