Escher Economics
Trying to find a way out of the economic trap that we currently find ourselves in is like attempting to escape from one of those Escher drawings in which stairs spiral round on themselves forever and you find yourself walking up a staircase, upside down. Multiple generations of people have experienced nothing but economic growth, fuelling a consumption frenzy that our rulers are still trying to keep going but, without the vital elements of either growth or debt, we have, temporarily at least, reached the end of the cycle and the bills have to be paid.
The pain that this is engendering amongst consumption minded electorates is seeing political parties thrown out of power for being in the wrong place at the wrong time, and replaced by those that have no better ideas. The key, however, lies not in economic growth but in focusing minds on relative wealth. Being wealthier than your brother-in-law keeps you happy, and happiness is the vital issue in the new world of behavioral economics.
Relative Happiness
Evidence seems to suggest that people are extremely concerned about their relative position in society. When Christopher Boyce and colleagues investigated this they concluded that what matters to people is how much they earn relative to their social peers: what they call a rank income hypothesis. No matter how irrational this is, it offers an explanation of why some societies are so resolutely opposed to redistribution of income through taxes and social benefits.
We are a social ape, at root, so this conflation of financial status with social status is perhaps not surprising in a world in which we’re bombarded by constant messages about the need to consume. It also goes some way towards explaining why money is bound up with happiness, but why more money doesn’t seem to make people any happier – the so-called Easterlin paradox - and in particular why people are consumed with the need to purchase new stuff: because it’s about social status. Furthermore it also explains why this new stuff doesn’t create any permanent sense of improved well-being.
Experience Happiness
Studies of happiness and money consistently show that the best way to spend the latter to achieve the former is by investing in experiences: climbing mountains, diving reefs, attending shows, and so on. The classic study of this is by Leaf Van Boven and Thomas Gilovich, in To Do or To Have? That is the Question:
“Our research suggests that individuals will live happier lives if they invest in experiences more than material possessions. By the same token, communities will have happier citizens if they make available an abundance of experiences to be acquired.”
These events aren’t one offs – they live in the memory, grow in the retelling and create bonds with the people we share them with. Buying things, on the other hand, creates a temporary improvement in well-being. After all how many times can you show off your new watch/dress/tablet/child*/car? (*Only wealthy celebrities need apply).
In fact, it’s been shown that assigning a monetary value to things that people generally do out of the goodness of their hearts can result in a decrease in the frequency of the behaviour. Back in the 1970’s Richard Titmuss caused a furore amongst economists (a behavioral response also known as “a storm in a teacup”) when he suggested that monetary rewards actually discouraged blood donations. Alasdair Rutherford gives a good overview of this and the subsequent history of altruism and economics in Get By With a Little Help From My Friends.
Financialization
Many of the economic analyses of consumer behavior start from the principle that more is better – more choice is automatically better than less, for instance – and that individual well-being is measurable by personal wealth. In fact one of the key elements of extreme free market viewpoints is that everything has a value that can be measured in monetary terms: the concept of financialization. This gives rise to the economic equivalent of Heisenberg’s Uncertainty Principle: if you measure the monetary value of something you change it.
As Frey and Oberholzer-Gee showed when they studied people being asked to have a waste disposal plant sited near them the reaction varied depending on whether the question asked was phrased in terms of altruism or money. When a monetary value was assigned to the waste disposal plant the amount of money people wanted went up and the number of people who were prepared to have in their locality at all declined: Money Can't Buy You Happiness covers this in more detail.
If financialization has these unintended behavioral consequences then it’s pretty clear that equating happiness with per capita income isn’t sensible. Although, to be honest, it’s hard to believe anyone would ever think that it was; the suspicion is that anyone adopting the position associated with financialization has to find something to measure, otherwise the whole approach doesn’t work. We’ve seen this before: see, for instance, Economic Value in Aitch-Two-Oh? It's otherwise known as man with a hammer syndrome.
A Manifesto For Hard Times
Oddly, this melange of behavioral misdirection is actually vaguely good news for beleaguered politicians, trying to figure out how to get re-elected on a budget that will hardly buy everyone a new toothbrush, let alone keep them in the state of economic bliss that advertising agencies have been selling for half a century. However, the lessons need to be applied carefully.
Firstly, don’t go in for major redistribution of wealth through regressive taxes: if you make some people wealthier and others poorer the latter will hold it against you and the former will forget the favour just as soon as they’ve bought their toothbrushes. This is not to say marginal rates of tax at the top shouldn’t be adjusted: annoying a few rich people to make a lot of slightly less well-off voters feel like they’re in catch-up mode will yield a net positive outcome: and if this actually makes the taxation system a bit fairer then so be it.
Secondly, do introduce savage and biting laws against tax avoiders and make some very public examples: including corporations. People hate free-riders, especially when they can’t join them. If you can’t legislate shame the hell out of them, nothing makes people more likely to comply with laws they don’t much like than the possibility of social humiliation. Sadly this doesn’t work with corporations, who have no shame, despite their willingness to use the law to pretend they’re real people. So shame the CEOs instead.
Thirdly, use what little financial firepower you have to crowd-in good behavior. Encourage people to set up social clubs, work for charities, volunteer for public works and to generally act as good citizens while making sure that individuals are publicly honoured for so doing. This will engender goodwill and, of course, will create new social experiences for people – exactly the kind of thing that genuinely creates personal happiness.
Don't Worry, Be Happy
Human behavior is malleable, within limits. The fundamental social hierarchy of which money is the main modern arbiter is buried quite deeply within our nervous systems, which would explain why free-market capitalism is still the most successful economic model yet invented. However, this doesn’t have to translate into behavior in which the only measure of worth is seeing how many things you can buy with your credit card before it snaps: although it's worth noting that people certainly do knowingly trade off happiness for money in some situations: see Do People Seek To Maximise Happiness? (Answer: sometimes).
If we’re going to experience a prolonged period of austerity in which average incomes go nowhere very quickly we can at least use it positively. And, let’s face it, policies that are directed towards helping people become happier, rather than wealthier, are likely to be more achievable for quite some time to come.
I think your two propositions:
ReplyDelete- "the bills have to be paid"
- "use what little financial firepower you have to crowd-in good behavior"
are mutually contradictory.
If bills are paid, the payees will be able to keep on doing the rat race and people will feel obliged to catch up. When your gilt-owning neighbour is getting a new Porsche and building a swimming pool with the bill repayments, how could you avoid trying to catch up?
I think all this is a bit of a red herring: people should try (or be nudged) to spend resources in ways that make them happier regardless of current macro circumstances. It doesn't stop being a good idea during boom times.