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A blog about economics in the South Caucasus.

The Economics of Happiness

The Kingdom of Bhutan is a very special country. When in 2004 King Wangchuck announced that there would be free elections and the kingdom would be gradually transformed into a democracy, people demonstrated in the streets against these reforms. They were so satisfied with their monarchy and their ruler that they tried to urge him not to give away any of his absolute powers to an elected parliament.

Also economically, Bhutan is special. It is the only country in the world that does not try to maximize the gross domestic product (GDP). Instead, King Wangchuk developed an index called “Gross National Happiness” (GNH) that aims to measure the well-being of the people directly, without taking the GDP as a proxy.

Typically, there are many adverse effects brought about through economic development – environmental pollution, social defragmentation of the society, inequality, egoism and overreaching competition between people, to name just a few. All these negative impacts of economic growth are not taken into account by the traditional GDP.

Another problem is that the GDP measures all economic activity equally, regardless of its cause. When in 2011 a devastating Tsunami hit Japan, causing thousands of victims and leading to the Fukushima nuclear disaster, the real GDP went down by just 0.7%. A ridiculous number, given that arguably the greatest catastrophe in Japanese history since the detonations of atomic bombs in Hiroshima and Nagasaki had taken place.

The ideas of the Bhutanese King resonated in the economics discipline. In the last 15 years, a new subfield has emerged within economics, namely the “Economics of Happiness”. Driven by original thinkers like Bruno S. Frey from Switzerland, it was initially considered an exotic and not fully serious pursuit to elicit the connection between the economic situation of a society and the “happiness” of its people. Yet if one thinks about it, the connection is rather natural: What, if not happiness of a population, should be the ultimate goal of economics?


MEASURING HAPPINESS

Economics was always concerned with social welfare of societies and the utility of economic agents. Yet both concepts do not coincide with happiness. Social welfare is usually defined as the surplus which economic agents obtain through trading on markets, measured in terms of money. However, many things which make people happy are not traded on markets, so clearly this concept falls short of comprehensive happiness. Utility, on the other hand, is but a convenient way to model preferences of people. A situation may be according to one’s preferences, but does that mean that one is happy? Again, the connection between happiness and utility is very loose.

In happiness economics, a variety of different methods were developed for quantitatively measuring well-being, quality of life, life satisfaction, and related concepts. Happiness economists claim that happiness, though being a subjective experience, can be objectively measured, assessed, and correlated with the characteristics of the society. Sophisticated questionnaires play an important role. According to these researchers, asking people questions that elicit their happiness and life satisfaction offers important information about the society and can signal the need for change.

A prominent happiness index is the New Economics Foundation's Happy Planet Index (HPI).  In the year 2012, HPI ranked 151 countries across the globe. According to this index Georgia is the 55th happiest nation, as happy as Armenia and happier then Russia, Turkey, and Azerbaijan. (To compare, Georgia was 71st place in 2009 by HPI).

Another attempt to quantify happiness was conducted by researchers at the Gallup World Poll. According to their data, collected 2005 through 2009, Georgia did not do that well. It was just on place 115 among 155 countries, and less happy then any of its neighbors.

The Life Satisfaction Index (see chart) was created by Adrian G. White, an analytic social psychologist at the University of Leicester in England. According to this index (2006 ranking), Georgia is on the hardly flattering 169th place among 178 countries, happier than Armenia but less happy than all of its other neighbors.

While the economics of happiness can boast with many counterintuitive results, there are also some expected outcomes. In spite of different approaches and different rankings, it is a robust finding in happiness studies that one of the most significant determinant of happiness is money. Life satisfaction is positively associated with income.  Money does buy happiness—at least up to some income level.

The chart depicts the Life Satisfaction Index, but what can be seen here coincides with HPI or any other measure of happiness. Bluntly speaking, richer countries are happier countries.

However, richer countries are the more developed countries, and they are more often democracies with strong property rights and developed institutions. It turns out that a good deal of their happiness advantage comes from these factors. Bruno S. Frey found out that the elements of direct democracy (referenda etc.), which play an important role in Swiss political decision making, substantially contributed to the happiness of Swiss people.

Money has diminishing happiness returns. Satisfaction rises sharply in income for poor countries, yet for rich countries more income does not yield huge happiness gains. Above $5000 monthly income, additional income has hardly any effect on happiness.


AND GEORGIA?

The Caucasus Research Resource Centers (CRRC) conducts an annual survey named Caucasus Barometer that includes question about overall life satisfaction. Respondents rate their satisfaction on a one to ten scale (1- not at all satisfied, 10-completely satisfied). In 2011, CRRC interviewed about 2500 persons in Georgia. The results suggest that in Georgia, richer people are happier people. Respondents with monthly personal income USD 800-1200 report an average 7.24 level of satisfaction with life, compared to much lower value of those who earn up to USD 100 (see chart below). Life satisfaction also increases not only due to higher personal income but it is also significantly correlated with total family income. Age is negatively associated with life satisfaction, and younger Georgians are more satisfied with life compared to the elderly people. Also, young people appear less negatively affected by having less money. The number of family members plays a significant role, larger families up to 7 members on average are happier, but this value decreases when families become even larger.

 

There is a positive correlation between happiness and the level of education. People with a higher level of education are happier than those with lower levels. According to CRRC’s Caucasus Barometer data, only 20% of respondents with incomplete secondary education (or lower) are satisfied with life (life satisfaction >=7), compared to 30% of those with higher education.

The growing happiness literature has shown that not only money matters. Age, education, size of family, democracy, and institutions are also highly important for happiness, and they gain in significance the more developed a country becomes. Furthermore, it was shown that in low income countries like Georgia people are less happy not only because they can afford less consumption, but also due to higher inequality, which is often perceived as unfair. For Georgian political decision makers, these insights from happiness economics may be very valuable and should be taken seriously.

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Guest - Eric on Tuesday, 19 March 2013 20:33

Since Bhutan was mentioned, here a scholarly article discussing Victor Pelevin's Generation П From Homo Sovieticus to Homo Zapiens: Viktor Pelevin’s Consumer Dystopia. In the book Pelevin explores the impact of TV and other advanced media technologies on the modern man. Here is a quote from the article:

"Each human being becomes a cell of an organism known by the ancients as the mammon, or simply Oranus ("rotozhopa" in Russian). The purpose of each cell is to allow money to pass into and out of it. In the process of its evolution, Oranus develops a primitive nervous system, the media. This nervous system transmits “wow impulses” that control the activity of the monadic cells:

-- oral (inducing a cell to digest money),
-- anal (inducing it to eliminate money), and
-- displacing (inhibiting all psychological processes that might hinder an individual’s identification with a cell of Oranus).

After repeated exposure to television, the mind commences to produce these impulses without external stimulation. Each monad is once and for all trapped in a cycle of consumption-excretion, a Perpetuum Mobile of consumer culture. Commodities are no longer linked to specific functions but operate in a mechanism of insatiable social desire that supplants other kinds of desire, including sexual ones."

What's the link to Bhutan, you may ask... Bhutan features in Pelevin's novel because until about 2003, Bhutan was the only country in the world where people where not allowed to watch TV!!! (in order to maintain their happiness)

Since Bhutan was mentioned, here a scholarly article discussing Victor Pelevin's Generation П From Homo Sovieticus to Homo Zapiens: Viktor Pelevin’s Consumer Dystopia. In the book Pelevin explores the impact of TV and other advanced media technologies on the modern man. Here is a quote from the article: "Each human being becomes a cell of an organism known by the ancients as the mammon, or simply Oranus ("rotozhopa" in Russian). The purpose of each cell is to allow money to pass into and out of it. In the process of its evolution, Oranus develops a primitive nervous system, the media. This nervous system transmits “wow impulses” that control the activity of the monadic cells: -- oral (inducing a cell to digest money), -- anal (inducing it to eliminate money), and -- displacing (inhibiting all psychological processes that might hinder an individual’s identification with a cell of Oranus). After repeated exposure to television, the mind commences to produce these impulses without external stimulation. Each monad is once and for all trapped in a cycle of consumption-excretion, a Perpetuum Mobile of consumer culture. Commodities are no longer linked to specific functions but operate in a mechanism of insatiable social desire that supplants other kinds of desire, including sexual ones." What's the link to Bhutan, you may ask... Bhutan features in Pelevin's novel because until about 2003, Bhutan was the only country in the world where people where not allowed to watch TV!!! (in order to maintain their happiness)
Guest - Florian on Tuesday, 26 March 2013 17:02

"Consumer dystopia"? I have to read that book! :-)

"Consumer dystopia"? I have to read that book! :-)
Guest - Quji on Friday, 22 March 2013 21:34

It is interesting, how more socialist and less socialist countries compare to each other. Also, did the HPI index catch the tragedy of tsunami & Fukushima disaster in Japan, which GDP failed to catch?

It is great that some economists started to think about non-money determinants of happiness because maximizing money, I would say, is just too "blind". It often happens even individually that you want to maximize the amount of money that you own, but you fail to realize that you are becoming less happy in this process.

It is interesting, how more socialist and less socialist countries compare to each other. Also, did the HPI index catch the tragedy of tsunami & Fukushima disaster in Japan, which GDP failed to catch? It is great that some economists started to think about non-money determinants of happiness because maximizing money, I would say, is just too "blind". It often happens even individually that you want to maximize the amount of money that you own, but you fail to realize that you are becoming less happy in this process.
Guest - Florian on Tuesday, 26 March 2013 17:22

Indeed, these are interesting questions. I do not know whether the tsunami and the Fukushima disaster were reflected in the happiness indices. This would be a great master's thesis topic for somebody writing on happiness economics ;-).
I once attended a talk of Bruno S. Frey and I remember him saying that inequality tends to reduce the happiness in a society, and that the Scandinavian countries, where people identify very much with the collective good, have high happiness values. This is, by the way, also my personal experience. The many beggars in the streets of Tbilisi can really cause some psychological grief. Another example: The house of one of our neighbors is currently crumbling. There are now 30 centimeter cracks in the walls, and it looks as if the house will collapse soon. A construction engineer would probably immediately ban anybody from living in that house. Yet I am afraid that these people must live in that house, because they have nowhere to go (they may be old people, whatever...). I would feel much better if I knew that there was a government taking care of our neighbors, like providing them with some basic transfer payment that would allow them to move out of their house and find an apartment elsewhere.

Indeed, these are interesting questions. I do not know whether the tsunami and the Fukushima disaster were reflected in the happiness indices. This would be a great master's thesis topic for somebody writing on happiness economics ;-). I once attended a talk of Bruno S. Frey and I remember him saying that inequality tends to reduce the happiness in a society, and that the Scandinavian countries, where people identify very much with the collective good, have high happiness values. This is, by the way, also my personal experience. The many beggars in the streets of Tbilisi can really cause some psychological grief. Another example: The house of one of our neighbors is currently crumbling. There are now 30 centimeter cracks in the walls, and it looks as if the house will collapse soon. A construction engineer would probably immediately ban anybody from living in that house. Yet I am afraid that these people must live in that house, because they have nowhere to go (they may be old people, whatever...). I would feel much better if I knew that there was a government taking care of our neighbors, like providing them with some basic transfer payment that would allow them to move out of their house and find an apartment elsewhere.
Guest - Ron Liebermann on Monday, 17 November 2014 05:53

Happiness is strong ego integrity stemming from healthy relationships with significant others who share the same culture and value system.

Happiness is strong ego integrity stemming from healthy relationships with significant others who share the same culture and value system.
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