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Saturday, 27 November 2010

Gross National Happiness

Himalyan Happiness

The tiny state of Bhutan, wedged between India and China up in the Himalayas, is the only country in the world that rates its progress based on Gross National Happiness (GNH) rather than Gross National Product (GNP). Despite the UK's best efforts Bhutan is unique and its experiment is unlikely to catch on across the developed world, but there are more than a few people who think they may have a point.

Firstly there’s the question of what GNP is actually measuring and whether it’s the sort of thing we should be aiming to increase year on year. Secondly there’s the even more fundamental question: what’s the purpose of life? If the answer to that isn’t money then economists need to think very carefully before they start remodelling the world again.

Measuring GNP

The GNP of a country is the value of the goods and services produced by its citizens. However, it’s not a straightforward measure: if my wife and I pay someone to look after our house and kids that counts towards GNP but if either of us stay at home and do the mucky job ourselves it doesn’t. It also misses out the black market completely, which possibly explains why citizens of some countries seem to have an enviable lifestyle despite apparently having no income and no effective government.

Mainly, though, GNP is used to measure economic growth because it's measurable and we can't find anything else we can even vaguely justify in that regard. Using GNP as a way of judging economic progress is, therefore, a triumph of hope over less attractive alternatives. In particular GNP can’t tell us about how incomes are distributed, it only tells us about aggregate wealth and, oddly perhaps, this may make a hell of difference to a nation’s happiness.

Utilitarianism

Now economists generally believe that people set out to maximise their utility and, by a process of elimination, usually end up by equating utility with wealth, or at least the money we spend on expressing our preferences, roughly on the grounds that it's something you can measure and if you can’t measure it you can’t do economics. Originally, though, utility had a much broader remit: indeed, it wouldn’t be too strong a claim to argue that the original idea of utility was precious close to happiness.

Back in the early days of economics, while Adam Smith and David Ricardo were figuring out the basic ideas, Jeremy Bentham was developing the branch of philosophy known as utilitarianism. At the heart of this was the principle:
“It is the greatest happiness of the greatest number that is the measure of right or wrong”.
Greatest Happiness or Revealed Preference

This, the Greatest Happiness Principle, was the original bedrock of utilitarianism and informed a whole generation of economic thinkers who came up with the fundamental concept of utility maximisation: people, in their own self-interest, are fundamentally motivated to maximise their utility. Unfortunately it’s darned difficult to develop practical theories when utility is equated to happiness because happiness is darned difficult to measure.

This is why subsequent financial thinkers moved towards more operational concerns: essentially looking at what could be measured – wealth, mainly – and equating this to utility, rather than trying to peer inside peoples’ minds. This led, eventually, to something called revealed preference theory.

Revealed preference theory, which originated with Paul Samuelson, essentially argues that you can tell what a person prefers by looking at the choices they make. If someone chooses to buy a new TV rather than a gym membership that tells you something practical about their preferences, i.e. they're a lazy slob. As it turned out, after the event, revealed preference theory also equates to utility theory. Which is nice, if you like that kind of thing.

Inside Heads

However, revealed preference theory also looks a lot like the psychological dead end that was Skinner’s behaviourism, which we looked at in B.F. Skinner's Stockmarket Slot Machines. By ignoring the inner world of human thoughts and emotions and relying only on observable behaviour it ends up telling you very little about why, in economic terms, people behave as they do. If, as behavioral psychologists now believe, the economic behaviour of individuals is heavily influenced by that of the people around them that’s not enough to formulate anything useful in the way of theory.

Trouble is, when you start trying to look inside people’s heads, you end up with one of a couple of problems. Firstly you can ask them what they think or feel. Unfortunately the evidence strongly indicates that people don’t know what they think or feel and, moreover, they’re very likely to tell the researcher what they think the researcher wants to hear rather than something approximating the truth, whatever that might be.

The Frog of Happiness

Alternatively you can look for some external measurable factor than you can use as a proxy for their behaviour – and that, as usual, turns out to be something financial. In fact you end up with something that looks suspiciously like revealed preference theory. And if it looks like a frog, croaks like a frog and tastes like a frog …

Happiness is, of course, one of these internal things that can’t be externally measured. However, we know that happiness and personal finances are intertwined, even if we don’t know how to measure this. In fact we know that one of the factors affecting personal happiness is the level of income disparity with the people around you – and this appears to apply at the national level as well as the individual.

The Easterlin Paradox

The Easterlin Paradox shows that richer people report being more happy. However, it also shows that this is true for all countries, even though the average income per person varies significantly between countries. The idea, of course, is that it’s the income relative to your peers not your absolute wealth that makes the difference. This sort of finding has been repeated many times – see this paper by Dynan and Ravina, or this one on Happiness and Income Inequality.

The effect of this stuff can feed across to economic behavior at a low level. In Expenditure Cascades Robert Frank, Adam Seth Levine and Oege Dijk look at how changes in income disparity can have major affects on people’s spending decisions:
“The two most robust findings from the behavioral literature on demonstration effects: 1) the comparisons that matter most are highly localized in time and space; and 2) people generally look to others above them on the income scale rather than those below”.
What they predict – and find – is that savings rates in a group decline when income inequality within that group increases. Basically people at the low end of the group start spending in an attempt to keep up with their wealthier counterparts. If this is all true, then the economic consequences of the unobservable state of happiness are not something that can be ignored.

Refuting Easterlin

The link between income disparity and happiness is disputed – Betsey Stevenson and Justin Wolfers find a much less strong role for relative income differences in shaping happiness. They think their evidence points to absolute income as being more important – so a poor person in a wealthy nation could be happier than a rich person in a poor country. This also implies that the focus of individual countries, if they’re concerned about the happiness of their subjects, should be on GDP growth: as the country grows wealthier so do its citizens and income disparity matters little.

On the other hand if income disparity matters more then GDP is useless – because it doesn’t tell us anything about how the money is spread over the population of an individual country. In which case focusing on Gross National Happiness becomes more important and, crucially, suggests that countries should focus a bit more on taking money away from rich people and giving it to the poor and bit less on just making everyone richer.

It would be lovely if the research made it abundantly clear as to whether GNH is more important than GNP, but it was never likely to be the case over something as subjective as happiness. A weaker conclusion might be that while we don’t know exactly how happiness and financial wellbeing interact there’s not much doubt that they do: GNP is not enough on its own. Oh, and economics is about more than externally observable behaviour: but any psychologist could have told you that without waiting for Bhutan to make the case first.


Related articles: B.F. Skinner's Stockmarket Slot Machines, Economic Value in Aitch-Two-Oh, Money Can't Buy Happiness

2 comments:

  1. I find this simply ridiculous. Why don’t we reinstitute the values of hard work, savings, and serving others to find happiness in life? Instead the world calls for tyranny to be reinstated. Organized wealth redistribution (aka stealing) will not make anyone happier or wealthier.

    Everyone wants a free lunch and don’t realize there is no such thing. Like I have said before, many people living in industrialized countries don’t have the faintest idea how capitalism has raised our standard of living. It wasn’t via theft, but freedom, hard work, savings and by making investments in capital goods that make us more productive.

    Why don’t we just raise the minimum wage to be 1,000,000 pounds per day for everyone in Britain? Everyone will be rich. Money grows on trees according to most everyone in North America and the UK.

    I suggest writing an article on the Selfishness of Mankind. If you make the average salary in Canada, USA or the UK you are in the top 4% of the world in terms of wealth. And all these “poor folk” are concerned about is stealing from their “more wealthy” neighbors in order to continue living a lifestyle that is well beyond their means.

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  2. Hey,

    in line with the promotion of „Gross National Happiness“ we created a Simpleshow that explains the movement of GNH and comments on the added value for the people, the environment, the social structure and the economy. Furthermore, it shows the influence on other countries that try to adopt GNH´s maxime.

    If you like this Simpleshow, feel free to use the material and/ or youtube link (visit: http://www.youtube.com/watch?v=7Zqdqa4YNvI) in your work to bring a bit more happiness to everyone of us.


    Best wishes and always a good karma

    ReplyDelete