Egan Cornachione

April 27, 2015

History of Modern Economic Thought

A Critical Analysis of Happiness Economics

Introduction:

A significant paradox seems to be at the heart of the study of economics. As stated by the

American Economic Association, “economists seek to measure well-being, to learn how well-being may

increase over time, and to evaluate the well-being of the rich and the poor” (AEA 2015). Most

introductory economics textbooks point to gross domestic product (GDP), a measure of annual national

income, as the best gauge of well-being in a country. This seems reasonable, since GDP is highly

correlated with many indicators of well-being such as life expectancy, nutrition, and infant survival rates

(Cowen and Tabarrok 2013, 483). More recent research, however, paints a different picture of GDP.

In 1974, an economist from the University of Pennsylvania, Richard Easterlin, published findings

that have provided a modern foundation for what is today called happiness economics. Easterlin studied

survey data from post-World War II to the 1970s in which individuals from various countries are asked to

report on their level of happiness or well-being in one of two different ways. The first is by asking

individuals if, in general, they are “very happy, fairly happy, or not very happy.” The second is a more

complex well-being rating system called the Cantrill ladder, in which individuals first define what their

best possible (10) and worst possible (1) life would be and report on a scale of 1 to 10 where they rank

today. Easterlin found, perhaps unsurprisingly, that within a country, those with the highest incomes

reported the highest levels of happiness. What is surprising is that he found that once a country has

reached a subsistence level of per capita income, increasing national income does not significantly raise

happiness, and poorer countries are not necessarily happier than richer ones (Easterlin 1974). While the

validity of his research has been heavily debated, his finding runs counter to the notion that GDP is a

good proxy for well-being or happiness.

This paradox raises the question of how to structure public policy. If GDP does not correlate well

with well-being, then measuring national progress based on GDP alone fails to accurately reflect a

country’s social welfare. Happiness economists believe that improving the well-being of humans should

be the main policy goal of nations (Layard 2005). This idea is not a new one, tracing as far back as 18th

century economist and philosopher Jeremy Bentham who believed in the “greatest happiness principle,”

which says that decisions should be made to produce the highest overall happiness of all beings (Burns

2005). Although many of Bentham’s ideas have since been rejected, the motivation behind his writings

has been carried on by happiness economists today, who believe in more than just income and growth in

measuring an economy.

In this paper, I will provide a review of Happiness: Lessons From a New Science, a 2005 book

written by renowned happiness economist Richard Layard. Layard has been at the forefront of today’s

happiness economics writing and a leader in the charge to make well-being the main goal of public

policy. He started the movement Action for Happiness, a nonprofit organization that seeks to improve

mental well-being and promote a happier society. In his other work he founded the Center for Economic

Performance at the London School of Economics and has impacted British labor policy with his study on

labor economics (CEP 2015). I will provide an overview of his book, review the empirical evidence

cited, discuss his policy recommendations and conclusions, and address the criticisms of this and related

literature. Through this analysis, I will show that happiness economics, while not without flaws, should

be a greater part of mainstream economics and new indicators of well-being should be used by

governments today.

Happiness: Lessons from a New Science

In the days of Bentham, the idea of using happiness as a goal of public policy (and the

assumption that people make decisions to make themselves the happiest) stemmed from philosophy,

historical evidence, and very little empirical research. Richard Layard delves into the psychological and

economic research of the past fifty years to demonstrate that we are often misguided in our perceptions of

what makes us happy, both as individuals and as nations. Not only has our obsession with income

produced very little increase in happiness, it has led to choices that erode our mental health and stability

(Layard 2005, 35). As Layard demonstrates, this is not conjecture based on anecdotes, it is a fact proven

by scientific evidence. The policy goals Layard mentions are simple, broad, and difficult to classify with

a particular ideology, but he promotes steps for individuals to take to make them happier and steps the

government can take to help aid citizens in making informed decisions regarding their well-being.

The psychological research on happiness is extensive and always developing. There are three

main takeaways Layard finds from the literature: happiness comes from a mix of biological and

environmental factors, human beings adapt quickly to new situations, and depression rates are increasing

in most developed countries (Layard 2005, 35-61). Twin comparisons have demonstrated the biological

link between genes and happiness. Identical twins report very similar levels of happiness, while fraternal

twins do not. This holds true even for mental illnesses such as schizophrenia, manic-depression, and

alcoholism (Layard 2005, 55-57). Some people are just more predisposed to happiness than others. The

second key finding is that of the adaptation phenomenon. Individuals change their income aspirations in

response to changes in their current incomes. Van Praag and Frijters (1999) ask people to report their

“required income” to meet their needs, and find that a dollar increase in actual income causes a forty cent

increase in required income. Thus the more money we make, the more money we think we need (Layard

2005, 48-49). Finally, depression, which can accurately be described as the absence of happiness, is

becoming more prevalent in America, and suicide rates, alcoholism, and crime have, in general, increased

since 1950 in most developed nations (Layard 2005, 36-37).

Econometric analysis of the data on happiness brings up three more key points: happiness is

reported mainly from surveys, relative income matters more than absolute income for happiness, and

there are seven main factors that are important to happiness (Layard 2005, 13-64). First, it is important to

reiterate that happiness is difficult to define and even more difficult to measure. It can now be measured

by scanning individuals’ brain waves but simply asking people, how happy they are in general produces

responses that are close to their actual objective feelings of happiness (Layard 2005, 13-22). This

suggests that surveys, while not perfect, do a good job of recording happiness. Second, at the heart of the

Easterlin paradox is the power of relative income. Driven by comparison, human beings measure their

own well-being by comparing themselves to others. Even in developed countries where most individuals’

basic needs are met, those with the lowest incomes are far more likely to report being “not too happy”

(Layard 2005, 31). Additionally, individuals indicate that they would prefer a world where they made

$50,000 per year and other people made $25,000 to a world where they made $100,000 per year and

others made $250,000 (Layard 2005, 41). People measure their well-being against the perceived well-

being of others. Finally, there are seven main factors that Layard finds from the literature to be most

important to happiness. They are work, family relationships, trust, freedom, health, values, and financial

situation. Econometric analysis of the World Values Survey finds that, across forty-six countries, these

factors each independently have a significant influence on happiness (Layard 2005, 63-65).

Layard investigates each finding more closely to look at how, exactly, the findings on happiness

can be applied to government policy. He comes up with several goals which, while not exactly

revolutionary, indicate areas in which policy can be focused to encourage a nation’s people to be happier.

The recommendations are based off the most important five of the seven factors of happiness: family

relationships, financial situation, work, community and friends, and health.

First, we should eliminate high unemployment. Employment not only brings financial security,

Layard intimates, but it gives a sense of purpose to one’s life. Unemployed has one of the most

detrimental effects to mental health and happiness of any demographic factor (Layard 2005, 64).

Eliminating high unemployment is not a new goal, but it has implications beyond increasing output- it is

good for the mental and emotional well-being of people.

Second, Layard contends that the nature of work today needs to change. He likens our obsession

with income to an addiction. In America, we tax products like cigarettes to discourage addictions. In the

same way, Layard argues for a progressive tax on income to discourage climbing further and further up

the hedonic treadmill. Higher incomes are not making us better off (above a certain level), yet there are

too many incentives driving people to believe that they need to work harder and earn more income.

Among the worst of these incentives is performance-related pay, which rewards individuals for activity

(working long hours) that makes them worse off (since the benefit of extra income does not improve well-

being enough to offset the loss of leisure time). Layard also points to a poor work-life balance and a

culture of competitiveness in the workplace as a cause of distress and unhappiness in developed nations

(Layard 2005 154-60).

Third, he supports a shift in the nature of our education system to include education about

ourselves. Layard believes we need to be educated about our emotions, mental illnesses, and values and

cultivate a sense of purpose beyond ourselves. This education should not be just another classroom

discussion, but an integrated part of the curriculum at every age. Layard risks his credibility with this

point, as it sounds to many like another way of government meddling in the private lives of its citizens.

His emphasis is not on teaching people how they “should” be, however, rather it is on showing people

how their emotions work and encouraging cooperation instead of competition from an early age. Parental

education is a necessary supplement to this curriculum ( Layard 2005, 161-3; 234).

Finally, the most contentious policy recommendation raised in this book is that of monitoring

trends in happiness and well-being as closely as national income is monitored. The link between income

and well-being is well-established as weak (Layard 2005, 3-4; Easterlin 1974). Yet national income is the

main comparator for well-being between nations. This is not to say that income growth is not without

benefits, but it has created several unintended and severely harmful consequences. Layard sees the

growth of income as something that is beginning to harm people- through poor mental health, increased

inequality, crime and a loss of community trust to recount a few (Layard 2005).

Critics of Happiness Economics:

Despite Layard’s warm writing tone and thorough use of research to back its claims, Happiness

has received considerable critique from many economists. There are three main critiques of happiness

economics that I will focus on. They center around the role of the government in private lives, the

arbitrary nature of happiness surveys, and the falsehood of the belief that policy makers only focus on

national income.

First, many argue that the government should not play a “big brother” role for its citizens. People

should be allowed to make their own choices, even if they result in unhappiness, and taking away this

right to choose a course of happiness violates democratic principles (Ormerod and Johns 2007, 15). The

case of Bhutan serves as a perfect example. The government of Bhutan discarded the use of GDP and

instead has created a measure called Gross National Happiness (GNH). In an attempt to promote and

preserve their culture, the Bhutanese government either expelled or imprisoned Nepalese or otherwise

non-Bhutanese individuals (Ormerod and Johns 2007, 70). While the GNH principle sounds good to

most, it puts too much power in the hands of the government and led to some tragic and undesirable

consequences.

The validity of happiness surveys has also been questioned. Critics claim that survey responses

are arbitrary and do not reflect actual well-being. They are quick to point out that much of happiness

research has been based off a question in which only three responses are possible- people can report being

either “very happy,” “fairly happy,” or “not very happy.” It is difficult to observe noticeable changes in

happiness under these conditions. This is perhaps best evidenced by the fact that, just as with income,

happiness has not increased along with increases in life expectancy, gender equality, and public spending

(Johns and Ormerod 2007, 12-13). Income may not be correlated with happiness, but there are other

measures that have increased in part due to increasing income that people would generally agree are

positive for overall human welfare. Happiness, especially as it is reported in surveys, is a highly

subjective measure of well-being, and making and measuring policy decisions based on it is deemed

foolish by its critics.

Finally, critics argue that the view that policy makers focus only on GDP is false. There are

many policies in place that are not enacted to boost GDP. For example, policies to reduce crime, provide

health care, and alleviate poverty are important to citizens and driven by a desire to improve lives rather

than increase national output (Wallace 2011). Direct objectives like these are straightforward to track and

measure and will presumably lead to improved well-being. Gross national happiness is much more

subjective, hard to increase or decrease, and governing a nation based on a subjective question of

happiness is fraught with risk.

Addressing the Critics:

These critiques, while valid, are missing the sentiment behind the policy recommendations. The

government would not be playing a “big brother” role in implementing happiness-based policies; it would

be encouraging behavior that promotes its citizens’ well-being. The idea is not to take away citizens’

right to choose what actions will make them happy, but, through policies and institutions, to inform them

of what makes us happy as people and incentivize behavior that will promote national well-being. Layard

argues that economic and political freedom is an essential part of happiness-based public policy, as a

component of happiness is the sovereignty of individuals to make their own choices (Wallace 2011).

Democracy and trust in the government are essential to national happiness.

Critics’ contention that happiness surveys are essentially meaningless since happiness is not

correlated with other factors we would expect is also not based on thorough evidence. This argument

fails to account for the fact that negative influences on happiness such as a loss of community trust and

decreases in family stability have canceled out some of the effect of positive influences on happiness.

Additionally, happiness is correlated with unemployment, and individuals’ responses to happiness

surveys change in response to changes in family structure, employment status, and physical and mental

health (Wallace 2011). The government can impact all individuals through policy in these areas.

Finally, while it is true that government policy is based off of more than just GDP, income

growth is an implicit assumption in many economic models. So long as output is considered before

welfare and not the other way around, there will be a disconnect between the stated goals of government

and its ability to achieve them (Layard 2005).

Conclusions:

Particularly since the discovery of the Easterlin paradox, happiness economists have presented a

very different view of the economy and the proper role of government in society. They see the potential

for harmony in an economic system if the government aligns its goals with the goals of individual actors.

If an educated population makes their personal well-being (and others’) their goal and the government

conducts policy to promote well-being above all else, we can raise national happiness, a statistic which

has been immovable for most developed countries since its initial study. Governments as well as

individuals must know that raising income is not the best way to promote happiness. Policy decisions

should instead be based in the scientific and survey evidence cited by happiness economists.

Although happiness economics does not necessarily represent a new ideology, it seems to be

gaining a respected place in the history of economic thought in recent years. Renowned economists such

as Joseph Stiglitz, Amartya Sen, and Daniel Kahneman all have supported the idea of using a measure

other than GDP to assess well-being. While not all the radical views of Layard are going to be accepted

by mainstream economics, his and others’ dissent of the use of GDP as a measure of national well-being

has led to increasing acceptance of new measures of well-being. In 2014, the United Kingdom launched a

happiness initiative by creating its own well-being and happiness statistics, joining nations such as

France, Canada, and South Korea in using such statistics (ONS 2015). Bhutan has completely abandoned

GDP and used its own measure, GNH, to guide policy since 1972.

Happiness economics may never reach mainstream status, but the sentiment and motivation

behind its study is something that all economists can take heed from. The main detractors that keep it

from reaching a mainstream audience seem to be its reliance on fuzzy and imperfect measures of well-

being and the lack of distinction between philosophical ideas of what “should” be and practical

applications of what “is” today. If we take nothing else from the courageous economists who study

happiness and well-being rather than money or resource allocation, it should be that the world can be a

happier place and there is a way, grounded in scientific evidence, to safely promote well-being through

government action.

Word Count: 2932

Works Cited:

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https://www.aeaweb.org/students/WhatIsEconomics.php

Burns, JH. 2005. “Happiness and Utility: Jeremy Bentham’s Equation” Utilitas. 17.1:46-61.

Center for Economic Performance. 2015. “Staff Biography: Richard Layard.” Accessed April 27,

2015 at http://cep.lse.ac.uk/_new/staff/person.asp?id=970.

Cowen, Tyler, and Alex Tabarrok. 2013. Modern Principles of Economics: Second Edition. New

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New York: Academic Press.

Easterlin, Richard. 2004 “The Economics of Happiness.” Daedalus. 133.2: 26-33.

Johns, Helen, and Paul Ormerod. 2007. “Happiness, Economics and Public Policy.” Institute of

Economic Affairs, Research Monograph. 62:1-108.

Layard, Richard. 2005. Happiness: Lessons from a New Science. New York: The Penguin Press.

Office of National Statistics. 2015. “Measuring Well-Being.” Accessed April 27, 2015

athttp://www.ons.gov.uk/ons/guide-method/user-guidance/well-being/index.html

Van Praag, Bernard and Paul Frijters. 1999. “The Measurement of Welfare and Well-Being: The

Leyden Approach.” in Kahneman, Diener and Schwarz, op. cit. 413-33. Accessed April 25 at

http://paulfrijters.com/wp-content/uploads/2012/06/kahneman.pdf.

Wallace, Paul, Layard, Richard, and Paul Ormerod. 2011. “Economist Debates: Happiness.” The

Economist, March 17-27. Accessed March 31, 2015 at http://www.economist.com/debate/

debates/overview/204.