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The Microeconomics of Happiness

posted Dec 21, 2011, 7:52 AM by Geoffrey Edelmann   [ updated Oct 5, 2012, 8:13 AM ]
The purpose of life is to achieve happiness. Happiness is our birthright. We know that lasting happiness must be achieved by each and every individual; yet the microeconomics question to address is how do we foster happiness as a society? What policies will lead the world to greater happiness and how should we measure that happiness? The Pursuit of Happiness: An Economy of Well-Being by Carol Graham tries to answer these questions.

Life Satisfaction and GDP per Capita 1998-2008
Life satisfaction GDP per Capita, Select Countries, 1998-2008
Figure 1: Money seems to overcome certain factors of unhappiness. However, it is not necessary as illustrated by Latin countries which, are quite happy given their GDP. From The Pursuit of Happiness: An Economy of Well-Being by Carol Graham


Experimental Method

For the most part, all results are based on self-survey (not very reliable) though there are some metrics such as the number of smiles per day. However, even smiling varies by culture, so corrections are made by country, religion, and race. Still, it is very hard to tease out how inherently happy an individual is without longitudinal studies.

Experimental Results

Money makes an individual happy, to a point. Money can relieve much day to day stress e.g. living by paycheck. But after our needs are met it stops providing relief. The happiness of money is not absolute, it is relative to our peers.

Money makes societies happy, to a point. See Figure 1.

People get happier as they age, to a point. There are many reasons, for example getting the kids out of the nest and you no longer have to schmooze. You also don't have to stress about how far you will go in your career (i.e. the anxiety of choice).

Unhappiness factors include such obvious things as crime, corruption, or illness to being obese and living in a rural area.

Adaptation

One of the most powerful factors in human happiness is adaptation – the ability to cope with current status. The author contends that adaptation is a good thing for an individual and bad for a society. People quickly adapt to poverty, crime, etc, and become complacent. This is a good thing for individual stress and unhappiness, but bad for driving us to national betterment. By the same token, the happiness of a sudden increase in money, status, or health is also fleeting; we adapt to the new norm. In fact, people adapt to a salary gain within a year and a promotion within 5 years.

Uncertainty

Best Possible Life and the Dow Jones Industrial Average 2008-2009
Best Possible Life and Dow Jones Industrial Average Figure 2: Would you prefer certain suffering or uncertain happiness? From The Pursuit of Happiness: An Economy of Well-Being by Carol Graham


Related to adaptation is uncertainty. Would you believe that people prefer certain suffering over uncertain happiness? Apparently nothing makes people more agitated than change. Figure 2 depicts the DJIA (black) versus time about the stock market crisis of 2008. As expected, the happiness index (gray) goes down during the crisis. But despite the fact that the DJIA doesn't make a significant recovery, happiness does. This is due to the fact that people are made more miserable by turbulence than stability. The corollary to this, is our government should strive for slow, certain, growth even if that overall growth is less than would be possible if greater variability is allowed.

Happy Peasants and Frustrated Achievers Paradox

Although people generally get happier with money, there is a surprising paradox: penniless people are happy and the filthy rich are miserable. In the explanation, the author and I part ways. She contends that the peasants simply don't know how miserable they should be and that the rich are burdened with the knowledge of all that could be achieved but hasn't been. She even ponders the morality of educating peasants about how unhappy they should be (to break the adaptation cycle). Personally, I think she has simply discovered something that monks and mendicants realized long ago, a absolute poverty sets you free. When you let go of the idea of owning a few things, you own all things. Conversely the more you have, the more you fear losing it. Anecdocally, I have met blissful holy men and wretched millionaires. Perhaps the author simply hasn't known many rich people personally.

The Pursuit of Happiness

How should America help its citizens move forward? Should our government encourage the equal opportunity to happiness or equal outcome at happiness? Graham reminds us of the Declaration of Independence, ingrained in our politics, suggest the former as our course of action.

In Conclusion

I highly recommend this book. In this brief summary I left out a lot. There is a lengthy discussion on the difference between temporary happiness (e.g. watching TV) and long term happiness (playing an instrument). Should society encourage us to suffer the short term frustration of practice for the long term benefits of achieving mastery of a second language? But people also need to stop and smell the roses and have daily happiness too. As a critique, the book feels more like several publications stapled together and not a single cogent story. However, the resulting repetition aided the absorption of material so unfamiliar to me.

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