Lessons from the economics of happiness

Updated on: May 27, 2021
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People’s happiness does not entirely depend on their absolute wealth but is a function of the people around them. Research has found that happy people actively seek to spend time with their families, friends and build meaningful social relationships.

The origin of happiness in economics can be traced back to the commencement of the “utilitarian” approach by philosopher Jeremy Bentham. Hence, when economists impart their views on happiness, they use the technical term “utility” which measures the total satisfaction derived from consuming goods and services. This gives rise to the proclivity to pursue higher economic growth as higher income equates to a higher standard of living and subsequently, more happiness in life.

If the pursuit of happiness is the key goal of the citizens of countries, then it’s worthwhile spending a little time to discover what happiness translates to, in practice. In other words, let’s use economics to find out what makes us happy? And, what will help us achieve satisfaction in the long-run? For an economist, an easy way to approach this question would be to gather data by simply asking people.

This query has piqued the interests of several economists giving rise to a field of study called the economics of happiness, which measures people’s self-reported happiness and correlates it with economic, social, and behavioural factors.

Two anomalies

One of the foremost seminal works in this field was done by the economist, Richard Easterlin, who showed that wealthier people in any country are more likely to self-report a higher level of happiness than poor people in the same nation. However, he also found two anomalies. First, as the countries get richer and people’s basic needs of food, shelter and a comfortable living are met, their levels of happiness remain constant. For instance, the fraction of people claiming that they are happy in the US is unchanged for the past 40 years.

Second, once the basic necessities are met, people in rich countries on average report similar levels of happiness to people in low-income countries. These findings combined led to the Easterlin paradox, that is, even though richer people in a given country report greater happiness than poorer people in the same country, people in rich countries do not report significantly higher happiness than people in the poorer countries. This finding baffled economists: why is it that beyond a certain point, money doesn’t buy happiness?

This mystery can be explained through the relative-wealth hypothesis: people’s happiness does not entirely depend on their absolute wealth but is a function of the people around them. This is why richer people are happier than poorer people in the same country and yet people in rich countries experience a similar level of happiness to people in poorer countries. This learning can help us find the answer to the ultimate happiness question.

Consider this: your adulthood is spent in the pursuit of higher studies with the end-goal of attaining gainful employment to ensure economic security for yourself and your family. This is indeed a noble pursuit. But if you get tempted to join a position with the sole motive of higher pay and for no other reason, then be careful! It may not make you as happy as you might expect.

With a higher salary and higher standard of living, you will tend to associate yourself with the class of people in your income bracket and the thrill of this new prestigious job will wear off quickly. Research studies have found that lottery winners report higher levels of happiness upon winning the prize, but six months later, report much lower levels of happiness than the pre-lottery win.

Pre-goal state

Now we ask an important question: why is it so difficult to sustain happiness? Psychologists explain it through the concept of hedonic adaptation. Lottery winners eventually get used to their winnings and their psychological state is no different than before the win. This logic can be extended to other aspects of our lives. Often, we think that if only I could achieve goal X (complete graduation, get a promotion, be well-settled with a life partner), then I will be happy. It has been scientifically proven that such objectives do not guarantee happiness because one will eventually get used to the new achievements and the happiness will revert to the pre-goal X state.

So, what really guarantees long-term happiness? The answers might be unsurprising to most, but nevertheless are worth emphasising. Research has found that happy people actively seek to spend time with their families, friends and build meaningful social relationships. Even with respect to work, it is not the money per se that will keep you happy, but the impact of your work on the development of the community as well as the network of your co-workers.

Happiness has also been positively associated with the concept of “flow”, that is, being totally engrossed in a work that makes you lose track of time. This feeling implies that you are passionate about something, and gain happiness from following it. Another finding is developing the habit of accepting that there are factors that one can and cannot control in life. This will help you accept challenging circumstances with equanimity and instead focus on goals that are within one’s reach.

Finally, for readers who want to be happier in their lives, we advise keeping a gratitude journal. This will help you move away from the human tendency to be adapted by one’s life events, begin taking things for granted, and instead really savour the fortunate aspects of life.

Lessons for policymakers

The happiness of economics has interesting lessons for the policymakers as well. The incessant production of goods and services and higher economic growth (as is captured by gross domestic product) should not be the solitary goal of a country to ensure its citizen’s happiness. Economic policy-making should instead focus on improving human welfare.

For instance, a citizen might also find happiness from their health outcomes which are dependent on health infrastructure and a clean environment. Hence, it is unsurprising that Finland — ranked 57th in overall GDP but one of the world’s leaders in health infrastructure — topped the list of the United Nation’s happiness report 2021 among 149 countries. Finland was followed by similar developed countries like Iceland, Denmark, Switzerland, The Netherlands, Sweden, Germany and Norway.

Just as social connections were the key to individual happiness, these can also be used to restructure the policy framework. Using an application from the economics of happiness, the government in Canada instituted a social security programme in which the recipients were given the opportunity for employment in community development.

This led to an expansion of their social network. People participating in this intervention reported higher happiness than the people who participated in other traditional alternate unemployment programmes. Practices and policies that foster social connections, community cohesion and civic engagement will contribute to higher happiness levels of its citizens.

Payal Seth is a consultant at Tata-Cornell Institute, Cornell University, and Palakh Jain is an Assistant Professor at Bennett University.

Published on May 27, 2021

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