Modern Society & the Economics of Happiness Andrew Oswald October 2011 I would like to acknowledge research support from the ESRC Centre for Comparative.

Modern Society & the Economics of Happiness

Andrew OswaldOctober 2011

I would like to acknowledge research support from the ESRC Centre for Comparative Advantage in the Global Economy (CAGE) at the University of Warwick.

Is western society going in a sensible direction?

Growing evidence suggests that it is not.

The problem is this:

The problem is this:

People care about their relative income

..but about the absolute level of ‘green’ environmental factors.

• Modern society is stuck.

• Individually, we chase higher income and ‘rank’, but for society as a whole this cannot be achieved.

The data suggest it would be rational instead to concentrate on environmental factors

The data suggest it would be rational instead to concentrate on environmental factors -- not on economic prosperity.

Why should you believe any of these claims?

Today I will describe results

• From fMRI scans

• From statistical work on well-being

But let’s start with everyday empirical evidence.

Consider your wrist.

5 euros

500000 euros

“A watch defines a man's look and tone.” Rolex advert.

“A watch defines a man's look and tone.” Rolex advert.

Subconsciously, humans are frightened of falling behind.

This links to new empirical work:

Armin Falk and colleagues on relative-income images in the brain (Science, Journal of Public Economics)

Peter Kuhn and colleagues on car purchasing by neighbours of lottery winners (AER forthcoming)

Ori Heffetz on visible goods (REStats forthcoming).

David Card, Alexandre Mas, Enrico Moretti, Emmanuel Saez on peers and satisfaction.

Two papers I would greatly recommend.

• Title: Social comparison affects reward-related brain activity in the human ventral striatum Author(s): Fliessbach K, Weber B, Trautner P, et al.Source: SCIENCE Volume: 318 Issue: 5854 Pages: 1305-1308 Published: NOV 23 2007

• Title: Relative versus absolute income, joy of winning, and gender: Brain imaging evidence Author(s): Dohmen T, Falk A, Fliessbach K, et al.Source: JOURNAL OF PUBLIC ECONOMICS Volume: 95 Issue: 3-4 Special Issue: Sp. Iss. SI Pages: 279-285 Published: APR 2011

We are now able to look inside the brain.

Armin Falk et al

Armin Falk et al

While being scanned in adjacent MRI scanners, pairs of subjects had to perform a task with monetary rewards for correct answers.

Variation in the comparison subject's payment affected blood oxygenation level-dependent (BOLD) responses in the ventral striatum.

Variation in the comparison subject's payment affected blood oxygenation level-dependent (BOLD) responses in the ventral striatum. This brain region is engaged in the registration of primary rewards.

Falk et al in Science and JPubEcon

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Falk et al in Science and JPubEcon

• “The mere fact of outperforming the other subject positively affected reward-related brain areas.”

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The next slide -- very briefly -- is for specialists.

Blood-oxygenation equations

• (similar with fixed effects, main variation across Ss)

Table: Activation and Income

Dependent variable: ventral striatum activation(1) (2) (3)

all conditions conditions 2-11 conditions 6-11

Own Income (in 100 Euro) 0.916*** 0.868*** 0.327***[0.109] [0.102] [0.091]

Other's income (in 100 Euro) -0.666*** -0.714*** -0.353***[0.087] [0.086] [0.090]

Constant -0.119 -0.061 0.068[0.144] [0.145] [0.167]

Observations 704 640 384R-squared 0.059 0.063 0.011

OLS estimates; clustering on individuals, robust standard errors in brackets; *** p<0.01, ** p<0.05, * p<0.1

So, inside your brain

So, inside your brain

You simply want to be high up the monkey pack

Here is a different kind of evidence.

It has been found that

It has been found that

Relative-income variables show up consistently in well-being equations.

It has been found that

Relative-income variables show up consistently in well-being equations.

E. Luttmer, Quarterly Journal of Economics 2005A. E.Clark et al, JPubEcon 1996, JELit 2008GDA Brown et al, Industrial Relations 2008 and Psychological Science 2010

D. Card et al, NBER paper, 2011.

A person’s happiness and mental health = f(their relative income).

By contrast:

The importance of ‘green’ factors

• Luechinger, S. “Valuing Air Quality Using the Life Satisfaction Approach” Economic Journal, 2009.

• Welsch, H. "Environment and Happiness: Valuation of Air Pollution Using Life Satisfaction Data." Ecological Economics, 2006.

• Di Tella, R., and R. MacCulloch. 2008. "Gross National Happiness as an Answer to the Easterlin Paradox?" Journal of Development Economics, 2008.

• Levinson, A. “Valuing Public Goods with Happiness Data: The Case of Air Quality” 2011 NBER paper.

These studies link happiness data to spatial environmental data.

Summarizing, the studies find huge effects from the environment on to human happiness.

Summarizing, the studies find huge effects from the environment on to human happiness.

A one SD reduction in SO2 is worth in happiness terms about the same to a person as 20% extra income.

Finally

Professor Easterlin’s paradox.

FIGURE 1: Happiness and Real Income Per Capita in the US, 1973-2004

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There is also evidence, perhaps not known to many economists, of worsening mental health through time in some countries.

Worsening GHQ levels through time

• Verhaak, P.F.M., Hoeymans, N. and Westert, G.P. (2005). “Mental health in the Dutch population and in general practice: 1987-2001”, British Journal of General Practice.

• Wauterickx, N. and P. Bracke (2005), “Unipolar depression in the Belgian population - Trends and sex differences in an eight-wave sample”, Social Psychiatry and Psychiatric Epidemiology.

• Sacker, A. and Wiggins, R.D. (2002). “Age-period-cohort effects on inequalities in psychological distress”. Psychological Medicine.

What of well-being among the young?

Helen Sweeting et al

“GHQ increases among Scottish 15 year olds 1987–2006” Social Psychiatry & Psychiatric Epidemiology (2008).

Her team assesses whether life is getting more stressful for young people.

It is.

Mental strain in young Scots

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Summing up:

Is this a rational future?

In my opinion, it is time as a society for us to face up to uncomfortable evidence.

In my opinion, it is time as a society for us to face up to uncomfortable evidence.

Is our society going in a sensible direction?

Is our society going in a sensible direction? The evidence suggests: no.

Extra slides

• Historically, from 1980 until 2011, Switzerland and the UK and Spain all had average quarterly GDP Growth of about 0.5 percent.

• Yet they have had very different unemployment rates.

Stiglitz Report 2009: “Measures of .. objective and subjective well-

being provide key information about people’s quality of life. Statistical offices [worldwide] should incorporate questions to capture people’s life evaluations, hedonic experiences … in their own survey.” P.16. Executive Summary of Commission Report.

“Emphasis on growth is misguided”

“Beyond GDP”

“Measuring what matters”

Happiness is the new GDP   

Smile, and the economy smiles with you. Factory workers in Macedonia.

There has recently been a critique of Easterlin’s idea

There has recently been a critique of Easterlin’s idea

Betsey Stevenson and Justin Wolfers have argued that economic growth does buy happiness.

Brookings Papers, Spring 2008

Their work is extremely valuable

Their work is extremely valuable

But ultimately I think they probably have the wrong answer.

• Much of their paper is concerned with cross-section patterns.

• In the long time-differences, which is the appropriate test, little is statistically significant in 1973-2007 European data.

Moreover, Stevenson and Wolfers agree that Americans have if anything become less happy over the last 40 years.

Overall

I would say that currently the balance of the evidence favours Easterlin rather than Stevenson-Wolfers.

[though it is bad science for us ever to close our minds, so we must watch for new evidence as it accumulates]

• In the early 70s, 33% of Americans described their lives as very happy, 52% as pretty happy, and 15% as not too happy.

• In the early 70s, 33% of Americans described their lives as very happy, 52% as pretty happy, and 15% as not too happy.

• By the late 2000s, the numbers were 31%, 55%, 14%.

Stiglitz Report 2009: “Measures of .. objective and subjective well-

being provide key information about people’s quality of life. Statistical offices [worldwide] should incorporate questions to capture people’s life evaluations, hedonic experiences … in their own survey.” P.16. Executive Summary of Commission Report.

“Emphasis on growth is misguided”

“Beyond GDP”

“Measuring what matters”

Happiness is the new GDP   

Smile, and the economy smiles with you. Factory workers in Macedonia.

Stiglitz et al:

Official statistics should blend objective and subjective well-being dataRecommendation 10: Measures of both objective and subjective well-being provide key information about people’s quality of life. Statistical offices should incorporate questions to capture people’s life evaluations, hedonic experiences and priorities in their own survey.