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Money and Happiness
Hélène Rey
Les Échoes
Thursday 10 April 2008
Nicolas Sarkozy don't invent anything new when he asked two winners of the
Nobel economics prize, Joseph Stiglitz and Amartya Sen, to construct growth
indices that more faithfully reflect French citizens' well-being than do those
based on Gross Domestic Product (GDP). He was very significantly preempted on
that front by the king of Bhutan, Jingme Singye Wangchuk, who had decreed as
early as 1972 that "gross national happiness" should be a more important
concept than GDP. The United Kingdom's Office of National Statistics is already
working on producing different indices of Britons' well-being.
There is at present a florescence of research studies on the relationship between
money and happiness. Richard Easterlin, economics professor at the University
of Southern California, has studied the results of numerous polls attempting
to measure the subjective sense of well-being for the populations of different
countries. His conclusions aroused a great deal of controversy. According to
Easterlin, once a minimum level of wealth is achieved, there's not any connection
between a society's level of economic development and the happiness of its members.
In the same way, he finds no correlation between growth in its standard of living
over time and a society's happiness. So, the proportion of Americans who describe
themselves as "very happy" has remained fairly stable over the last
fifty years in spite of a spectacular increase in American GDP per person since
the end of the Second World War.
However, within a given society, the wealthiest people appear to be the happiest.
These paradoxical results may be reconciled, supposing that an individual's
level of happiness does not depend on his absolute level of wealth, but his
wealth relative to the other members of his society. If an individual's income
grows at the same speed as his neighbors', he won't be any happier. On the other
hand, if his income grows faster than the average, he'll be in Seventh Heaven.
If these results are correct, the implications for economic policy are important.
Economic growth in the classic sense of the term no longer appears as a priority.
And our attachment to relative wealth makes the growth in income inequality
still more painful for us, giving another justification for redistributive income
policies.
Quite recently, the Wharton School's Justin Wolfers and Betsey Stevenson (1)
revisited these questions with new data bases including more observations. Unlike
Easterlin, they find a robust and positive correlation between income per person
and happiness. In their study, the richest countries are the happiest on average;
the wealthiest households are also the happiest within each society; and happiness
grows over time with GDP. There are exceptions, of course: Belgians seem to
become unhappier in spite of the growth in their wealth. But overall, growth
seems to favor happiness. So are we back where we started? Not altogether. For
one thing, it's obvious that the correlation Wolfers and Stevenson found between
income and happiness is partial. Other variables, omitted from their study,
would be just as positively linked to their happiness index.
More fundamentally, we should wonder about the validity of indices of happiness
constructed on information from polls. Can the results of these polls be aggregated
at the level of a country? That seems problematic. To be very happy or moderately
happy can mean different things to the different people polled, according to
who they are, their age, their country. To average such qualitative data is
inappropriate. To construct happiness indices in such an arbitrary way on the
basis of polls and then to use them to define economic policies seems risky.
A more promising path would be to construct indices of well-being such as those
developed by the United Nations. The human development index, for example, incorporates
GDP per person, education and life expectancy. Although imperfect, such indices
have the advantage of being built from objective and easily quantifiable data.
Thus, they are more difficult for politicians to manipulate!
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Hélène Rey is a professor at the London Business School.
(1) "Economic Growth and Subjective Well-being: Reassessing the Easterlin
Paradox," Brookings Economics Panel, April 2008.
Translation: Truthout French language editor Leslie Thatcher.
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