Europe and the Economics of Happiness

[German version of this article published in Financial Times Deutschland, 27 May 2011]
Andrew Oswald is a Visiting Fellow at the IZA Institute (Forschungsinstitut zur Zukunft der Arbeit) in Bonn and a Professor of Economics at the University of Warwick in England. He was a member of the Stiglitz Commission on the measurement of social progress.
Happiness is the new Gross Domestic Product (GDP). The economics I learned as a PhD student in the 1970s is being replaced by broader, more sensible, and more interdisciplinary ways to think. New rankings of the well-being of nations are being calculated.

Politicians have acted. Nicholas Sarkozy, David Cameron and Angela Merkel recently told their nation’s government statisticians that we need for the coming century to be able to assess the level of a country’s mental well-being and that it is no longer adequate to focus upon GDP (roughly, the flow of Euros earned in people’s pay packets in a year). An influential report saying this was published just over a year ago from a commission of economists, headed by Joseph Stiglitz, which was set up on the suggestion of Nicholas Sarkozy. In the UK, an equivalent National Well-being Forum, on which I and many civil servants and researchers sit, will be meeting throughout this year to redesign national objectives for the future. Similar things are happening in many countries.

The concept of GDP has served us well. It was invented 80 years ago -- in an era when many more of Europe’s citizens went hungry than owned an automobile and when physical health was poor. Today, however, our problems are closer to the reverse. Too much food is consumed. There are too many traffic jams. Almost one in ten Europeans took anti-depressant tablets last year.

A new intellectual movement -- the economics of happiness -- has sprung up and throughout the remainder of the century will alter both government policy and commercial opportunities for businesses. It began quietly, in a handful of university corridors, while most economists paid no attention. For once, Europe can be said to have led intellectually and the USA to have followed.

If you have ever sat through the graphs and equations of a first-year undergraduate lecture in economics, you may feel that the words ‘economics’ and ‘happiness’ do not greatly deserve to go together. Or you may even have an instinctive reaction that happiness is something to be debated by philosophers and not quantified. Yet remarkable progress is being made.

Nobody pretends that to measure the well-being of a person or society is painlessly easy. Nevertheless, in the manner of medical statisticians, the researchers in this field study data on different people -- giant clouds of dots you might say if you want to think of a graph on a computer screen -- and find the best fitting lines through those dots. In that way, we aim to uncover hidden patterns. We search for the deep-down, the implicit relationships, between happiness and many of life’s influences -- income, education, gender, having children. It is fair to ask if it is possible to do this in a systematic way. We think it is. There have been many checks on the quality of the data. The latest work is blending subjective scores asking people about their happiness with physiological measures like heart rate and other objective indicators. You can find such articles in the last year or two in journals like Science and the Proceedings of the National Academy of Sciences of the USA. Moreover, if we look at fMRI images in brains, emotions such as happiness and sadness show up in different parts, so there at some deep physiological level we know something about what looks like happiness and its opposite. Here the work of Armin Falk at the University of Bonn is helping to lead the world. It is beginning to be understood also that certain genes are correlated with happiness.

If you are an environmentalist, the economics of happiness is potentially particularly valuable for you. That is not yet widely realised by the Green movement. Just in the last few years, we have managed, using new techniques, to put dollar, euro, pound values on the happiness value from clean air, lack of noise, lack of chemical additives, and so on. Brilliant papers have been done by Simon Luechinger, a young researcher at the University of Zurich, who in German data has traced people’s happiness levels back to how they depend -- without people being aware -- upon the levels of sulphur dioxide emissions in plants far from their homes. Some of the most exciting work is a remarkable blend of geographical information system data and well-being survey data.

There is another important application of the economics of happiness. One day, in my judgment, it will be used a lot in the courts. Many legal actions– negligence actions say– are about injuries to people that do not come with automatic price tags attached. Hence judges have to use their judgment to adjudicate, and juries have to dole out sums of money for complex human tragedies. That is difficult for them. Our statistical methods have found the first way to do this systematically.

But it is at the macroeconomic level that the new economics of happiness is throwing up particularly subversive ideas. Once we begin to assess nations by how much their citizens actually enjoy their lives, traditional international rankings alter. What is Denmark’s secret -- it is currently Europe’s most satisfied nation -- in the Table? Where is France’s joie de vivre? Can Germany rise up through the European well-being rankings? We are only just, as researchers and policy-makers, beginning to grapple with such questions. We do not yet have good answers.

On happiness and hypertension, for any doubters of such data, it has recently been demonstrated that there is a powerful relationship between countries where people say they are happy compared to less happy, and countries having less hypertension, that is, lower blood pressure. Hypertension data thus seem to validate happiness data.

Perhaps the biggest problem for economic policy in western society is currently what is called the ‘Easterlin Paradox’. The paradox is that modern data suggest that countries do not seem to get happier as they get richer.

Why is economic growth not being accompanied by rising happiness? There are some clues. One thing is that in a deep sense humans are animals of comparison. What I want subconsciously is to have three BMWs and for my neighbour to have an old Ford. The problem then is one of un-escapable relativities. For well-off countries, the tide of economic growth lifts all the boats, and unfortunately, where having three BMWs was unusual, eventually it becomes the norm, and even that annoying Mr Schmidt next door to me has a BMW. So there is a kind of generalised neutrality, a sort of washing out effect, from economic growth that seems to be produced in people’s emotional minds.

One day the headline on the front page of FTDeutschland will be not “economic growth was up 1.2% last month” but rather “the country’s composite psychological well-being index rose 0.8% last month”. Counting Euros as a way of approximating human progress will be viewed as misguided and the new ideas on the measurement of well-being will seem obvious. People will look back and puzzle to themselves why it was not done that way in the early part of the 21st century.